Coach's New Bag

Coach's New Bag

The Hamptons, the celebrated summer retreat, has never been for those with modest ambitions. The homes are lush, the stores well-appointed. For many, it represented America in the extreme: shorn of humility and caution, a place of careless abundance. Then the stock market gave way, Bear Stearns collapsed, and the recession arrived.

In July 2008, amid the spreading gloom, the senior executives of Coach gathered in the empty second floor of their 4,000-square-foot store at 69 Main St. in East Hampton for a private annual meeting. At the end of the first day they made an important decision. The brand had emerged from its modest origins in the 1940s to become an emblem of the working woman and then, remarkably, a favorite among the fashion-conscious. It had created the very conceit of affordable luxury. Now that sense of expansiveness, opportunity, even desire, was diminished. Coach had to adapt.

So began a nearly yearlong quest to design a line of purses and accessories that could be priced to fit the times without cheapening, or otherwise damaging, Coach's image. Doing so would require executives to find new sources of leather, fabric, and hardware, renegotiate deals with suppliers, and collaborate more than they ever had. "I've never worked harder," says Lew Frankfort, who has been with Coach since 1979 and has served as its chief executive since 1995. The resulting collection, which will be introduced in late June, is called Poppy. It's more youthful; Frankfort describes it as eclectic and spontaneous. The average price will be $260, about 20% less than the usual Coach purse.

Nearly every fashion label has had to find a way to seem recession-chic. J.Crew now sells a basic ballet flat for $98 instead of $118. The average price of a Vera Wang wedding gown was $5,500 last year; next spring it will be $3,800. One of the worries at Coach is that Poppy might be regarded as a temporary--or, worse, ill-considered--response to consumers' straitened circumstances. Frankfort and his team believe that the habits and expectations developed during the recession will last far beyond it. The days of the $330 purse could be over. Poppy is supposed to help move the entire company back to what Frankfort calls a more comfortable place, which at Coach means an average price of $290 for a handbag.

For Coach this shift is a social experiment, a managerial challenge, and a financial necessity. Company revenues during its last fiscal year, which ended in June 2008, were $3.18 billion, up 22% from the year before. But now, for the first time since the handbag maker went public in 2000, sales growth is slowing, profits are falling, and margins have slipped. Coach is disciplined: It frequently surveys customers about their outlook and tastes; it carefully tests new designs; it measures almost everything; and it has a lot of cash. The company might handle this comedown just fine. But when women, fashion, and money are involved, the results aren't always predictable.

PARSING

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parsing - parser  THE NUMBERS

Frankfort, 63, energetic and exacting, sits at a glass desk in an airy office on the 12th floor of the old brick building in Manhattan that used to be Coach's factory. The white orchids are placed just so; coffee and juice are here, newspapers and magazines there. On the wall behind him he has neatly tacked up pages of numbers. Daily and weekly sales reports are broken down by category and store, of which there are 324 full-price and 109 factory outlets in North America (Coach also sells in some department stores). Then the data are more finely parsed to determine the number of people who came into each store, the percentage who bought something, what they purchased, and how much they spent. Frankfort also keeps track of the global instructions for the next floor plan, which is changed monthly in every store as Coach introduces items and removes others (eventually those make their way to the outlets). Years ago, the company determined that regular customers come into its stores every 30 days or so. Frankfort decided they should see something different each time.

Coach spends about $5 million annually on that customer research. Every three months it surveys some 20,000 women online about the Coach brand as well as about their economic expectations and spending habits. So it was with some certainty that, in January 2008, Frankfort told fashion industry publication Women's Wear Daily that a consumer recession had begun. "I thought it would likely be a serious, prolonged downturn," Frankfort recalls saying. "And that Coach would need to create even more compelling reasons for consumers to shop."

People at Coach often talk about "the iterative process," the controlled and deliberative way in which decisions are made. This is not a company that makes rash moves. At first, Frankfort believed Coach could respond to the changing fortunes of Americans without thoroughly reviewing how the company did business. Maybe creating a fresh feel in its stores would be enough.

But by the spring of 2008, the financial world seemed to be coming undone, unemployment was rising, and among the fashionistas, cheap was the new black. Frankfort and his executives reconsidered. They agreed it was time to create a more "youthful energy" for the brand. "This was an attitude we felt we were missing," says Frankfort.

People are anxious, uncertain of their prospects, and they want to buy something fun? Some would say that's not just counterintuitive, it's misguided. But Coach's research suggests otherwise. "People are not buying safe. It's a mistake to think so," says Reed Krakoff, Coach's confident, well-compensated, 45-year-old executive creative director. (He took home $22.4 million last year.) "People want to be inspired. That's what fashion is about; that's what shopping is about." Krakoff called the new concept "Poppy," and the name stuck.

That's where Coach was when Frankfort, Krakoff, Michael Tucci, the head of North American retail operations, Jerry Stritzke, the just-hired chief operating officer, and nine others met in East Hampton in July 2008. It was Tucci, 48, animated, forthcoming, and smart enough to have left Gap before its decline, who made the crucial presentation. Even before the recession he had been arguing that Coach had become too expensive. "We have a long history of being a very grounded $200 handbag business," he says. "Beginning around 2001 we started moving up and became a $300 handbag business. Then we reached $330. You could ask why we went so far. We had to push it. And the customer came right with us." Until she didn't. "We reached our natural limits," says Tucci.

To convince Frankfort and the others of that, he reviewed the merchandise breakdown from Coach's 2007 fiscal year. That was when Coach sold the most purses, at an average of $290. In its 2008 fiscal year, Coach earned more, but it did so by selling fewer bags at higher prices. "We saw an opportunity to reengineer our assortment so that we have 50% of our bags below $300, instead of 30%," says Tucci. "We didn't just say 'let's lower our prices by 10% or 15%.' "

EXPLORING ALTERNATIVES

Still, deciding to wind back was difficult. "It required a mind shift," Frankfort says. "We took the view that the world will forever be different, and we need to acclimate ourselves." The cachet

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ca·chet
n.
An edible wafer capsule used for enclosing an unpleasant-tasting drug.  of a brand is intangible, sometimes ephemeral. But Frankfort says his hesitation was about the potential impact on the company's profitability. "We needed to be persuaded that, by rebalancing, we would generate a lot more volume to offset the lost dollars," he says. "And that we could design and manufacture these products and still provide acceptable--no, excellent--returns." Coach's gross margins had been above 75% for the past five years. But during the recession, as the company has lowered prices at its factory stores, its margins have fallen to 72.4%, a rate Frankfort expects to maintain. By comparison, brands such as Polo Ralph Lauren and Tiffany have margins of less than 60%.

Frankfort calls what happened at the meeting a collective epiphany. After the executives returned to Manhattan, Krakoff began developing Poppy so that the average price of a bag would be less than $300. The figure meant everything and nothing to him. "The smartest way to be creative is to understand your limitations from the start," Krakoff says. "If you don't have that information, your idea gets pushed this way and that way: The leather is too expensive, the shape is too big, this won't work in Japan. Then no one is happy. I want to know everything in the beginning."

Designing Poppy required a close and improvised collaboration between Krakoff and Stritzke, Coach's chief operating officer. Krakoff wanted the leather and the fabric to be thinner, lighter, softer, drapier. He wanted the name Coach to look like it had been written in graffiti on some bags, but the company didn't have much experience with printing. "Poppy shifted the burden to the supply chain to bring innovation to the designers," says Stritzke, 48, who has years of experience in the global manufacturing of apparel. "We're much more attuned to what each other needs now."

Stritzke discovered that Coach "hadn't explored as many of the alternatives as you might have thought." As he explains: "We [moved] production from America to Asia, but we hadn't done much more than that." Stritzke traveled to Asia to strike deals with new tanneries and factories, and he renegotiated contracts with European suppliers, which still provide about half of Coach's leather. "It's ironic," Stritzke says. "The economic environment makes this necessary and easier. It would have been harder if our global suppliers were busy making inexpensive dumb stuff where they don't have to work as hard." Coach has also benefited from a 15% drop in the price of leather, as many of the biggest buyers--auto companies, shoe and furniture makers--have faltered.

Over the next several months members of Coach's design and merchandising groups met three times to review Poppy's progress. They considered 25 different materials and 15 Coach tags to hang on the purses. They worked through three prototypes for each of the six bags. By Oct. 15 they were ready to present the line to Frankfort, who deemed it "awesome." The next month, Coach invited a couple dozen young women, four to six at a time, to its Manhattan showroom to assess the collection. Poppy seemed to resonate with them. No one at Coach felt the need to make any changes.

That bit of good cheer soon gave way to a dismal reality: the worst holiday season anyone at Coach had ever experienced. The company's profits for the last three months of 2008 declined 14%. "The first question everyone asked when they came into our full-price stores was, 'What's on sale?' " says Frankfort. "We never go on sale." (Coach does discount at its outlets, which Frankfort says draw different customers.) Any lingering resistance to the idea that Coach had to reposition itself ended then. "Sometimes you need to get roughed up a bit to make a courageous move," says Tucci.

As spring began, Frankfort looked for other ways to cut costs. He laid off 10% of the corporate staff and said Coach would close four stores. The company had already planned to move the East Hampton store to a smaller space on a more desirable lane.

The main pieces in the Poppy collection were tested in nine Coach stores and 23 department stores in April and May. And for the first time, Coach let people make online purchases through Facebook. Two $198 bags, the Groovy and the Glam, did better than Coach expected. But one didn't do quite as well: That was the Spotlight, which sells for $298.

For more on managing in a recession, watch an interview with CEO Lew Frankfort at businessweek.com/go/09/coach