Following a period of immense growth, Michael Kors has analysts questioning how much longer it can stay on top. Since exploding onto the financial scene with its December 2011 IPO, which raised $944 million for the affordable luxury brand, the price of Kors shares took a tumble in July and again this month. Concerns primarily stem from the saturation of the market with MK goods, and thus, the lack of exclusivity associated with the brand, and the effects of excessive discounting of the brand's garments and accessories. In fact, some are likening Kors' brand to Coach, which is currently struggling to find its footing again by way of a $250-$300 million restructuring plan, which has entailed bringing a new creative director on board, upping its fashion creed with more high fashion ad campaigns, filing an array of lawsuits to protect its trademarks, planning to close over 70 under-performing stores, and shifting away from low priced bags with that awful “C” print to ones of higher quality. This comes on the heels of Coach long-dominating the U.S. handbag market, and then being heavily targeted by counterfeiters, and subsequently, crashing and losing the majority of its marketshare to the likes of Kors, Tory Burch and Kate Spade.
As you may recall thanks to Louis Vuitton, Gucci, etc., market saturation is a dangerous tactic. The Paris-based brand, which has not-so-secretly suffered quite a bit over the past couple of years following what felt like complete and utter market saturation of its famed Toile Monogram print, has been working doggedly to regain its footing as one of the most covetable luxury brands. In fashion, image is everything and for awhile there, the image of too many Louis Vuitton Speedy or Neverfull bags (some of which were counterfeits) was overbearing, and as a result, the demand for such accessories suffered greatly.
Is this what is in the cards for Michael Kors? Maybe. American consumers and even some of their international counterparts are "turning sour on the ubiquitous brand," according to the Business Insider. While the brand has reported remarkable growth (revenue has increased at a compound annual rate of nearly 50% since 2008), one simply has to wonder: At what point does such mass-consumption of a brand’s products create over-exposure in the mind of consumers that will turn them off from wanting to purchase its products in the future? It seems that time is steadily approaching for Kors, at least in the U.S. CNBC, for instance, reported recently that the New York-based brand's "bubble has burst," stating that the pace of both Michael Kors' revenue growth and its stock gains look difficult to sustain over the long-term.
Kors arguably has a little bit less to worry about than Louis Vuitton or Gucci, as it is an affordable luxury brand, as opposed to an actual luxury brand (and consumers are generally much more willing to spend $200 on a purse than $1500). However, there is still a delicate balance between a company’s ability to increase awareness of its brand and expand its reach, and thus, its profits, and its ability to uphold its identity as a brand (a rather aspirational one in Kors' case, think: yachts, helicopters, the whole jet set lifestyle) and to maintain consumers' desire to shop its brand.
According to a recent article in the Wall Street Journal, Kors' growth from a 3 percent share in the North American luxury handbag and accessories market in 2009 to 18 percent, according to recent measurements, is not necessarily a great thing for its future. In fact, the brand's popularity, coupled with reports of increased promotional activity, is said to be corroding its image as an aspirational brand. And the increased amount of discounts, particularly on the goods being stocked in the 3,700 department and specialty stores worldwide (department stores tend to be more aggressive with discounts than brand-owned stores), does not help either. Per the WSJ:
Fears of discounting hit Kors stock this summer after Barclays and Citigroup published research reports that both estimated that Kors in June roughly doubled the square footage in its stores devoted to discounted goods, compared with a year ago. The Barclays report also published Google data that showed the Michael Kors brand was being searched less frequently in the U.S., a sign that consumers were losing interest.
While all is not lost, as the brand reported that total revenue increased 43.4% to $919.2 million from $640.9 million in the first quarter of fiscal 2014 (which ended ended on June 28) and profit climbed to $187.7 million, from $125 million a year earlier, its stock price is down. Kors shares fell 5.9% in trading early this week to $77.01. The shares, which have surged since its IPO in 2011, are now down 5% so far this year. These numbers, in particular, shed light on concerns that the hot seller of handbags and apparel might not be able to remain immune to the discounting and tough growth conditions plaguing the broader retail business. Growth outside of the U.S. is also working in Kors' favor. The brand plans to increase its global presence in non-established international markets.
Going back to Kors' market saturation strategy for a second, I do wonder, what is the alternative? Is there a more sustainable way for brands to rake in cash at this speed and volume without ultimately leading to a crisis-induced need to rebrand? I'm not entirely sure. It seems that such rapid turnover will ultimately lead to saturation and result in the need for a brand to revamp. Coach is arguably the best example. Its profit-chasing without any indication of restraint (particularly evident in the late 80's and throughout the 90's) has led to the need to undergo massive internal and external changes in hopes of regaining its image in the minds of consumers and thus, its market share. Gucci and Louis Vuitton, which both rather recently saturated the market with relatively accessible (read: lower priced than their more exclusive, luxury offerings) logo-covered accessories, have it a little bit easier. This may be because they have many, many decades of luxury branding to rely on in instances of consumer doubt. Coach and Kors simply do not have this cache on which to fall back, as they are inherently a few steps down the ladder from high fashion houses. But, in the end, I suppose it simply is not fair to compare luxury and affordable luxury brands, even though, I would argue that their goals are the same: Increasing profit and employing a sustainable method of growth.