Michael Kors is banking on Jimmy Choo to give it a much-needed boost, but there are a few potential problems at play, according to analysts, not least of which is a lack of demand for Kors' core bag business.
New York-based Michael Kors confirmed this week it will buy famed footwear brand Jimmy Choo for $1.2 billion; Kors, known for its the accessible luxury offerings, plans to expand the Jimmy Choo by opening more stores, especially in Asia. One red flag for analysts is the obvious disparity between Kors' accessible offerings and Choo's high end accessories.
According to Reuters, "Jimmy Choo, whose towering stilettos were made famous by characters in the popular TV series 'Sex and the City," is synonymous with affluence, and somewhat at odds with Kors' image of accessible luxury. It could be argued that Jimmy Choo will give Kors's tumbling sales and stock a leg up, but experts said Kors' expansion plans could dilute the shoemaker's brand name.
"Revenue expansion doesn't come from opening stores today, but figuring out how to unlock the e-commerce component and (Kors) haven't proven that they get that either," said Eric Schiffer, CEO of private equity firm Patriarch Organization.
Kors has made this mistake before. Once a seller of popular Mercer and Hamilton handbags, Kors put its wares too quickly on too many shelves, making them ubiquitous. Since then, the company has struggled to come up with designs that have caught the fancy of the well-heeled buyer, who have gravitated toward bags offered by Coach and Tory Burch.
Kors has been trying to stem the sales declines by expanding into dresses, menswear and online, but has had little success. "If (Kors) had fixed their U.S. market, if they'd shown improvements there and then made this acquisition, people would be a lot more comfortable with it," said Gabriella Santaniello, analyst at A-Line partners.
"For (Jimmy Choo), I could see them opening in another market but I think that is what makes everyone nervous. It is like: "Look what they did with the Michael Kors brand, are they going to do that to Jimmy Choo?"
Kors' rival Coach faced similar problems not so long ago. But Coach responded quickly, tightening supplies to department stores to regain its luxury cachet, before diversifying with the buyout of upscale shoemaker Stuart Weitzman in 2015.
The company recently bought smaller rival Kate Spade, whose products are a hit with millennials.
Both retailers seem to be looking to emulate the successful multibrand strategy employed by European conglomerates, LVMH and Kering, where cash flows from one large brand are reinvested into smaller but faster growing ones. These two industry giants have grown into luxury powerhouses by buying multiple luxury brands such as Louis Vuitton, Givenchy, Celine, Marc Jacobs, Christian Dior and Loewe, among others, for LVMH, and Gucci, Yves Saint Laurent, Balenciaga, Brioni, and Alexander McQueen, etc. for Kering.
Kors' CEO John Idol said the company would look to grow by buying more globally recognized luxury brands like Jimmy Choo. "We are really looking to build an international luxury company and less so brands that ... have a greater reliance on wholesale than its own retail strategy," he said on a conference call on Tuesday.
Idol said Jimmy Choo would be run independently with minimal interference from Kors' management and that he doesn't want the two brands to be linked with each other. But analysts said while this could be the right approach for Coach, which has a creative, forward-thinking team, it could overwhelm Kors, at least initially.
Kors will need to have a deep understanding of demand, it will have to innovate to drive excitement, maintain the trueness of the brands it acquires, and little or no overlap with other brands in its portfolio, said Jason Green, CEO of customer strategy firm Cambridge Group.
For now at least, analysts said, Kors should be looking to walk before it runs.
(Reporting by Gayathree Ganesan and Siddharth Cavale in Bengaluru; Editing by Sayantani Ghosh)