Coach Brands is one of the most iconic luxury brands, and it's interesting because it's
in between super luxury designer brands and general middle market brands. So Coach has this
unique place in the market that for many years has driven a big part of its success.
Coach is now a part of Tapestry, Inc., but today we're going to really focus on the Coach
portion of Tapestry. We're going to talk a little bit about luxury brands and how they fit into the
Strategy Simplified framework. We're going to talk about the history of Coach and Tapestry,
we're going to talk about if Tapestry, and Coach in particular, is successful right now,
and what the future of success for this brand might be using the Strategy Simplified framework.
Let's get started. Tapestry, Inc. is the current name of a company that really
was known for many years as just Coach, and then acquired two other big brands:
Kate Spade and Stuart Weitzman. And the core of the business was based in New York City.
Coach New York, Kate Spade New York, and then Stuart Weitzman all New York brands. And in 2018,
the revenue was in the $6 billion range for the conglomerate. In 2017, the company decided that
it wanted to be more than just Coach to represent the other brands that it had acquired. And so they
renamed as Tapestry, which caused some confusion in the marketplace because it actually seemed like
there wasn't any brand left at the end of the day. So there was a new brand that had no brand name,
and so there was a little bit of a challenge in terms of their stock price reception to that.
Overall, this business is a goods business, a product. And if you've been following Strategy
Simplified at all, you'll know that there are two main types of businesses: variable costs
and fixed cost businesses. And the variable cost type of the business is where every time
something is delivered to a customer, there is an actual linear incremental cost. And for Coach,
that's absolutely true. This is a variable cost business. But interestingly, in luxury brands, we
see something a little different than you would in other kinds of retail or product based businesses
where it's not super clear whether variable cost is always the biggest part of the business. And
we're going to dive into that in just a second. So when we know that it's a variable cost business,
we want to dive into the numbers, and in this case that's where we're going to see this kind of funky
story. Usually when we're looking at it, we would look at the net sales revenues. Then we would
look at the cost of sales, and then from there the gross profit. And if that number - if the cost of
sales is more than 50 of net sales, bingo, it's a variable cost business, and we can see that.
But what happens if that doesn't happen? Well then, we look at a second thing. We look at
the cost of sales compared to the fixed cost of the business. We look to see which one's larger.
And you'll see in this case this begins to break the rule. So we need to understand what to do
when that happens, and whether to hold with our conviction, or change the business model
definition. So in this case, Tapestry, Inc., which includes Coach, is as of June 29, 2019, $6 billion
in net sales. So revenue about $6 billion. $1.97 billion in cost of sales, or the actual cost
of the products that it takes to produce it. So about $2 billion, or one-third of it, are variable
costs. So immediately we would say no, this is probably a fixed cost business, or at least
it's not definitely a variable cost business, so that might defy what we said originally.
Then we go down and we look at what the selling general and administrative costs
are. And look at this: $3.2 billion. So those eclipse the magnitude of the cost of sales.
What's interesting about this? Well, it's a luxury brand, so it's going to be different in terms of
the margin that we expect on the net sales, and also the mode of operation will be different. So
this is a variable cost business where every time you buy Coach purses, or Stuart Weitzman shoes,
or a Kate Spade bag, some cost is incurred by the company in order to manufacture and deliver that.
But we also have this very high overhead business that's focused on branding,
so it's spending a huge portion of its amount on branding, administrative which is normal,
and then selling costs, which include the vehicles for selling, which in their case are a lot of very
expensive retail stores. So one of the questions of this kind of business is does that make it
a fixed cost business? Is this a fixed cost business where you're just trying to sell enough
to generate your capacity? And there would be, if that were true in a luxury brand, two options for
the way that the luxury brand could evolve. One is that the luxury brand could reduce its price
significantly over time, looking to drive volume and still maintaining some margin but maybe not
the somewhat extraordinary margins that you can see here. I mean $2 billion in cost of sales
and $6 million in revenue means that one-third of the cost of everything that they're selling
in the store is cost, and the rest of that is gross profit. So very healthy margins on the
contribution margin side. So one option is that you could just reduce the prices
and find a more optimal revenue curve. And in luxury fashion, that could be one of the options.
However, your second option is to maintain what you have and to spend what's left over,
the two-thirds of your gross profit on sustaining those profit margins. And that's arguably what
luxury fashion does and has done, which is where they do spend overwhelmingly on some
of the fixed costs of the business. And the point is to maintain the pricing power over the costs.
What is Coach, and Kate Spade, and Stuart Weitzman probably not going to do? They're probably not
going to spend the majority of their effort in the business negotiating with suppliers. That's not
going to be a key for how they're thinking about their business. What they're going to do instead
is focus on spending money on branding, on great retail experiences, etc.,
to try to drive up the contribution margin, the price per item, and the number of items
that different customers purchase. If they're able to do that effectively, then they'll be
successful in the long run. So what happens in the future? Well, in a market that currently is shut
down and hurting in light of coronavirus, and is reopening and will reopen slowly, we're not going
to see a bounce back immediately in retail to any level to where it was, and especially not to
pre-e-commerce levels. So what's going to happen? We need to see luxury brands competing and
thriving in an e-commerce model where they could really show up in the numbers in the same way that
they are right now on the cost of sales and the variable cost, but then really diminish their
SG&A, their selling general administrative costs. If you can have a luxury brand with no storefronts
and a very low cost to operate, that's going to be the powerful luxury brand of the future,
and that's what we need to see in luxury brands to evolve successfully over time.
We hope that you enjoyed this conversation about luxury brands, Strategy Simplified, and cost
structure. We'll make sure to include the numbers for you as well so you can take a look at those.
We hope that you enjoy understanding these kinds of videos, and please join us on Strategy
Simplified, our podcast, or on our channel to get more information. Thanks again for joining.