Do 'Accessible Luxury' Brands Have an Inherently Limited Lifespan?
Posted on 04 August 2016
LONDON, United Kingdom — Last week, Coach Inc., Kate Spade & Co. andMichael Kors Holdings Ltd. reported their quarterly earnings. Once the darlings of Wall Street, in the last year these accessible luxury brands have run into trouble, with some reporting weak earnings and declining same-store sales.
Last Tuesday morning, Coach reported fourth quarter revenues of $1 billion, a 12 percent drop compared to the same period last year. While the American leather goods and accessories maker’s revenues beat expectations, same-store sales fell by 19 percent. Then, on Wednesday, Kate Spade & Co. reported second quarter net income of $8.5 million, after reporting a loss in the same period a year earlier. Kate Spade shares have dropped 35 percent in value since the beginning of 2015. Finally, on Thursday, Michael Kors reported revenues of $986 million, up from $919.2 million for the same period last year, topping expectations. Profit fell for the second quarter in a row, as sales at existing stores declined.
It wasn’t always this way. For years, accessible luxury brands like Michael Kors, Kate Spade and Coach — as well as Tory Burch andRalph Lauren — posed a real challenge to higher-end luxury brands like Hermès, Gucci and Louis Vuitton, offering handbags with luxury-like cachet for as cheap as $300.
For a long time, the formula worked well. In 2014, London-based department store Selfridges sold an average of 225 Michael Kors Selma bags every week. To date, the brand has also sold tens of millions of its $300 MK tote. And, as recently as this season, Harvey Nichols reported a 34 percent increase in sales of Michael Kors bags, compared to this time last year.
“One of the main drivers is the increasing number of middle class consumers, particularly from emerging markets. They are really creating demand for accessible luxury products,” said Claudia D'Arpizio, a partner at consulting firm Bain & Company.
The world’s middle class population is set to hit 3.2 billion in 2020, up from 1.8 billion people in 2009, according to the Organisation for Economic Co-operation and Development (OECD). The OECD predicts that the majority of this growth will come from Asia, which will account for 66 percent of the world’s middle class population by 2030, compared to 28 percent in 2009.
“During the recession, consumers pulled back and economised — often out of necessity, but also because saving money and getting a bargain became a cool thing to do,” added Marcie Merriman, executive director of retail strategy and consumer engagement at Ernst & Young. “With Gen Z, there’s been more of ‘work hard, live well’ attitude. This mentality could translate into more interest in luxury items, and continued growth in the affordable luxury category.”
Fuelled by such trends, the accessible luxury market is expected to grow €150 billion ($164 billion) between 2014 and 2021, reaching €685 billion ($747 billion) by 2021, according to a report by Boston Consulting Group and Altagamma. And yet, this year, shares in Michael Kors have lost almost half of their value, Kate Spade shares have dropped 35 percent, and, up to last Monday's close, Coach shares had fallen 19 percent this year. Now, these labels face pressure to reinvigorate their businesses to earn back customers and investor confidence, in the face of diluted brand cachet and over-distribution.
Do accessible luxury brands have an inherently limited lifespan?
“Accessible luxury brands enjoy a lot of success, but only for a limited period of time. Most of them expire after a few years, but they try to keep on going as long as possible,” said Mario Ortelli, senior luxury goods analyst at Sanford C. Bernstein. “True luxury brands usually have greater heritage, more brand equity and are therefore more stable and resilient. Accessible luxury brands tend to be more volatile, but can deliver faster growth in the early stages of development.”
According to D'Arpizio, accessible luxury labels follow the same codes as true luxury brands — from stores in prestigious locations, to high-end customer service, to luxurious packaging. “What varies between the two is the pricing and product positioning,” she explained. “Accessible luxury is a strategy used to create desire for products that are not ‘super-luxurious,’ but are affordable to a larger audience. I think very few of these brands have a long-term position [in the market].”
Over the past few years, Michael Kors has expanded heavily. The brand is currently available in 4,133 locations worldwide, up from 2,913 sites at the beginning of 2013. In 2014 the label had 703 stores, up from 231 in 2011. Kors products — in particular, its handbags — have become ubiquitous, and as a result, the brand’s luxury cachet has been diluted. READ FULL ARTICLE