COACH: Have We Ruined This Market?

Brands that sell expensive things are always torn between growing the market and protecting the brand. Even COACH now says it will open stores in China more slowly. These brands are starting to think about the longer game.

If you happen to meet Yann Bozec, a tall Frenchman, any time soon, he will probably ask you, eagerly: "What did you think of our Mother's Day campaign on Weibo?" You had better answer: "Oh! I thought it was great!" Bozec, who became COACH's president and CEO for China last August, said much the same last Thursday when he talked about where COACH stands in the Chinese market.

For Mother's Day, COACH played on the original English meaning of its name, a coach or mentor, and called mothers "the first mentor in life" (My First Coach). Yes, you can also read it as "my first COACH handbag." The campaign drew 46.356 million views on Weibo, and under the rules set at the start, COACH gave away 8 wristlets at random.

COACH's numbers in China don't look bad either. In the third quarter of fiscal 2015, which ended March 28 this year, COACH's sales in China grew 10%, while Burberry's sales in China grew only in the mid-single digits over the same quarter. Measured store by store against the previous quarter, COACH's same-store sales are also rising.

But you may remember that two or three years ago, COACH's sales in China were growing at around 40%-60%. Back then COACH opened 30 stores a year, nearly one a week, and quickly made China its third-largest market after North America and Japan.

Slower growth in its third-largest market is not the only bad news: the top two markets are still weak. In North America, the biggest, too many outlet stores and too many discount promotions wore out consumers' interest. COACH has had to keep closing stores and cut back on promotions, and this hard-line trimming has sent results sliding without pause. Meanwhile, newer brands at similar prices, Michael Kors and Kate Spade, have lured away more young shoppers.

This year COACH has closed another 69 stores in North America, 13 of them outlets. That has dragged down the group's overall results. In the first nine months of this fiscal year, COACH's reported net income fell by almost half from a year earlier.

On recent conference calls, COACH's global CEO Victor Luis has grown used to blaming poor results on the "brand transformation" COACH is carrying out worldwide. "It takes time for these results to show up in the numbers," Luis said. Now the China business has learned the line too, hoping to give consumers more confidence: "Brand transformation takes several years," Bozec said last Thursday.

The "brand transformation" plan first took shape in 2013, when Stuart Vevers arrived as the new creative director. Vevers wanted to turn COACH into a lifestyle brand. He widened the product line to include ready-to-wear and shoes, and began launching a large number of men's collections. COACH then announced it would move from its once slightly cheap "accessible luxury" positioning to "modern luxury." In the summer of 2014, COACH laid out the plan at a meeting with analysts and investors, trying to persuade Wall Street to back a long project. As of the end of last year, judging by the weak share price, Wall Street had not really bought in.

But this time COACH seems determined. At the end of last year it bought the high-end shoe brand Stuart Weitzman, and it has spent more on store renovations and marketing for its own brand. This year, COACH's selling, general and administrative expenses come to about half of net sales.

COACH's store at Shin Kong Place in Beijing

So far COACH has opened or renovated 40 modern luxury stores worldwide, two each in Beijing and Shanghai. In China, COACH has also spent more on print advertising: Elle magazine produced a supplement for it introducing the spring/summer 2015 collection. "That's more impressive than buying the inside front or back cover. It shows financial muscle," said a fashion editor who asked not to be named.

COACH used to rarely buy prime advertising pages in major fashion magazines. It put more of its money into opening stores, which paid back more directly in sales and let consumers see exactly what they were getting. In 2009, COACH took back its distribution rights in China and switched to running its own stores. A year later Jonathan Seliger, a former executive at the British luxury menswear brand Alfred Dunhill, became president for China. He threw himself into the job, intending to run COACH like an energetic, fast-changing young company.

Under Seliger, COACH was red-hot on the strength of its "accessible luxury" idea and opened roughly 30 stores a year in China. In a 2013 media interview, Seliger recalled: "Compared with the European brands that have been in China for many years, I feel we have to move forward at a few million miles an hour." To make luxury more "accessible," opening more stores was almost a necessity. The stores were also placed next to those of European luxury brands and looked much the same in decor and display, yet, as in markets worldwide, their prices were 40%-60% lower.

It looked tempting. In the late twentieth century, young American women just starting their careers carried COACH bags as a clumsy, endearing way of imitating their bosses. In China in the early 2000s, people were happy to spend two or three thousand yuan to try this "luxury" from New York. COACH didn't care who its customers were. It only wanted to know whether they could find something they liked among the new products released every month, and whether the turn-lock clasp was practical enough. To find out, it surveyed tens of thousands of consumers, on the scale of a fast-moving consumer goods brand.

The sales figures show that Chinese consumers were at first very willing to pay for "accessible luxury," and only later lost interest. In fiscal 2012, COACH's sales in China grew by more than 60%. In fiscal 2013, growth held at 40%. In the third quarter of fiscal 2014, growth in China slowed to 20%. At the end of the fourth quarter of fiscal 2014, last August, Luis mentioned on a conference call for the last time that same-store sales in China had grown by double digits. That same month, Seliger left.

People began to question COACH's aggressive strategy in China: it opened stores far too fast and rushed into second- and third-tier cities. This made COACH look less and less like a luxury brand in the traditional sense. COACH also launched a Chinese website that sold online. Even now, European luxury brands remain especially wary of e-commerce. They fear that a second-rate user experience will damage the brand, and that even with orders coming from more than 300 Chinese cities (COACH's own figure), the gain would not be worth the cost.

Yet at the start, the same strategy was seen as the way to deliver "accessibility." The contradiction may lie in the paradox built into the phrase "accessible luxury," which makes it hard to strike a balance between market and brand. Over the past few years, COACH clearly leaned too far toward the market.

Now COACH has started working on the brand. It says it will become a "modern luxury lifestyle collection brand." Its first priorities are to shake off its cheap, discounted image, even at the cost of lower sales, and to deliver the "greatly increased fashion relevance" it promised Wall Street. Creative director Stuart Vevers has taken his ready-to-wear collections to New York Fashion Week three times. The clothes carry echoes of the classics of long-established fashion houses, but COACH still told analysts on conference calls that the fashion world has warmly welcomed COACH into the fashion conversation.

At least in timing, this message suits the China market. Two months after COACH retold its "brand story" to Wall Street, Bozec became president and CEO for China. The China market is far from what it was, but compared with Japan and the United States it is still "fantastic." COACH's consumer surveys show that in China more than 80% of customers still intend to buy COACH again, a higher share than in the United States or Japan.

What COACH has to do is keep these customers and use its new positioning to win back others. After buying "my first COACH handbag in life," those customers broadened their horizons quickly, long ago developed more mature taste and buying habits, and were bound to say goodbye to their "first mentor in life." "For the same price, you might as well buy a better brand overseas," said the fashion editor quoted above. COACH has no plan to narrow its price gap in China any time soon.

Can Bozec change this? For the middle three years of Seliger's time as China CEO, Bozec was COACH's senior vice president for Asia and COO, based in Shanghai. One of the projects he pushed was COACH's Chinese website and e-commerce business. Lately he has become almost obsessed with WeChat and Weibo. "We have the most followers of any luxury brand," Bozec said. "Even more than fast fashion."

In most respects, Bozec has kept to Seliger's approach. In China, COACH still stresses its 40%-60% price advantage, clearly marking out a segment apart from traditional European luxury brands. COACH still likes to have KOLs endorse it online and to engage often with consumers on new media. And COACH still dislikes the exclusivity other luxury brands show in choosing their customers; even after renovation, its stores remain friendly. If Bozec's Chinese were as good as Seliger's, I suspect he too would seize every chance to chat with customers.

But COACH China has still made one big change: it has stopped Seliger's "full speed ahead" plan. On conference calls, Victor Luis called this "slower channel growth," meaning fewer new stores each year.

This year COACH plans to open about 25 stores in China and close 11. COACH says most of the stores closing are in department stores with thinner foot traffic, and it intends to move them to busier shopping districts nearby. Asked where China's new markets are, Bozec preferred to talk about the growing middle class rather than "new markets" in a geographic sense. "Sales and store openings are not really goals for us," Bozec said. "The goal is brand transformation, and that takes many years."

In those many years, COACH will still have to search for a balance between market and brand. It may make some mistakes, or it may do well. Recently COACH has been debating internally the promotions it runs on WeChat, which clearly work well at drawing users. But unlike before, COACH now worries that they will deepen the "cheap and discounted" impression and take it back to the days when being "accessible" no longer set it apart.

If Bozec really does keep track of other brands' moves on new media, as he says, he must also have noticed this: on the holiday COACH thought worth a big campaign, Hermès and Burberry simply showed a few accessories suitable for mothers, available to buy. Chanel was busy showing its cruise collection in Seoul and staging an exhibition in New York that retold the story of No. 5 perfume.

"One problem is that if I buy my mother a COACH, I won't buy the brand for myself," said the fashion editor who had praised COACH's financial muscle. COACH may need to consider that even if it doesn't choose its customers, its customers will still choose it.

Images from: COACH website, Wikipedia