The luxury appeal: analyzing affordable luxury brands through the Great Recession

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Content THE LUXURY APPEAL: ANALYZING AFFORDABLE LUXURY BRANDS THROUGH THE GREAT RECESSION BY MICHELLE JENKINS __________________________________________________________ A Thesis Presented to the FACULTY OF THE USC GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In Partial Fulfillment of the Requirements for the Degree MASTER OF ARTS STRATEGIC PUBLIC RELATIONS MAY 2014 Copyright 2014 Michelle Jenkins ii DEDICATION This thesis would not have been possible without the unwavering support from my family and friends. I can’t thank you enough for all of your encouragement and guidance throughout this journey. Mom and Dad, thank you for allowing me this wonderful opportunity. My accomplishments are a testament to you. iii ACKNOWLEDGEMENTS As I embarked on this journey, I was both overwhelmed and nervous. I would like to thank my thesis committee chair, Brenda Lynch, for continually encouraging me through this process. Her positive guidance provided great inspiration and vision for my thesis. Having Brenda as a mentor was beneficial, both for my thesis as well as throughout my graduate experience at USC. I would also like to thank Jennifer Floto and Matthew Le Veque, my committee members, for their valuable guidance and direction. Their unique perspectives proved to be very advantageous throughout this process. Thank you! iv TABLE OF CONTENTS Dedication ii Acknowledgements iii Abstract v Chapter One: The Great Recession 1 Chapter Two: Luxury Retail 4 Chapter Three: Introduction to Case Studies 16 Chapter Four: Rock & Republic Case Study 18 Chapter Five: Coach Inc. Case Study 35 Chapter Six: Tiffany & Co. Case Study 52 Chapter Seven: Conclusion 68 Bibliography 73 v ABSTRACT This paper examines the impact of strategic business decisions made by luxury retail companies during an economic recession. While the Great Recession impacted many businesses worldwide, the luxury retail market acted as a harbinger for the overall status of the economy. The purpose of this paper is to investigate business decisions made during economically turbulent times, through analyzing three leading affordable luxury companies, as this is the most vulnerable segment of the luxury retail industry. The key issues discussed in this paper include the Great Recession, the landscape of the luxury retail industry and three affordable luxury case studies. Results reveal three main factors for public relations practitioners to consider when faced with a crisis. The principal conclusion is that luxury brands need to place the upmost importance in the preservation of brand image, as perception is reality – especially when the stakes are high. 1 CHAPTER ONE: THE GREAT RECESSION THE DOWNFALL In 2008, the National Bureau of Economic Research (NBER), a private group of leading economists, declared that the United States had been in a recession since December 2007. 1 While this merely confirmed what many Americans already knew, questions arose regarding the severity of the downturn and how long it would last. This period of economic downturn became known as the Great Recession, as it proved to be one of the longest since the Great Depression, which took place in the 1930s. According to the NBER, the deterioration in the labor market throughout 2008 justified the reasoning for the Great Recession’s official start date of December 2007. Although the study did not cite causes for the economic recession, it was widely accepted that the depreciation of the housing market, which began its downfall in 2006, was generally responsible for the collapse of the U.S. economy. In the 2000s, the real estate boom afforded many consumers the luxury to spend frivolously, as the cash-‐out refinancing of home mortgages turned many American homes into virtual ATM machines. 2 However, it was only a matter of time 1 Isidore, Chris. “It’s Official: Recession since Dec. ’07.” CNN.com. CNN Money. December 1, 2008. <http://money.cnn.com/2008/12/01/news/economy/recession/>. 2 Coy, Peter. “The Great Recession: An ‘Affair’ to Remember.” Businessweek.com. Bloomberg Businessweek. October 11, 2012. < http://www.businessweek.com/articles/2012-‐10-‐11/the-‐great-‐ recession-‐an-‐affair-‐to-‐remember>. 2 until the housing bubble burst. As a result, the amount of foreclosures skyrocketed. In 2009 alone, an estimated 2.8 million homes initiated foreclosure. 3 While many Americans nationwide struggled, economists argued about what changes were needed to pull the economy out of its rut. But Lakshman Achuthan, managing director of the Economic Cycle Research Institute, believed that despite efforts to improve the economy, the only solution for the Great Recession was time. 4 By the end of 2008, every state reported an increase in unemployment – a first in the 32 years of documenting unemployment statics. For the American people, this bleak outlook meant that the recession was virtually inescapable. “This is important because there’s nowhere you can move to find a job,” said Gus Faucher, the director of macroeconomics for Moody’s Economy. 5 Despite the austere conditions, economists generally agreed that the U.S. economy would not plunge into an official depression, but rather maintain its recession status for the foreseeable future – a topic that deeply worried the masses. Much of this consensus was reached because of the numerous policies that had been previously implemented to support Americans through tough economic times, and to avoid allowing the economy to collapse into a full depression. As the economy started to recover, American consumers remained cautious with their spending habits. By 2013, the economy had vastly improved; however, 3 Cooley, Thomas & Rupert, Peter. “The Great Housing Recession Continues.” Forbes.com. Forbes. April 21, 2010. <http://www.forbes.com/2010/04/20/housing-‐foreclosure-‐unemployment-‐ opinions-‐columnists-‐thomas-‐cooley-‐peter-‐rupert.html>. 4 Isidore, Chris. “It’s Official: Recession since Dec. ’07.” CNN.com. CNN Money. December 1, 2008. <http://money.cnn.com/2008/12/01/news/economy/recession/> 5 Isidore, Chris. “The Great Recession.” CNN.com. CNN Money. March 25, 2009. <http://money.cnn.com/2009/03/25/news/economy/depression_comparisons/> 3 the overall market condition remained questionable for most Americans. The Pew Research Center reported in a September 2013 study that Americans perceived an uneven recovery – and they were right on the mark. 6 Despite the imbalanced economic recovery, businesses recovered and many consumers willingly increased their spending habits, yet the influence of the Great Recession still remained. Even as the economy strengthened, the fear of other economic downturns, or other external threats, remained at the forefront of consumer’s thoughts. To prepare for hard times ahead, businesses were tasked with creating strategic plans to weather the impact of these potentially tumultuous times and sustain the company’s reputation for the indefinite future. For the luxury retail market, creating a strategic plan was of the upmost importance. While many luxury consumers eagerly spent exorbitant amounts to continue to show off high-‐end designer labels, they also consciously cut back on discretionary spending during the economically challenging time. The economy’s shortfalls proved an unavoidable obstacle for premium retailers throughout the Great Recession. They affected companies in various ways, from meager sales decreases to filing for bankruptcy and going out of business. Much like the American public, luxury retailers were forced to wait out the Great Recession, while strategizing tactics to ameliorate the adverse effects and maintain the company’s prestigious brand image. 6 Desilver, Drew. “American perceive an uneven recovery – and they’re right.” PewResearch.org. Pew Research Center. September 12, 2013. <http://www.pewresearch.org/fact-‐ tank/2013/09/12/americans-‐perceive-‐an-‐uneven-‐recovery-‐and-‐theyre-‐right/>. 4 CHAPTER TWO: LUXURY RETAIL THE LUXURY RETAIL MARKET The luxury retail market is a highly coveted segment, since companies reap high profit margins because of the willingness of consumers to pay premiums to own the top luxury brands with such an elite cachet. Various definitions and concepts about luxury brands will be discussed in a moment, but it’s important to note that the United States accounts for the largest luxury retail market in the world and is known as the primary market for luxury consumption, meaning Americans are blazing the trail for the luxury goods market. 7 As the popularity for luxury brands accelerated in the early 2000s, consumers often spent out of their price range for brands that they connected with. The Boston Consulting Group described this phenomenon by coining the term “trading up,” which describes the purchasing patterns of middle-‐class consumers that spend premiums to own luxury goods, even though these steep prices put a serious dent in their budgets. 8 With the onslaught of the middle-‐class consumer in the luxury market, new opportunities arose for niche luxury brands to target a broader range of customers. To capitalize on this opportunity, many luxury companies introduced entry-‐level products – usually beauty items and fragrances – to attract new consumers in an effort to establish a life-‐long connection with the brand. “At an entry-‐level price 7 Chauhan, Sanjana. “Why Some Luxury Brands Thrived in the U.S. Despite the Recession.” LuxurySociety.com. Luxury Society. February 7, 2013. <http://luxurysociety.com/articles/2013/02/why-‐some-‐luxury-‐brands-‐thrived-‐in-‐the-‐us-‐despite-‐ the-‐recession>. 8 Silverstein, Michael, Fiske, Neil & Butman, John. “Trading Up: The New American Luxury.” New York: Portfolio Trading, 2008. Print. 5 point, the person can interact with the brand and when they have more income, they already have a relationship with that brand,” said Steven Fischer, a lecturer of image, style and design at Northwestern University. 9 As the relationship progresses between retailers and entry-‐level customers, the brand garners more fans in various market segments that continually spend, usually on increasingly more expensive merchandise. Luxury retailers also constitute a more stable market, as they are less affected by overall economic conditions. Wealthy customers are less sensitive to high gasoline prices, rising grocery bills and overall economic recessions. Moreover, luxury consumers often continue spending throughout adverse times, only cutting back on conspicuous spending. 10 While these luxury consumers continue to spend, less-‐than-‐affluent consumers cut back heavily. Despite setbacks from the Great Recession, Bain & Company said the luxury retail market looked strong by 2013, reaching $300 billion, which was up from $293 billion in 2012. Additionally, the U.S. remained the largest luxury market, in terms of revenue, reaching upwards of $86 billion. Following the U.S., Japan and Italy are the second and third largest markets, respectively. 11 9 Shea, Erin. “Entry-‐level products can attract future high-‐end luxury consumers.” LuxuryDaily.com. Luxury Daily. July 12, 2013. <http://www.luxurydaily.com/entry-‐level-‐products-‐can-‐attract-‐future-‐ high-‐end-‐luxury-‐consumers/>. 10 Lamb, Rachel. “Are luxury brands impervious to threats of a recession?” LuxuryDaily.com. Luxury Daily. October 21, 2011. <http://www.luxurydaily.com/are-‐luxury-‐brands-‐impervious-‐to-‐talk-‐of-‐a-‐ recession/>. 11 Hsu, Tiffany. “Affordable luxury brands are booming in popularity.” LATimes.com. Los Angeles Times. December 20, 2013. <http://articles.latimes.com/2013/dec/20/business/la-‐fi-‐accessible-‐ luxury-‐20131220>. 6 LEVELS OF LUXURY Within the luxury industry, the market differentiates elite retail brands in to multiple segments. Bain & Company defines these segments under three main categories: accessible, aspirational and absolute brands. 12 Accessible brands are known for their affordability among luxury retailers, offering entry-‐level price points that more population segments can afford. Aspirational brands lure consumers to buy into the lifestyle that the brand represents, and offer prices that only select consumers can afford. Lastly, the most expensive are known as absolute brands, which attract the wealthiest consumers and rely on brand heritage and elitism. Absolute brands are truly resilient, as economic conditions do not affect this category. To reinforce this resilience of absolute brands, consulting company Prince & Associates conducted a survey which showed that consumers worth more than $10 million in assets planned to increase spending on luxury goods in 2008, while those with less would curb their spending due to the Great Recession. 13 Additional terminology for the various segments of the luxury retail industry includes affordable luxury vs. true luxury. Affordable luxury attracts ambitious consumers looking to invest in luxury goods within a limited budget, which includes brands such as Coach, Michael Kors and Tory Burch; true luxury refers to the most elite luxury brands, which the mass market cannot afford, such as Hermes, Louis 12 “Worldwide luxury goods market growth projected to slow substantially by end of year and head into recession in 2009.” Bain.com. Bain & Company. October 29, 2008. < http://www.bain.com/about/press/press-‐releases/worldwide-‐luxury-‐goods-‐market-‐growth-‐ projected-‐to.aspx>. 13 Sullivan, Aline. “Luxury brands covet the recession-‐proof.” NYTimes.com. The New York Times. March 7, 2008. <http://www.nytimes.com/2008/03/07/style/07iht-‐mluxe.1.10800096.html>. 7 Vuitton and Chanel. Most true luxury brands are distributed only through its private stores or within distinct boutiques within exclusive department stores. 14 This allows true luxury brands to retain its cachet and appeal to the most exclusive luxury shoppers. It also keeps merchandise under the company’s jurisdiction, as the consumer would not find these luxury goods on sales racks or in discount stores. Affordable luxury companies have also been coined ‘bridge brands,’ for their multi-‐segment appeal. Bob Shullman of the Shullman Research Center describes the appeal of bridge brands: “American consumers have been sitting on their hands for many years. They’re frustrated and they want to treat themselves. But they’re also trying to survive, so they have to find something to splurge on that’s not going to break the bank.” 15 As the popularity grows for this segment, bridge brands have expanded their reach to include shopping destinations traditionally only occupied by the highest-‐ end luxury retailers, which allows these brands to take market share from multiple retail segments and vastly increase its customer base. The most recent example of this is Tory Burch’s newest flagship store located on Rodeo Drive in Beverly Hills, California – a location famous for its high-‐end, elite retailers, which previously would not have been occupied by an affordable luxury company. 16 14 Sullivan, Aline. “Luxury brands covet the recession-‐proof.” NYTimes.com. The New York Times. March 7, 2008. <http://www.nytimes.com/2008/03/07/style/07iht-‐mluxe.1.10800096.html>. 15 Hsu, Tiffany. “Affordable luxury brands are booming in popularity.” LATimes.com. Los Angeles Times. December 20, 2013. <http://articles.latimes.com/2013/dec/20/business/la-‐fi-‐accessible-‐ luxury-‐20131220>. 16 Moore, Booth. “Jessica Alba, Rashida Jones, more celebrate Tory Burch on Rodeo Drive.” LATimes.com. Los Angeles Times. January 15, 2014. <http://www.latimes.com/fashion/alltherage/la-‐ar-‐jessica-‐alba-‐rashida-‐jones-‐tory-‐burch-‐rodeo-‐ drive-‐20140115,0,7237940.story#axzz2sOCracay>. 8 While both affordable and true luxury companies faced various hurdles in the Great Recession, the burden really affected companies within the affordable luxury segment. “They [luxury goods companies] might have lost the luxury shopper that would buy one LV [Louis Vuitton] handbag a year, but they’ve kept the ones that buy one a month,” explained Ben Perkins, the research director for consumer goods at Deloitte. 17 The majority of affordable luxury’s target market is comprised of aspirational shoppers that make a limited amount of purchases, while straining their budget to attain these goods. Throughout the Great Recession, the distinction among affordable and true luxury companies became more apparent. Affordable luxury companies faced numerous tough decisions, as maintaining sales among its target market demanded innovative practices. However, Scilla Huan Sun, the manager of the Julius Baer Luxury Brands fund, believes “affordable luxury still has a lot of long-‐term growth potential.” 18 True luxury companies had a much easier time. Its target market, comprised of the most elite population, was not as affected by the recession and its consumers could still willingly afford to purchase exuberantly prices goods. THE GLOBAL LUXURY MARKET While the U.S. is considered the leader in luxury goods, the worldwide luxury retail market remained a focal point for companies, especially throughout the Great 17 Neate, Rupert. “Recession bypasses market for luxury goods.” TheGuardian.com. The Guardian. February 15, 2013. <http://www.theguardian.com/business/2013/feb/15/recession-‐bypasses-‐ luxury-‐goods-‐market>. 18 Sullivan, Aline. “Luxury brands covet the recession-‐proof.” NYTimes.com. The New York Times. March 7, 2008. <http://www.nytimes.com/2008/03/07/style/07iht-‐mluxe.1.10800096.html>. 9 Recession. As China’s population continued to become more affluent, and Europe continued to develop its luxury retail presence, globalization was a key tactic for exponential company growth throughout the Great Recession, as well as after the recovery. Expanding internationally also enables luxury retailers to solidify the company as a complete lifestyle brand, transcending worldwide across multiple categories. Despite these benefits, international expansion can be risky. “You have to be really careful,” explained Brad Farrell, L’Oreal Paris’ skincare brand manager. 19 Though international markets had been growing exponentially in the mid-‐2000s, this bubble of financial growth could burst, leaving companies heavily invested and strapped for capital. Throughout the Great Recession, the impact of America’s downturn had global reach. While the global luxury industry receded by 2009, the market quickly recovered and posted impressive double-‐digit sales growth for the following three years. 20 Bain & Company’s Claudia D’Arpizio stressed the importance of globalization: “We are seeing sharp disparities between brands that are not keeping up with the quickening pace of change in the market and those that are adjusting to shifts in tastes and demographics.” 21 19 “Luxury Brands: Marketing the Upscale During a Downturn.” UPenn.edu. University of Pennsylvania: Wharton. November 12, 2008. <http://knowledge.wharton.upenn.edu/article/luxury-‐ brands-‐marketing-‐the-‐upscale-‐during-‐a-‐downturn/>. 20 “Bain projects global luxury goods market will grow overall by 10% in 2012, though major structural shifts in market emerge.” Bain.com. Bain & Co. October 15, 2012. <http://www.bain.com/about/press/press-‐releases/bain-‐projects-‐global-‐luxury-‐goods-‐market-‐will-‐ grow-‐ten-‐percent-‐in-‐2012.aspx>. 21 “Bain projects global luxury goods market will grow overall by 10% in 2012, though major structural shifts in market emerge.” Bain.com. Bain & Co. October 15, 2012. 10 Although globalization remained risky, it became more and more important for the future success and longevity of luxury retailers. Improving brand image abroad had the power to improve positioning within the retailer’s home country. By increasing the level of popularity worldwide, these luxury retailers became more persuasive. Additionally, studies have shown that consumers of luxury goods tend to shop more when traveling, as they have more time and perceive prices to be lower than in their home countries; this is especially true of the Chinese and Russian populations. 22 Capitalizing on these trends remained very appealing for luxury retailers. As many companies successfully globalized their brands, further expansion seemed likely. “For some luxury retailers, more than half of their sales come from emerging markets…and remember on top of this, Chinese shoppers are coming over here to buy as well,” said retail analyst, John Mercer, from Mintel. 23 With that kind of success, it’s understandable why going global remained an attractive strategy among the luxury goods industry. LUXURY GOODS AND THE RECESSION Luxury retail customers are generally heavily involved in the stock market. As the market ebbs and flows, so does high-‐end consumer spending habits. Luxury <http://www.bain.com/about/press/press-‐releases/bain-‐projects-‐global-‐luxury-‐goods-‐market-‐will-‐ grow-‐ten-‐percent-‐in-‐2012.aspx>. 22 Sullivan, Aline. “Luxury brands covet the recession-‐proof.” NYTimes.com. The New York Times. March 7, 2008. <http://www.nytimes.com/2008/03/07/style/07iht-‐mluxe.1.10800096.html>. 23 Neate, Rupert. “Recession bypasses market for luxury goods.” TheGuardian.com. The Guardian. February 15, 2013. <http://www.theguardian.com/business/2013/feb/15/recession-‐bypasses-‐ luxury-‐goods-‐market>. 11 shoppers make up 50 percent of the total income in the U.S. and account for 48 percent of total expenditures, despite being a small segment of consumers. “The sharp downturn of the stock market affects the confidence of luxury shoppers. Their wealth might not be affected much, but their buying patterns are affected because they feel poor,” explained Walter Loeb, the president of retail consultancy Loeb Associates. 24 In October 2008, Bain & Company’s Luxury Goods Worldwide Market Study was released. The study predicted that the growth of the luxury goods market was slowing, and would head into a recession by 2009 – the first recession for the luxury goods market in six years. “How much and how long depends in part on how companies react. The most resilient will be those with strong international and diversified brands,” said Claudia D’Arpizio, a Bain partner and lead author of the study. 25 However, some luxury retailers found a niche to help throughout the Great Recession. The global downturn spurred a new breed of luxury companies, which the Brand Finance Global 500 report coined as recession-‐proof: “Alphabrands.” 26 Among the companies tagged as an alphabrand were Coach, Oscar de la Renta, Alexander McQueen and Cartier. Results of the report show that luxury consumers 24 Byron, Ellen & Talley, Karen. “Luxury Sales at Risk.” WSJ.com. The Wall Street Journal. August 10, 2011. <http://online.wsj.com/news/articles/SB10001424053111904480904576498632940394432>. 25 “Worldwide luxury goods market growth projected to slow substantially by end of year and head into recession in 2009.” Bain.com. Bain & Company. October 29, 2008. <http://www.bain.com/about/press/press-‐releases/worldwide-‐luxury-‐goods-‐market-‐growth-‐ projected-‐to.aspx>. 26 Chauhan, Sanjana. “Why Some Luxury Brands Thrived in the U.S. Despite the Recession.” LuxurySociety.com. Luxury Society. February 7, 2013. <http://luxurysociety.com/articles/2013/02/why-‐some-‐luxury-‐brands-‐thrived-‐in-‐the-‐us-‐despite-‐ the-‐recession>. 12 were resisting temptations to purchase lower-‐end merchandise, and instead focusing on high-‐end, cutting-‐edge designs that these alphabrands continued to produce, despite the Great Recession. Analysts carefully tracked the luxury goods sector throughout the downturn, as it proved to be a harbinger for the overall economy. In 2010, American Express Business Insights released a study which indicated that luxury spending had recovered, and was even eclipsing pre-‐recession levels, as consumer confidence improved. The survey’s findings aligned with those completed by Bain & Company, which also indicated that the luxury retail industry had rebounded from the downturn much faster than the economy at large. Ed Jay, the senior vice president of business insights at American Express, elaborated on the condition of the market: “The biggest challenge for luxury retailers will be addressing the new normal. During the economic recovery, new groups of customers are emerging in the luxury retail sector, such as Generation Y and aspirational luxury shoppers – those who were not shopping in luxury retail prior to the recession.” 27 Although the economy at large showed signs of recovery, the cyclical nature of the market didn’t mean all tough times were behind the luxury retail segment. But, it was a good sign that luxury customers were spending again: “That was key to 27 Finocchiaro, Peter. “Luxury spending higher than pre-‐recession levels: American Express.” LuxryDaily.com. Luxury Daily. December 17, 2010. < http://www.luxurydaily.com/luxury-‐spending-‐ higher-‐than-‐pre-‐recession-‐levels-‐american-‐express/>. 13 why we suffered such a bad recession – their [luxury consumers] spending fell very sharply,” said Mark Zandi of Moody’s Analytics. 28 By 2011, the luxury goods sector was continuing to recover at an accelerated rate. Consumers flocked to luxury stores and were not turned off by the premium prices that awaited them. In fact, many luxury companies even increased prices to attract pristine luxury clientele because consumers often associate higher prices with better quality and more exclusivity. 29 For example, Crème de la Mer increased its price of 16-‐ounce facial crème to $1,650 at Bergdorf Goodman in 2011, from $1,350 in 2008. 30 MARKETING DURING A DOWNTURN While many American retailers struggled through the Great Recession, luxury retailers did not feel as much pressure from customers throughout these tough times. However, luxury retailers were not left untouched: “Even though our customer seems to be responding a little better to what’s happening in the economy, I think we still have to be very cognizant of what’s going on out there,” said Nordstrom’s chief financial officer Michael Koppel. “If the overall economy slows 28 Clifford, Stephanie. “Even Marked Up, Luxury Goods Fly Off Shelves.” NYTimes.com. The New York Times. August 3, 2011. <http://www.nytimes.com/2011/08/04/business/sales-‐of-‐luxury-‐goods-‐ are-‐recovering-‐strongly.html?_r=0>. 29 Perocchi, Anna. “Economy is in Crisis, Yet Luxury Brands, Tiffany’s, LVHM Still Report Sales Growth.” Forbes.com. Forbes. August 5, 2011. <http://www.forbes.com/sites/annaperocchi/2011/08/05/economy-‐is-‐in-‐crisis-‐yet-‐luxury-‐brands-‐ tiffanys-‐lvhm-‐still-‐report-‐sales-‐growth/>. 30 Clifford, Stephanie. “Even Marked Up, Luxury Goods Fly Off Shelves.” NYTimes.com. The New York Times. August 3, 2011. <http://www.nytimes.com/2011/08/04/business/sales-‐of-‐luxury-‐goods-‐ are-‐recovering-‐strongly.html?_r=0>. 14 down, eventually it slows everything down.” 31 For Nordstrom, it was imperative to analyze the market, as its department stores cover many different apparel categories, including affordable and true luxury merchandise such as J Brand and Chanel, respectively. These harsh economic conditions did come full turn, as many luxury retailers were forced to advertise promotions in an attempt to attract customers into stores and move excess inventory, especially in 2009. While luxury retailer’s profits dropped drastically, analysts feared that discounting to move inventory would tarnish brand images and permanently taint companies’ reputations. Bain & Company predicted that the luxury retail market would return to growth quickly after the slowdown in 2009. To recover successfully after the downfall, D’Arpizio believed that “brands that cut overhead costs while investing in their customers and products would be in the best position to recover strong year-‐ over-‐year growth once the economy improves.” 32 D’Arpizio also advised brands to be wary of cost cutting. Instead she recommended improving consumer targeting and building a smart cost culture to endure hard economic times. At the University of Pennsylvania’s Wharton Marketing Conference, a variety of panelists, including Gucci, Prada, Tom Ford and L’Oreal Paris, gathered to discuss marketing efforts for luxury retailers amidst the tough economic times of 2009. 31 Byron, Ellen & Talley, Karen. “Luxury Sales at Risk.” WSJ.com. The Wall Street Journal. August 10, 2011. <http://online.wsj.com/news/articles/SB10001424053111904480904576498632940394432>. 32 “Worldwide luxury goods market growth projected to slow substantially by end of year and head into recession in 2009.” Bain.com. Bain & Company. October 29, 2008. <http://www.bain.com/about/press/press-‐releases/worldwide-‐luxury-‐goods-‐market-‐growth-‐ projected-‐to.aspx>. 15 Consensus among the panelists regarding improved customer service emerged as a huge tactic needed to overcome adverse times. “I really think the foundation of luxury is customer service – that is what we are hearing,” said Cori Galpern, the marketing adviser for Tom Ford International. 33 Furthermore, the unanimous consensus across the luxury retail industry was to maintain companies’ premium brand image by resisting the urge to drop prices in lure of gaining short-‐term sales increases. “Good management weathers good times and the difficult times, and fashion doesn’t change,” said Patrick Abouchalache, retail industry analyst at Roberts Mitani, “You have to stay the course,” he added. 34 This key insight would lead to long-‐term success for luxury retailers long after the Great Recession had subsided. 33 “Luxury Brands: Marketing the Upscale During a Downturn.” UPenn.edu. University of Pennsylvania: Wharton. November 12, 2008. <http://knowledge.wharton.upenn.edu/article/luxury-‐ brands-‐marketing-‐the-‐upscale-‐during-‐a-‐downturn/>. 34 “Luxury Brands: Marketing the Upscale During a Downturn.” UPenn.edu. University of Pennsylvania: Wharton. November 12, 2008. <http://knowledge.wharton.upenn.edu/article/luxury-‐ brands-‐marketing-‐the-‐upscale-‐during-‐a-‐downturn/>. 16 CHAPTER THREE: INTRODUCTION TO CASE STUDIES While the luxury market recovered quickly after the Great Recession, it is important to understand the impact of this economically adverse time and to analyze successful practices to better prepare businesses for future crises. The lasting impact of the Great Recession varied with each luxury retailer, as some went out of business and others capitalized on the downturn to grow and diversify the brand. As previously stated, not all segments of luxury retail were affected the same. The true luxury market was left virtually untouched, as its target market has little problem enduring economic recessions. Where the market really struggled was in the affordable luxury segment, in which sales plummeted and entry-‐level consumers abruptly stopped spending. The vulnerability of this segment was showcased on a global scale, and the variance of each retailer’s success depended fully on the strategies that they implemented. To gain better insight, three affordable luxury case studies will be analyzed. Each of the three case studies was selected based on their fluctuating performance throughout the Great Recession. While one company flourished throughout the Great Recession, another virtually ended its operations and exited the affordable luxury market. By analyzing each of the three case studies, it becomes apparent where each company either thrived or retrogressed. The first case study is premium denim company Rock & Republic. While Rock & Republic was a market leader at the beginning of the Great Recession, a string of 17 bad decisions during the downturn led the company to file for Chapter 11 bankruptcy. The second case studied is Coach, the U.S. market leader in premium handbags. The storied company started from humble beginnings but developed a strong hold on the affordable luxury market. Due to carefully calculated moves, Coach navigated the Great Recession successfully and continued to grow the brand despite the overall economy. The final case study is premium jewelry company, Tiffany & Co. While the Great Recession was extremely challenging for jewelry companies, Tiffany implemented a strategic plan that benefited the company in many ways, but also left its future and market position in question. Each of these affordable luxury companies was a pre-‐recession market leader in their respective industries. They all boasted international brands and had bright futures. However, the Great Recession’s outcome left each company with different outlooks because of the decisions made during the economically stressful times. 18 CHAPTER FOUR: ROCK & REPUBLIC CASE STUDY THE PREMIUM DENIM INDUSTRY The premium denim industry first emerged on the market in 2000 when 7 For All Mankind, a premium denim company, debuted its first line. 35 From the onset, consumers supported paying an exorbitant price for a product that once was sold for no more than $50 from companies such as Levi Strauss and Calvin Klein. Following 7 For All Mankind’s success, competitors emerged in the market looking to capitalize on the highly profitable niche. Companies such as Citizens of Humanity, Joe’s, True Religion and Rock & Republic soon solidified themselves among the premium denim industry’s top leaders. By November 2006, market researcher NPD Group released data indicating that department store sales of premium denim priced at $100 or more increased sales the most among all women’s denim categories. Additionally, premium denim priced at $100 or more had a 23 percent sales increase over the year – a tremendous sales increase from $165 million to $203 million. 36 As the market continued to grow in 2007, it became apparent that premium denim was not a short-‐term market fad, but that it had been accepted among the luxury market as a necessary staple in a consumer’s wardrobe. “People who would never have considered paying more than $80 aren’t blinking at $170 [a pair],” said 35 Dickler, Jessica. “It’s all in the jeans.” CNNMoney.com. CNN. February 23, 2007. <http://money.cnn.com/2007/02/22/smbusiness/smallbiz_denim/>. 36 Jana, Reena. “Riding Hip Jeans into New Luxury Markets.” Businessweek.com. Bloomberg Businessweek. January 22, 2007. <http://www.businessweek.com/stories/2007-‐01-‐22/riding-‐hip-‐ jeans-‐into-‐new-‐luxury-‐marketsbusinessweek-‐business-‐news-‐stock-‐market-‐and-‐financial-‐advice>. 19 Karen Short, a senior analyst at Friedman, Billings, Ramsey & Co., regarding the consensus of high consumer demand for premium denim. 37 By 2008, despite the Great Recession, denim was an $11 billion dollar industry according to NPD Group – with premium denim holding an astonishing 7 percent of the total market. To justify the willingness of consumers to splurge on a $300 pair of jeans, NPD’s chief industry analyst said that consumers “see it as an investment.” 38 This unique investment benefited the consumer in two ways: by achieving the perfect fit of premium denim and beholding the cachet of wearing a noticeable premium brand. The competitive advantage of premium materials and impeccable craftsmanship differentiates premium denim by fitting women in a way that highlights their assets and flatters the body. 39 7 For All Mankind mastered the perfect fit, and showed other premium denim competitors a roadmap for success. To add even more value, dramatic washes and intricate detailing on the back pockets of jeans further incentivized the appeal of premium denim – justifying the supersized prices. Due to the extraordinary level of popularity, the premium denim industry became highly competitive. Companies were enticed to enter the market because of high returns and a seemingly endless consumer demand. True luxury customers had 37 Dickler, Jessica. “It’s all in the jeans.” CNNMoney.com. CNN. February 23, 2007. <http://money.cnn.com/2007/02/22/smbusiness/smallbiz_denim/>. 38 Perman, Stacey. “Selling $300 Jeans in a Down Economy.” Businessweek.com. Bloomberg Businessweek. November 18, 2008. <http://www.businessweek.com/stories/2008-‐11-‐18/selling-‐ 300-‐jeans-‐in-‐a-‐down-‐economybusinessweek-‐business-‐news-‐stock-‐market-‐and-‐financial-‐advice>. 39 Holmes, Elizabeth. “Seeking a $200 Fit in $60 Jeans.” WSJ.com. The Wall Street Journal. September 11, 2009. <http://online.wsj.com/news/articles/SB10001424052970203706604574373182520071954>. 20 an insatiable appetite, while it also attracted a large amount of aspirational shoppers that would spend out of their budget ranges to possess a new pair of premium denim. 40 As the popularity continued to grow, premium denim became more ubiquitous, making it evermore important for companies to differentiate their brand. For Rock & Republic, branding came easily. The company was gaining market share exponentially throughout the mid-‐2000s with no signs of slowing down. The unique company presented a number of core characteristics that suggested the brand would continue its dominance for the indefinite future. However, the Great Recession brought insurmountable challenges to the company, which eventually lead to Rock & Republic’s downfall. ROCK & REPUBLIC’S BRAND Founded in 2002 by CEO Michael Ball, Rock & Republic began its reign over the premium denim industry despite its unconventional beginnings. Rock & Republic was basically born out of a fluke, when Ball told his then-‐girlfriend that her premium denim jeans were not flattering on her. The rash statement quickly turned into a challenge for Ball, who vowed to create premium denim that would complement a broader range of women’s bodies. 41 40 D’Amato, Suzanne. “In or Out?” WashingtonPost.com. The Washington Post. August 26, 2007. <http://www.washingtonpost.com/wpdyn/content/article/2007/08/23/AR2007082301619.html>. 41 Perman, Stacey. “Selling $300 Jeans in a Down Economy.” Businessweek.com. Bloomberg Businessweek. November 18, 2008. <http://www.businessweek.com/stories/2008-‐11-‐18/selling-‐ 300-‐jeans-‐in-‐a-‐down-‐economybusinessweek-‐business-‐news-‐stock-‐market-‐and-‐financial-‐advice>. 21 With no design, fashion or retail experience, Ball started creating premium denim that quickly caught on with celebrities in the Los Angeles area through word-‐ of-‐mouth marketing and Ball’s connections. His vision was carried out by manufacturers, which made the jeans based on Ball’s preferences. The first line of Rock & Republic premium denim hit stores in 2004 and sold for around $300 a pair. 42 As the initial success of Rock & Republic in smaller-‐boutique stores caught the attention of the fashion industry, large department stores and national retailers became keen to carry the line. Rock & Republic soon became available at major department stores nationwide, including Nordstrom and Saks Fifth Avenue. Despite Ball’s inexperience, he was always certain about one thing: “I was always clear about who we were as a brand and who we were going after. The market was clean, edgy, rock-‐and-‐roll. I was very confident.” 43 This confidence is what catapulted Rock & Republic to retail success. Consumers became infatuated with the brand that portrayed an edgy, rough-‐around-‐the-‐edges image, which capitalized on the flawless fit of the jeans known among the marketplace. Soon Rock & Republic expanded from premium denim, adding cosmetics, accessories, shoes, and handbags, with plans to add a boutique hotel, restaurant and even a domestic airline. This solidified Rock & Republic as a multi-‐category brand, which intended to boost customer loyalty by using the prestige of its established 42 Miller, Tracy. “Victoria Beckham sues denim company Rock & Republic: report.” NYDailyNews.com. New York Daily News. May 4, 2008. <http://www.nydailynews.com/entertainment/gossip/victoria-‐ beckham-‐sues-‐denim-‐company-‐rock-‐republic-‐report-‐article-‐1.326341>. 43 Perman, Stacey. “Selling $300 Jeans in a Down Economy.” Businessweek.com. Bloomberg Businessweek. November 18, 2008. <http://www.businessweek.com/stories/2008-‐11-‐18/selling-‐ 300-‐jeans-‐in-‐a-‐down-‐economybusinessweek-‐business-‐news-‐stock-‐market-‐and-‐financial-‐advice>. 22 premium denim to springboard into new categories and create a full lifestyle brand. 44 This confidence lead Ball to turn down exclusive retail offers from Barneys and Bloomingdale’s – both leading department stores in the United States. This play for exclusivity was all a part of the plan for Ball: “My ability to say no made our brand…I had a twofold strategy about where I placed the brand and leveraged the exclusivity.” 45 Ball played on this brand image, creating elaborate and provocative fashion shows, each one attempting to outdo the previous masterpiece. For New York Fashion Week in 2007, Ball garnered attention and attendance by staging a show that was catwalk free. Guests were invited to attend a cocktail party with a high-‐ energy ambiance that incorporated eye-‐catching lighting and video effect. In the center of the lounge was a large platform for models to fashion Rock & Republic’s newest line. 46 Cohen, the NPD Group’s chief industry analyst, believed that Ball’s unwavering confidence built Rock & Republic’s strong brand image, which appealed to many different age segments and delivered on Ball’s promise that “these jeans 44 Jana, Reena. “Riding Hip Jeans into New Luxury Markets.” Businessweek.com. Bloomberg Businessweek. January 22, 2007. <http://www.businessweek.com/stories/2007-‐01-‐22/riding-‐hip-‐ jeans-‐into-‐new-‐luxury-‐marketsbusinessweek-‐business-‐news-‐stock-‐market-‐and-‐financial-‐advice>. 45 Perman, Stacey. “Selling $300 Jeans in a Down Economy.” Businessweek.com. Bloomberg Businessweek. November 18, 2008. <http://www.businessweek.com/stories/2008-‐11-‐18/selling-‐ 300-‐jeans-‐in-‐a-‐down-‐economybusinessweek-‐business-‐news-‐stock-‐market-‐and-‐financial-‐advice>. 46 Sekula, Anna. “Rock and Republic Stages Dazzling Light Show.” BizBash.com. BizBash. September 14, 2007. <http://www.bizbash.com/rock_and_republic_stages_dazzling_light_show/new-‐ york/story/8669/>. 23 will make your life better, you will feel better.” Furthermore, Cohen referred to Rock & Republic as “recession-‐resistant,” due to the brand’s strong lifestyle image. 47 Ball’s confidence in Rock & Republic’s brand was unwavering. His nontraditional strategy for the company also played out in the media, in which Ball was repeatedly reported for making harsh comments regarding competitors, as well as facing pending legal suits that brought mass amounts of negative press to Rock & Republic’s brand. Controversy always seemed to surround the company, ranging from Ball’s over-‐zealous, triple-‐digit sales forecast for 2008 that miffed competitors, to the numerous civil suits he faced for a range of violations. 48 However, Ball believed that all publicity was good publicity for the brand, as this never swayed his confidence – or changed his behavior. THE DOWNFALL OF ROCK & REPUBLIC As Rock & Republic continued to rely on its brand image throughout the 2008 recession, troubled times emerged for the company that was once so successful that its sales growth showed a 270 percent increase over one year. 49 The problems culminated in April 2010 when Rock & Republic, the seemingly superlative company, filed for Chapter 11 bankruptcy protection. 47 Perman, Stacey. “Selling $300 Jeans in a Down Economy.” Businessweek.com. Bloomberg Businessweek. November 18, 2008. <http://www.businessweek.com/stories/2008-‐11-‐18/selling-‐ 300-‐jeans-‐in-‐a-‐down-‐economybusinessweek-‐business-‐news-‐stock-‐market-‐and-‐financial-‐advice>. 48 Perman, Stacey. “Selling $300 Jeans in a Down Economy.” Businessweek.com. Bloomberg Businessweek. November 18, 2008. <http://www.businessweek.com/stories/2008-‐11-‐18/selling-‐ 300-‐jeans-‐in-‐a-‐down-‐economybusinessweek-‐business-‐news-‐stock-‐market-‐and-‐financial-‐advice>. 49 Jana, Reena. “Riding Hip Jeans into New Luxury Markets.” Businessweek.com. Bloomberg Businessweek. January 22, 2007. <http://www.businessweek.com/stories/2007-‐01-‐22/riding-‐hip-‐ jeans-‐into-‐new-‐luxury-‐marketsbusinessweek-‐business-‐news-‐stock-‐market-‐and-‐financial-‐advice>. 24 Rock & Republic, the privately held Culver City-‐based company, said that the filing would ease pressure on its balance sheet, but that day-‐to-‐day operations were expected to continue. Geoffrey D. Lurie was named the chief restructuring officer and offered the following statement regarding the bankruptcy: “The Chapter 11 filing is a strategic action that will alleviate balance sheet burdens and enable us to adopt the financial and operational initiatives needed to support the brand’s growth needs…we are confident that this is the right move for Rock & Republic.” 50 Following this statement, a Rock & Republic spokesperson stated that the company would be exploring financial relationships and hone in on its core apparel and footwear business as a means to getting the company back on track. These efforts put an end to Ball’s somewhat unrealistic visions of Rock & Republic-‐ branded hotels and domestic airline. In an effort to refocus the brand, Lurie planned to slow diffusion lines to protect Rock & Republic’s branded goods. While the Great Recession pushed more premium denim to the sales racks at top department stores nationwide, signs of a recovering economy were seen through Levi’s decision to launch a premium denim 50 Chang, Andrea. “Rock & Republic files for bankruptcy protection.” LATimes.com. Los Angeles Times. April 2, 2010. <http://articles.latimes.com/2010/apr/02/business/la-‐fi-‐rock-‐republic2-‐ 2010apr02>. 25 line priced at $200 a pair and Hudson releasing an ultra-‐premium denim line priced per pair at $995. 51 With the current state of the market and the strength of Rock & Republic’s brand, recently hired strategic adviser Marvin Traub reported that many investors had shown interest in the company because of the “personality and a niche of its own” characteristics. 52 On December 21, 2010, apparel company VF Corp (NYSE: VFC) announced its plans to purchase Rock & Republic’s trademarks and intellectual property. 53 By spring 2011, Rock & Republic successfully finalized its sale to VF Corp and won approval of its Chapter 11 plan. 54 However, under VF Corp’s ownership, Rock & Republic would be sold as a lower priced denim collection, no longer competing in the premium denim market. The once market-‐dominating brand had fallen from the charts because of poor strategic decisions made by the company, which eventually lead to its bankruptcy. “It’s bittersweet,” said Ball regarding the dismal status of his self-‐made 51 Odell, Amy. “Investors Salivating Over Bankrupt Rock & Republic.” NYMag.com. New York Magazine. April 16, 2010. <http://nymag.com/thecut/2010/04/investors_salivating_over_bank.html>. 52 Odell, Amy. “Investors Salivating Over Bankrupt Rock & Republic.” NYMag.com. New York Magazine. April 16, 2010. <http://nymag.com/thecut/2010/04/investors_salivating_over_bank.html>. 53 “Asset Purchase Agreement Executed for Rock and Republic Brand.” VFC.com. VF Corporation. December 21, 2010. <http://www.vfc.com/news/press-‐releases?nws_id=97F3D420-‐337C-‐70AE-‐ E043-‐A740E3EA70AE>. 54 Feintzeig, Rachel. “Rock & Republic trustee takes aim at ex-‐CEO.” MarketWatch.com. The Wall Street Journal. June 14, 2011. <http://www.marketwatch.com/story/rock-‐republic-‐trustee-‐takes-‐ aim-‐at-‐ex-‐ceo-‐2011-‐06-‐14>. 26 company. “It’s amazing what I created and it’s long standing and there’s a legacy there, but if I had to do it again, would I do it differently? One hundred percent.” 55 WHERE ROCK & REPUBLIC FAILED How did Rock & Republic go from a leader in the premium denim industry to a non-‐contender? Numerous decisions lead Rock & Republic away from its core brand – the very thing that led the company to its success. Distribution problems, misjudgment by management, unfit partnerships and a line of “recession denim” all proved to be factors in Rock & Republic’s destruction. I. DISTRIBUTION PROBLEMS Rock & Republic built its brand on being sexy and cool, by targeting young, hip trendsetters. Exclusivity drove the brand to prominence, through such decisions as turning down exclusive retail contracts with Bloomingdale’s and Barneys at the onset of its retail success. The company used strong, bold messaging and marketing to solidify its brand image among its target audience. Sold in 86 countries, the worldwide brand demanded a prestigious price tag of around $200-‐$300 per pair in 2008. Despite the high level of exclusivity, Rock & Republic denim was found selling at Canadian Costco stores in 2007. Not only does Costco – a chain of giant warehouses known for bulk pricing and cost cutting – not align with Rock & Republic’s brand, it violated contractual agreements with Simms Sigal & Co., Rock & Republic’s exclusive 55 Feintzeig, Rachel. “Rock & Republic Founder Moves On.” WSJ.com. The Wall Street Journal. June 15, 2011. <http://blogs.wsj.com/bankruptcy/2011/06/15/rock-‐republic-‐founder-‐moves-‐on/>. 27 Canadian distributor. 56 The Washington Post’s Suzanne D’Amato described it best: “Now you can add Rock & Republic jeans to your shopping cart at Costco along with Kirkland Signature sheets and a 24-‐pack of mac and cheese.” 57 When questioned about this bizarre occurrence, Rock & Republic assured Simms Sigal & Co. that Costco was not authorized to carry the product and publically declared to take action. However, months passed after Rock & Republic’s PR team released the statement indicating that they would open an investigation, all while the premium denim line continued to appear at Costco stores. This gave Simms Sigal & Co. much reason to believe that Rock & Republic intentionally devalued its contractual agreement as a means to sever the exclusive deal, which was not set to expire until the end of 2012. 58 During this time, Rock & Republic failed to successfully communicate, both internally and externally, to its most important stakeholders. While the public relations department should have disseminated information about the situation, important questions went unanswered when Rock & Republic stayed silent. Simms Sigal & Co., employees at Rock & Republic, and distributors worldwide were left to speculate about the bizarre situation. Not only did Costco stores not align with Rock & Republic’s target market, Ball also jeopardized the company’s relationships with high-‐end department stores. In 56 Feintzeig, Rachel. “Rock & Republic Faces Denim Dispute.” WSJ.com. The Wall Street Journal. September 3, 2010. <http://blogs.wsj.com/bankruptcy/2010/09/03/rock-‐republic-‐faces-‐denim-‐ dispute/>. 57 D’Amato, Suzanne. “In or Out?” WashingtonPost.com. The Washington Post. August 26, 2007. <http://www.washingtonpost.com/wpdyn/content/article/2007/08/23/AR2007082301619.html>. 58 Feintzeig, Rachel. “Rock & Republic Faces Denim Dispute.” WSJ.com. The Wall Street Journal. September 3, 2010. <http://blogs.wsj.com/bankruptcy/2010/09/03/rock-‐republic-‐faces-‐denim-‐ dispute/>. 28 the past, Ball credited department stores as the key to Rock & Republic’s retail success, yet distributing merchandise to Costco risked loosing these established relationships. High-‐end department stores rely on a pure, luxury-‐driven brand image and selling products that are available at discount stores threatens the department store’s image. After Rock & Republic declined to support Simms Sigal & Co. in a lawsuit against Costco, a representative at Rock & Republic admitted that the company itself was distributing its merchandise directly to Costco, according to Simms Sigal & Co. 59 Despite these damaging allegations, Rock & Republic did not engage in any crisis communications efforts to save face among the luxury retail market. II. UNFIT PARTNERSHIPS In 2006, a time that many would consider to be Rock & Republic’s peak in the market, Ball entered a partnership with Vision Racing, a team that competes in NASCAR. The automotive industry always held an interest for Ball and he felt that this was “an optimal partnership [for Rock & Republic] because drivers are a prime reflection of Rock & Republic’s core customers – young, hip, edgy and cool.” 60 This self-‐serving partnership blinded Ball from the truth about his target market: Rock & Republic consumers did not view automotive racing as cool, hip or 59 Feintzeig, Rachel. “Rock & Republic Faces Denim Dispute.” WSJ.com. The Wall Street Journal. September 3, 2010. <http://blogs.wsj.com/bankruptcy/2010/09/03/rock-‐republic-‐faces-‐denim-‐ dispute/>. 60 “Rock & Republic Revs Into the 90 th Anniversary of Indianapolis 500.” TheAutoChannel.com. The Auto Channel. May 24, 2006. <http://www.theautochannel.com/news/2006/05/24/008466.html>. 29 trendy. However, this did not sway Ball’s vision: “What’s cooler than an Indy car doing 200+ miles an hour around the Indianapolis motor speedway…nothing.” 61 While Ball was constantly in the media spotlight, he used these opportunities to talk about Vision Racing. He was constantly quoted raving about how cool the partnership was and that it aligned with Rock & Republic’s target market seamlessly. The focus on Vision Racing took public relations and marketing efforts away from promoting the Rock & Republic brand and heightened the attention on the unfit partnership. With Rock & Republic under Ball’s full control, rash decisions were made that put the brand’s legacy in jeopardy. Ball also held a lifelong passion for cycling that led him to start a small, local cycling team in 2007 as a passion project with the goal of getting back in shape. As the team garnered hype and attention over time, Ball saw an exciting new business idea: “I started to take more interest in expanding this, [so] I created Rock Racing the brand.” 62 Rock Racing took the traditionally conservative cycling industry with bravado and caused controversy from the start. The team enjoyed showcasing their “expensive team vehicles (Cadillac Escalades) [and] flashy team escorts boasting tight jeans and a lot of cleavage.” 63 Rock Racing’s apparel was sold in Rock & Republic stores, quickly becoming engrained with the Rock & Republic brand despite its misalignment. 61 “Rock & Republic Revs Into the 90 th Anniversary of Indianapolis 500.” TheAutoChannel.com. The Auto Channel. May 24, 2006. <http://www.theautochannel.com/news/2006/05/24/008466.html>. 62 “Celebrity Drive: CEO of Rock and Republic Michael Ball.” Motor Trend: February 2009. Print. 63 Raia, James. “Rock & Republic files for chapter 11, Rock Racing’s outlaw team has ridden into the sunset.” Examiner.com. Examiner. April 2, 2010. <http://www.examiner.com/article/rock-‐republic-‐ files-‐for-‐chapter-‐11-‐rock-‐racing-‐s-‐outlaw-‐team-‐has-‐ridden-‐into-‐the-‐sunset>. 30 As the Rock Racing team progressed, so did the controversy regarding the team’s members. Within the industry, a “bad boy” image emerged because of Ball’s decisions to sign many riders that had a history of doping suspensions or involvement in doping scandals. 64 Rock Racing brought a new onslaught of bad publicity to Rock & Republic and its impetuous CEO and, more importantly, it tainted the company’s prestigious brand image. III. RECESSION DENIM It’s no secret that strong brands hold up better in controversial times; it’s also no secret that Rock & Republic had one of the strongest, if not the strongest brand image within the premium denim industry. Nigel Hollis, chief global analyst at branding firm Millward Brown, believed that a distinctive position and a perceived differentiation in the market gave brands a huge boost, stating, “Rock & Republic seems to fit that bill even in a fairly competitive market.” 65 After Rock & Republic sales fell flat in the second half of 2008, Ball answered by stating that he would not price jeans above $280. “The top-‐tier has fallen off,” he expressed, “there is no point in sitting there.” 66 Although there were other strategies to incentivize buying in tough economic times, Ball believed the bottom-‐line reason for Rock & Republic’s sales decline was due to its high price. Thus, Ball thought that 64 “Rock Racing’s sponsor in bankruptcy.” CyclingNews.com. Cycling News. April 2, 2010. <http://www.cyclingnews.com/news/rock-‐racings-‐sponsor-‐in-‐bankruptcy>. 65 Perman, Stacey. “Selling $300 Jeans in a Down Economy.” Businessweek.com. Bloomberg Businessweek. November 18, 2008. <http://www.businessweek.com/stories/2008-‐11-‐18/selling-‐ 300-‐jeans-‐in-‐a-‐down-‐economybusinessweek-‐business-‐news-‐stock-‐market-‐and-‐financial-‐advice>. 66 Perman, Stacey. “Rock & Republic: Recessionistas will Still Be Wearing Fashion Denim.” Businesweek.com. Bloomberg Businessweek. October 29, 2009. < http://www.businessweek.com/smallbiz/running_small_business/archives/2009/10/last_novembe r_w.html>. 31 if he lowered the price, consumers would start purchasing his denim at accelerated rates. Because Ball put so much emphasis on the price reduction, the opportunity to advantageously communicate the business decision was lost. The media became focused only on the lower prices, which indicated to the market that Rock & Republic’s pristine brand image had been lost. But, this was not the only price reduction that Rock & Republic would experience during the Great Recession. Instead of relying on the strong brand image that Rock & Republic worked to create, the company further reduced prices by announcing an ultra-‐exclusive line of denim, ironically called “recession jeans.” The new line cut the prices of the premium jeans even more, with prices ranging from only $128 to $132. Not only was the title “recession jeans” unattractive to consumers, the marketing and communications efforts continued to focus solely on the lower price points. There was no creative messaging or value proposition to entice customers to purchase the cheaper denim. This short-‐term ploy to raise revenue only worked against Rock & Republic. Premium denim consumers believed that each pair of denim was an investment, thus justifying a higher price tag. Lowering the price did nothing but tarnish Rock & Republic’s brand image. Ball misjudged the cause of Rock & Republic’s drop in sales, leading to the rash decision to cut prices, which did not produce the results the company was hoping for. 32 Additionally, Ball attempted to recreate the exclusivity once associated with the $300-‐per-‐pair premium denim by selling the recession denim for only a short time period in a small number of outlets. He then tagged the line as “limited edition.” The line included only two women’s styles and two men’s styles. 67 Marketing the line as limited edition seemed like an oxymoron, because once a brand discounts its merchandise, it’s near impossible to regain an elite brand image. Consumers looking for bargains on designer apparel already knew about ways to score premium apparel for less. Stores such as Nordstrom Rack and Loehmann’s were selling premium denim that was overstocked in department stores, and offered a selection of top brands such as Rock & Republic, 7 For All Mankind, True Religion, J Brand, Citizens of Humanity and Joes. This assortment offered prices just under $100 and was known among the affordable luxury market. Thus, creating a line of recession denim at lower prices did not incentivize customers to buy, and in turn, did not increase sales for Rock & Republic. 68 THE FUTURE FOR ROCK & REPUBLIC After being sold to VF Corp, Rock & Republic’s brand was marketed to a new audience. On April 28, 2011, VF Corp announced an exclusive partnership with Kohl’s Corporation (NYSE: KSS) to carry Rock & Republic apparel. “Bringing the 67 Perman, Stacey. “Rock & Republic: Recessionistas will Still Be Wearing Fashion Denim.” Businesweek.com. Bloomberg Businessweek. October 29, 2009. < http://www.businessweek.com/smallbiz/running_small_business/archives/2009/10/last_novembe r_w.html>. 68 Brown, Brittni. “Mr. Ball misses the mark with Rock & Republic Recession Collection.” Examiner.com. Examiner. June 4, 2009. <http://www.examiner.com/article/mr-‐ball-‐misses-‐the-‐ mark-‐with-‐rock-‐republic-‐recession-‐collection>. 33 original Rock & Republic brand exclusively to Kohl’s with a compelling new value proposition is a unique and exciting opportunity,” announced Eric Wiseman, chairman and CEO of VF Corp. 69 Kohl’s, the value-‐oriented department store, is a vastly different company in comparison to the likes of Nordstrom, Neiman Marcus and Bloomingdale’s – all of which used to carry Rock & Republic’s premium denim. Rock & Republic merchandise at Kohl’s included men and women’s apparel and footwear, with plans to introduce accessories, children’s and home collections. Notable celebrities at the Kohl’s fashion show launch for Rock & Republic included Ashley Simpson, Molly Sims and Zoe Saldana – a much slimmer showing than Rock & Republic historically attracted. 70 Media coverage for Rock & Republic now highlights discount shopping, for example a picture of Amy Smart wearing Rock & Republic denim in an article regarding A-‐list bargains from People Magazine. 71 Despite the recent success at Kohl’s, Rock & Republic’s future remains questionable due to Kohl’s unclear market position. As JC Penney struggles, Kohl’s has been unable to capitalize on market share, while top competitors such as Macy’s, Target and Wal-‐Mart have all benefited from JC Penney’s recent failures. Kohl’s relies on private and exclusive labels, such as Rock & Republic, to keep revenue 69 “VF & Kohl’s Announce Partnership for The Rock & Republic Brand.” VFC.com. VF Corp. April 28, 2011. <http://www.vfc.com/news/press-‐releases?nws_id=A1EE6289-‐69D3-‐F05A-‐E043-‐ A740E3EAF05A>. 70 Tschorn, Adam. “Rock & Republic for Kohl’s fits like a pair of skinny jeans.” LATimes.com. Los Angeles Times. February 12, 2012. <http://latimesblogs.latimes.com/alltherage/2012/02/new-‐ york-‐fashion-‐week-‐rock-‐republic-‐relaunches-‐kohls.html>. 71 “It Only Costs How Much?! A-‐List Bargains.” PeopleStyleWatch.com. People Magazine. August 6, 2013.<http://www.peoplestylewatch.com/people/stylewatch/gallery/0,,20601775,00.html#21198 627>. 34 flowing at the discount department stores, but its long-‐term market position remains unclear within the industry. 72 For affordable luxury consumers, the desirability of the denim is no longer present. Rock & Republic transitioned from an ultra-‐popular premium denim brand to a mid-‐market apparel line targeted toward consumers looking for bargain fashion. With overall lower price points, the brand exclusivity is lost and affordable luxury consumers have turned to competitors such as Paige Denim or J Brand for their premium denim purchases. 72 Loeb, Walter. “Kohl’s – Why Some Things Are Very Wrong.” Forbes.com. Forbes. October 16, 2012. <http://www.forbes.com/sites/walterloeb/2012/10/16/kohls-‐some-‐things-‐are-‐very-‐wrong/>. 35 CHAPTER FIVE: COACH INC. CASE STUDY THE PREMIUM HANDBAG INDUSTRY In contrast to the premium denim industry, the premium handbag industry boasts a storied, illustrious history. The global handbag industry, at large, was estimated to be a $96 billion market in December 2013, according to IBISWorld. 73 While luxury handbags only account for a small percentage of the market, the segment has established itself among the most valued in the luxury industry. Handbags, especially luxury handbags, are a prized possession for women globally and promising industry growth keeps the stakes high for luxury handbag retailers. While premium handbags are currently one of the fastest growing segments in the luxury market, the Great Recession proved especially challenging for luxury handbag retailers. Consumers in the affordable luxury market curtailed frivolous spending, which included handbags, due to a smaller amount of disposable income. Despite the drawback, international expansion remained a bright spot during this time. During the economic downturn, luxury handbag retailers moved focus to international expansion in order to maintain company growth. They keyed in on China, due to the promising rise in high net worth individuals. Expanding the market base continued to benefit the luxury handbag industry, even after America recovered from the Great Recession and resumed spending. With strong customer bases across the world, the luxury handbag industry is expected to continue 73 “Global Handbag & Purse Manufacturing: Market Research Report.” IBISWorld.com. IBISWorld. December 2013. <http://www.ibisworld.com/industry/global/global-‐handbag-‐purse-‐ manufacturing.html>. 36 growing due to the increasing demand from emerging markets and a growing preference for branded products domestically. This is promising news for Coach, the market leader in luxury handbags in the United States. 74 COACH’S BRAND Coach began in 1941 as a family-‐run workshop, which eventually turned into the global, industry-‐leading luxury company it’s known as today. Celebrated for its handcrafted leather goods, cultivated through skills handed down from generation to generation, Coach has segmented its place in the luxury handbag and accessories market. Owned under the Sara Lee Corporation, Coach prepared to go public in 2000. Sara Lee Corp’s attempt to get rid of businesses acquired over the last quarter-‐ century gave Coach the opportunity for a $140 million stock sale. 75 On October 5, 2000, Coach became a publically traded company listed on the New York Stock Exchange under the symbol COH. 76 As a publically traded company, CEO and Chairman Lew Frankfort led the company to sizzling growth. Sales were exploding as the company tore through the early to mid-‐2000s, as women could not get enough of the affordable luxury handbags and accessories. However, in 2007 Coach began to lose its dominant 74 “Research and Markets: Global Handbag Market Report – 2013 Edition.” Reuters.com. Reuters. May 22, 2013. <http://www.reuters.com/article/2013/05/22/research-‐and-‐markets-‐ idUSnBw225581a+100+BSW20130522>. 75 “Sara Lee Plans Coach Spinoff.” NYTimes.com. The New York Times. June 20, 2000. <http://www.nytimes.com/2000/06/20/business/sara-‐lee-‐plans-‐coach-‐spinoff.html>. 76 “Company Profile: A Rich Heritage.” Coach.com. COACH. <http://www.coach.com/online/handbags/genWCM-‐10551-‐10051-‐en-‐ /Coach_US/CompanyInformation/InvestorRelations/CompanyProfile>. 37 market share to emerging competitors. “It was on such an amazing tear that inevitably the growth started to slow,” explained Kirk Palmer, founder of an eponymous retail executive search firm. 77 With headquarters in New York City – where the company was started – Coach distributes its merchandise worldwide through Coach stores, select department and specialty stores, and through its website. Todd Kahn, the executive vice president of Coach, referred to the company as a microcosm of America, due to its broad reach and diversified product lines. Kahn stressed that the company utilizes logic, making decisions by a “righteous, knowledge-‐based, decision-‐making process, which governs virtually everything we do.” 78 While Coach has come a long way over the years, the company attributes its success to the unique combination of its original American attitude and design, the heritage of its fine leather goods and custom fabrics, and superior product quality. 79 This quality has been seen through years of high-‐class Coach handbags, and has since expanded to men’s bags, small leather goods, footwear, outerwear, watches, scarves, fragrance and jewelry. 77 Pasquarelli, Adrianne. “Coach goes digital, skews younger.” CrainsNewYork.com. Crain’s New York Business. November 15, 2009. <http://www.crainsnewyork.com/article/20091115/SUB/311159964/coach-‐goes-‐digital-‐skews-‐ younger>. 78 “Logic and Magic.” LEADERS Magazine. Volume 36, Number 4: 83. Print. 79 “Company Profile: A Rich Heritage.” Coach.com. COACH. <http://www.coach.com/online/handbags/genWCM-‐10551-‐10051-‐en-‐ /Coach_US/CompanyInformation/InvestorRelations/CompanyProfile>. 38 COACH’S RECESSION OUTLOOK In January 2008, CEO Frankfort announced that he believed the economy was already in a consumer recession, despite economic indicators that showed it would benefit from a tax stimulus package. “It may not be indicated overall within the GDP but consumers are behaving as if we’re in a recession,” he admitted. 80 The announcement was made after Coach saw its quarterly U.S. sales plummet as people avoided malls and reevaluated spending habits. Frankfort said the recession began in December 2007 and was “unlikely to evaporate anytime soon.” 81 Based on the pending economic conditions, Coach began evaluating the company and its brand in an attempt to spring sales and maintain brand prominence through the Great Recession. This bold move set Coach as an outlier, as other top retailers and competitors did everything they could to avoid accepting the impending recession. Coach cut its sales outlook for the second half of fiscal 2008, and targeted 17 percent sales growth instead of the 19 percent previously anticipated. Even with a decreased sales outlook, Coach would still outperform competitors, as the entire handbag market was expected to slow. 82 In July 2008, amid the toughest economic times, senior executives at Coach met to discuss a long-‐term recession plan. Coach had built its brand from modest 80 Geller, Martinne. “Coach CEO says U.S. in ‘consumer recession.’” Reuters.com. Reuters. January 23, 2008. <http://www.reuters.com/article/2008/01/23/us-‐coach-‐ceo-‐interview-‐ idUSN2361386120080123>. 81 Jones, Sandra. “Coach CEO: Recession label applies, not likely to disappear soon.” ChicagoTribune.com. Chicago Tribune. January 26, 2008. <http://articles.chicagotribune.com/2008-‐ 01-‐26/business/0801250555_1_recession-‐disappear-‐applies>. 82 Geller, Martinne. “Coach CEO says U.S. in ‘consumer recession.’” Reuters.com. Reuters. January 23, 2008. <http://www.reuters.com/article/2008/01/23/us-‐coach-‐ceo-‐interview-‐ idUSN2361386120080123>. 39 origins and relied on history and brand image to move product sales. Now, Coach was tasked with recreating the desire that brought the company to be a market leader. There was a strong consensus among Coach executives that the brand needed to adapt; that it needed to recreate an elite cachet within the affordable luxury market. Frankfort recalled this time by saying, “I’ve never worked harder.” 83 But Coach was prepared for these times; Coach understood the market and what consumers wanted. This level of confidence came from really understanding their customers through insights garnered by issuing endless customer surveys, and conducting market analyses and internal evaluations. From these observations, Coach gleaned that habits and expectations developed in the Great Recession would last far beyond the economically challenging times. However, while Coach understood the market through quantitative analysis, consumers can prove to be unpredictable, thus reliance on number analysis cannot always be trusted. WHERE COACH SUCCEEDED In 2008, Coach started its yearlong process to revamp the company’s brand image. Executives believed that Coach needed a fresh, energized feel – as well as lower price points. This position proved challenging, as Coach did not want to tarnish its luxury position by temporarily discounting prices. Coach developed a 83 Berfield, Susan. “Coach’s Poppy Line is Luxury for Recessionary Times.” Businessweek.com. Bloomberg Businessweek. June 18, 2009. <http://www.businessweek.com/magazine/content/09_26/b4137040272361.htm>. 40 plan to carefully maneuver through the recession by creating a new line titled “Poppy,” focusing on men’s apparel, developing stores internationally and refreshing the brand’s image. I. POPPY In the spring of 2009, Coach’s Poppy line debuted with a younger, funkier style that was customer friendly and price conscious. The line showcased a diverse array of pieces, including bags with a bohemian style, rhinestones and sequins, and even a purse with shoelace cinched sides – all of which aligned with a much younger demographic than Coach had previously marketed its merchandise towards. 84 To ensure a successful launch, Coach’s PR and marketing teams used an array of tactics to generate a substantial amount of consumer buzz. Todd Slater of Lazard Capital Markets said the collection had “already generated a lot of media and customer buzz, thanks to smart marketing (bus ads, blogging and press interviews highlighting Poppy’s strategy) and the fact that customers can pre-‐order the collection in stores and have it shipped free to their homes.” 85 The line proved to be a bright spot, even as Coach’s profits fell in October 2009. With the market reeling while customers cut back, younger women rejoiced in the Poppy line that was priced lower, between $200-‐$300. The line also proved to be a 84 Lezan, Jennifer. “Coach’s poppy line – affordable by the masses.” Examiner.com. Examiner. March 13, 2009. <http://www.examiner.com/article/coach-‐s-‐poppy-‐line-‐affordable-‐by-‐the-‐masses>. 85 “Analyst says ‘Poppy’ brand could help Coach.” CrainsNewYork.com. Associated Press. June 22, 2009. <http://www.crainsnewyork.com/article/20090622/FREE/906229997>. 41 substantial factor in Coach’s increased store traffic. 86 With the average price of a Poppy bag at $260 – 20 percent less than a usual Coach purse – Frankfort believed it would be enough to spur a successful holiday shopping season. “Consumers are starting to feel a bit more confident that the economy is stabilizing, that the outlook is no longer dire.” 87 But Coach didn’t just make the decision to lower prices without thorough analysis. “We saw an opportunity to reengineer our assortment so that we have 50 percent of our bags below $300, instead of 30 percent,” explained Michael Tucci, the head of North American retail operations. Coach analyzed its past sales and found that it sold the most bags in 2007, with an average price of $290 per handbag. Further analysis convinced Coach’s management that by rebalancing their pricing structure, Coach would generate enough sales volume that would in turn justify the offset of Poppy’s lower price points. 88 The analysis also suggested that Coach would secure excellent return on investment from this price restructuring. This decision to lower entry-‐level price points proved successful as Coach stabilized its profits. To avoid diluting the brand, Coach’s shrewdly managed brand became appealing to a younger audience, without tarnishing the overall desirability of the brand by implementing successful PR and marketing campaigns that connected with the younger target market in a meaningful, effective manner. 86 Covert, James. “Coach Profits Fall, but Poppy is Popular.” NYPost.com. The New York Post. October 20, 2009. <http://nypost.com/2009/10/20/coach-‐profits-‐fall-‐but-‐poppy-‐is-‐popular/>. 87 Maestri, Nicole. “Check Out Line: Coach profits from Poppy.” Reuters.com. Reuters. October 20, 2009. <http://blogs.reuters.com/shop-‐talk/2009/10/20/check-‐out-‐line-‐coach-‐profits-‐from-‐ poppy/>. 88 Berfield, Susan. “Coach’s Poppy Line is Luxury for Recessionary Times.” Businessweek.com. Bloomberg Businessweek. June 18, 2009. <http://www.businessweek.com/magazine/content/09_26/b4137040272361.htm>. 42 Thus, Coach expanded its market, while retaining its core consumers. Needham analyst Christine Chen applauded Coach, saying, “Coach has one of the best management teams out there…they reacted appropriately to the environment without tarnishing the brand.” 89 While Poppy’s overall price points were lower than Coach’s other merchandise, the line still respected Coach’s core strategy. Frankfort was adamant that Coach never had sales. There were never eye-‐catching posters in store windows drawing attention to discounts or advertisements highlighting reductions. 90 Instead, Poppy was generated to give consumers a pleasant surprise when looking at the price tag, as it would show a lower price than the consumer would expect to see. Because of this, Coach never jeopardized its elite image by drawing extended attention to its lower price points. II. MEN’S STORES To supplement the success of Poppy, Coach turned its focus to the expansion of its men’s collection – an area of business with great potential for growing sales. In May 2010, Coach debuted its first-‐ever standalone men’s store on Bleecker Street in New York City. The store catered to men’s needs, showcasing lofty ceilings, brick 89 Poggi, Jeanine. “Best in Class: Coach’s Price is Right.” TheStreet.com. The Street. February 16, 2010. <http://www.thestreet.com/story/10680981/1/best-‐in-‐class-‐coachs-‐price-‐is-‐right.html>. 90 Poggi, Jeanine. “Best in Class: Coach’s Price is Right.” TheStreet.com. The Street. February 16, 2010. <http://www.thestreet.com/story/10680981/1/best-‐in-‐class-‐coachs-‐price-‐is-‐right.html>. 43 walls and hemlock-‐tiled floors. It offered leather goods for men, as well as exclusive items such as bright parkas and rugged bracelets. 91 This decision followed success from other luxury retailers that catered to men. Ferragamo CEO Michele Norsa said, “Men don’t like to enter a men’s and women’s store to find their products at the back of the store.” 92 Playing on the need for a customized shopping experience for men, Coach communicated its new venture in the media by stressing the benefits that this store will have for men. Showing this brand flexibility kept Coach relevant among its target audience, especially with the promising new men’s niche. With the store’s opening, Coach could also test the market. “We’re going to put it in front of the customer…and learn,” said Tucci, “If we have a viable concept, we’ll roll with it.” However, Coach had reason to believe this new business venture would be successful. “We didn’t open the store down on Bleecker Street just to do one,” Tucci admitted during the opening. 93 Menswear had proven to be more resilient throughout the Great Recession, making it attractive for retailers. In a survey conducted by the American Affluence Research Center in October 2009 of the wealthiest 10 percent of U.S. households, men planned to reduce spending much less than women on designer apparel. 91 Thomsen, Kat. “Opening Tomorrow: Coach Men’s Store.” GQ.com. GQ. May 6, 2010. <http://www.gq.com/style/blogs/the-‐gq-‐eye/2010/05/opening-‐tomorrow-‐coach-‐mens-‐ store.html>. 92 Passariello, Christina & Smith, Ray. “Rewarding Men with a Store of Their Own.” WSJ.com. The Wall Street Journal. February 19, 2010. < http://online.wsj.com/news/articles/SB10001424052748704820904575055463962988660> . 93 “Coach Caters to Men with New NYC Shop.” CNBC.com. CNBC. May 6, 2010. <http://www.cnbc.com/id/36961274>. 44 Additionally, 23 percent of male respondents admitted to not reducing spending since the recession began. 94 After expanding its focus on menswear, Coach found continued success attending to this niche market. Frankfort addressed Coach’s success in a statement made in 2012: “We’re so excited about the results we’re achieving globally in our Men’s business, which remains on track to double to over $400 million this year. Given the success of Men’s, we are now accelerating the rollout of Men’s within existing retail stores. By the end of this fiscal year, we expect to have a broader expression on Men’s in nearly 100 Coach retail stores in North America, up from 42 at the end of the third quarter.” 95 Executives at Coach found another benefit in expanding the menswear lines: international expansion. Brands usually target men when opening stores internationally, especially in markets such as China and Russia, because women in these countries usually seek approval from their husband before indulging in a new 94 Passariello, Christina & Smith, Ray. “Rewarding Men with a Store of Their Own.” WSJ.com. The Wall Street Journal. February 19, 2010. <http://online.wsj.com/news/articles/SB10001424052748704820904575055463962988660> . 95 Dishman, Lydia. “Why Coach Continues to Bag Soaring Profits.” Forbes.com. Forbes. April 24, 2012. <http://www.forbes.com/sites/lydiadishman/2012/04/24/why-‐coach-‐continues-‐to-‐bag-‐soaring-‐ profits/>. 45 store. 96 Once the man shows interest and approves, sales from women often follow. For Coach, this was the perfect strategy. III. INTERNATIONAL EXPANSION The third part of Coach’s recession plan proved to be the most important in terms of longevity. In 2010, Coach began a serious global expansion that included a special interest in China. Coach planned to add 11 stores, totaling 43 by June 2010. Frankfort believed that the Chinese market had the economic capacity to support at least 150 locations, making it the most desirable location for expansion. 97 Condor Capital’s Ken Schapiro agreed with this notion, saying, “China, in particular, seeks the same luxuries that are afforded to western consumers and they now have the disposable income to purchase these ‘entry-‐level’ luxuries.” 98 Along with the expansion brought great risks for Coach. To maximize the chances for success, Coach followed in its traditionally disciplined footsteps by heavily investing in intensive market research in China to assure preparedness for the expansion. Coach also looked to determine the best product mix for the Chinese market, which included analysis of Chinese buyer’s preferences on materials, sizes, 96 “Coach Caters to Men with New NYC Shop.” CNBC.com. CNBC. May 6, 2010. <http://www.cnbc.com/id/36961274>. 97 Poggi, Jeanine. “Best in Class: Coach’s Price is Right.” TheStreet.com. The Street. February 16, 2010. <http://www.thestreet.com/story/10680981/1/best-‐in-‐class-‐coachs-‐price-‐is-‐right.html>. 98 “Condor Capital’s Ken Schapiro: Affordable Luxury Retailers Benefitting from Increased Consumer Selectivity in Discretionary Spending.” PRNewswire.com. PR Newswire. October 26, 2010. < http://www.prnewswire.com/news-‐releases/condor-‐capitals-‐ken-‐schapiro-‐affordable-‐luxury-‐ retailers-‐benefitting-‐from-‐increased-‐consumer-‐selectivity-‐in-‐discretionary-‐spending-‐ 105774268.html>. 46 styles and functions. 99 This also gave Coach the opportunity to strategize the best method for effectively communicating and marketing the brand in the region. The decision to expand internationally, in large part, was inspired by Coach’s North American expansion in the 1980s – in which business exploded from $20 million in revenue in 1985 to $500 million in 1995. Frankfort used this case study to provide assurance for the Chinese expansion because of the loyal following Coach had in China, as well as same-‐store sales growing by double-‐digit percentages in the region. Although related to its North American expansion, Coach was more excited about China’s promising opportunity because of its developing economy, whereas the U.S. had already been economically developed. 100 But Coach hadn’t isolated its international expansion solely to China. At the beginning of 2012, Coach bought back six locations in Singapore and acquired 26 domestic retail Coach businesses in Taiwan. Showing no signs of stopping, Coach planned to take control of one of the fastest growing markets in Asia by buying back its South Korean distribution. 101 This gave Coach full control over international operations and brand messaging. 99 Dishman, Lydia. “Coach’s Expansion Plans for China, Europe, and Men’s are in the Bag.” CBSNews.com. CBS Money Watch. May 10, 2010. <http://www.cbsnews.com/news/coachs-‐ expansion-‐plans-‐for-‐china-‐europe-‐and-‐mens-‐are-‐in-‐the-‐bag/>. 100 Poggi, Jeanine. “Best in Class: Coach’s Price is Right.” TheStreet.com. The Street. February 16, 2010. <http://www.thestreet.com/story/10680981/1/best-‐in-‐class-‐coachs-‐price-‐is-‐right.html>. 101 Dishman, Lydia. “Why Coach Continues to Bag Soaring Profits.” Forbes.com. Forbes. April 24, 2012. <http://www.forbes.com/sites/lydiadishman/2012/04/24/why-‐coach-‐continues-‐to-‐bag-‐ soaring-‐profits/>. 47 IV. REFRESHING THE BRAND IMAGE At the beginning of the Great Recession when Coach executives met to discuss the future of the brand, there was an overwhelming consensus that the brand needed to reinvent itself to maintain its cachet. “People are not buying safe, it’s a mistake to think so…People want to be inspired. That’s what fashion is about; that’s what shopping is about,” stressed Reed Krakoff, Coach’s executive creative director. 102 As a result, Coach searched for ways to refresh the brand. With the launch of Poppy, Coach allowed customers to make online purchases through Facebook for the first time. 103 This was critical for Poppy’s success, as the younger demographic was much more technologically advanced, in comparison to older demographics. This digital initiative showed an effort to stay technologically relevant and a well-‐understood knowledge of Poppy’s younger target market’s desires. But it didn’t stop there. Coach devoted a large portion of its marketing budget – which was $163 million in 2008 – to digital initiatives. 104 Joining Twitter and bolstering its Facebook account were at the top of Coach’s digital goals. This allowed the PR and marketing teams more freedom to grow the brand. Following its launch on Twitter, Coach became one of the site’s recommended brands to follow. 102 Berfield, Susan. “Coach’s Poppy Line is Luxury for Recessionary Times.” Businessweek.com. Bloomberg Businessweek. June 18, 2009. <http://www.businessweek.com/magazine/content/09_26/b4137040272361.htm>. 103 Berfield, Susan. “Coach’s Poppy Line is Luxury for Recessionary Times.” Businessweek.com. Bloomberg Businessweek. June 18, 2009. <http://www.businessweek.com/magazine/content/09_26/b4137040272361.htm>. 104 Pasquarelli, Adrianne. “Coach goes digital, skews younger.” CrainsNewYork.com. Crain’s New York Business. November 15, 2009. <http://www.crainsnewyork.com/article/20091115/SUB/311159964/coach-‐goes-‐digital-‐skews-‐ younger>. 48 Coach reinvented its brand by becoming more innovative and adaptive in the eyes of its target market. By connecting with its publics through social media, Coach developed a deeper relationship between brand and consumer. This gave the public relations department was allowed another platform for messaging – an opportunity that was especially important for connecting with the younger generations. Coach also didn’t miss the chance to capitalize digitally on the opening of its first men’s store. To encourage social media at the event, Coach’s PR team offered a giveaway through Foursquare, a popular digital platform. 105 The first 200 people to digitally “check-‐in” to the opening received a free bottle of Coach’s signature fragrance, which incentivized customers to show up early. In 2009, Coach also generated a holiday campaign centered on ecommerce and blogging. Tucci created a month-‐long holiday blog, which featured a different fashion blogger each day that applauded a variety of Coach’s products. This was especially important given the influence that top fashion bloggers have on Poppy’s target market. The holiday blog was directly tied to Coach’s website, in which features such as a wallet-‐finder and a wish list had been added to make the experience more user friendly in preparation for the holidays. At the time, Coach’s website accounted for only 2 percent of total sales – an amount that was expected to grow substantially. 106 105 Thomsen, Kat. “Opening Tomorrow: Coach Men’s Store.” GQ.com. GQ. May 6, 2010. <http://www.gq.com/style/blogs/the-‐gq-‐eye/2010/05/opening-‐tomorrow-‐coach-‐mens-‐ store.html>. 106 Pasquarelli, Adrianne. “Coach goes digital, skews younger.” CrainsNewYork.com. Crain’s New York Business. November 15, 2009. <http://www.crainsnewyork.com/article/20091115/SUB/311159964/coach-‐goes-‐digital-‐skews-‐ younger>. 49 Digital remained a point of focus for Coach throughout the Great Recession, as the brand continued to concentrate on growing its digital revenue in the market. Continuously developing Coach’s website, marketing sites, third-‐party flash sites and social networking also stayed at the top of Coach’s digital priorities. 107 This importance gave Coach’s PR and marketing teams the ability to create strategic communications plans to foster a meaningful digital presence. THE FUTURE FOR COACH Today, Coach aspires to evolve into a full lifestyle brand. While the anchor of the company is still handbags and accessories, creating a full lifestyle brand will not only help Coach in the U.S., but in its global expansion efforts as well. “We plan to convey this new expression of the Coach brand by telling a complete story about the women and men who are our consumers,” explained Kahn. 108 In 2014, Coach will also experience a large change in management. Frankfort announced in February 2013 that he would be stepping aside as Coach’s head of international operations in 2014; Victor Luis will be filling his position. Frankfort said he plans to remain “indefinitely” as the company’s executive chairman. With the leadership transformation, Coach continues to push for global expansion as an all-‐ inclusive lifestyle brand. Luis said in a statement that, "Together with Lew 107 Trefis Team. “Why Coach Can Bag a $66 Stock Price.” Forbes.com. Forbes. February 12, 2013. <http://www.forbes.com/sites/greatspeculations/2013/02/12/why-‐coach-‐can-‐bag-‐a-‐66-‐stock-‐ price/>. 108 “Logic and Magic.” LEADERS Magazine. Volume 36, Number 4: 83. Print. 50 [Frankfort], we will build upon the company's strong foundation, leveraging the global opportunity, while continuing to evolve the Coach brand." 109 To evolve into a lifestyle brand, Coach is focusing marketing efforts on its product lines outside of handbags. Trey Laird of creative agency Laird + Partners believes that “this is a pivotal time for Coach as it transitions from being ‘just a brand’ to a complete lifestyle world.” 110 In a time when Coach is experiencing intense pressure from competitors, as it loses market share in the handbag industry, expanding the brand’s reach will help secure customers buying into the complete lifestyle. 111 It will also appeal to Coach’s investors, which are currently worried about the tough emerging competition. Coach’s EVP of marketing, Stephanie Stahl, says that this will be the first time everything appearing in ads will be Coach’s merchandise. This includes everything from ready-‐to-‐wear to outerwear, all showcased as one inclusive lifestyle brand. Coach believes this will portray a more emotional and expansive image of the brand to consumers. 112 However, this transformation is easier said than done. Brian Sozzi, chief equities analyst at NBG Productions, believes Coach needs to “put out more 109 “Coach’s longtime CEO Lew Frankfort to step aside.” USAToday.com. Associated Press. February 14, 2013. <http://www.usatoday.com/story/money/business/2013/02/14/coach-‐ceo-‐step-‐ aside/1920203/>. 110 Klara, Robert. “Coach: We’re a lifestyle brand, not just pricey purses anymore.” AdWeek.com. AdWeek. September 30, 2013. <http://www.adweek.com/news/advertising-‐branding/coach-‐we-‐re-‐ lifestyle-‐brand-‐152778>. 111 Trefis Team. “Why Coach Can Bag a $66 Stock Price.” Forbes.com. Forbes. February 12, 2013. <http://www.forbes.com/sites/greatspeculations/2013/02/12/why-‐coach-‐can-‐bag-‐a-‐66-‐stock-‐ price/>. 112 Klara, Robert. “Coach: We’re a lifestyle brand, not just pricey purses anymore.” AdWeek.com. AdWeek. September 30, 2013. <http://www.adweek.com/news/advertising-‐branding/coach-‐we-‐re-‐ lifestyle-‐brand-‐152778>. 51 fashionable product,” adding, “[Michael] Kors is a clear leader,” in reference to top competitor Michael Kors. 113 For Coach, these challenges are significant. Competitors such as Michael Kors and Tory Burch have been gaining popularity with affordable luxury consumers, as these companies appear to be the newest, freshest brands available in the market. Coach will need to continue reinventing the brand, by using innovative methods to preserve its desirability and achieve indefinite future success. Public relations will play a crucial role by continuing to cultivate relationships with key target markets. 113 “Coach’s longtime CEO Lew Frankfort to step aside.” USAToday.com. Associated Press. February 14, 2013. <http://www.usatoday.com/story/money/business/2013/02/14/coach-‐ceo-‐step-‐ aside/1920203/>. 52 CHAPTER SIX: TIFFANY & CO. CASE STUDY THE LUXURY JEWELRY INDUSTRY In the U.S., jewelry is a big business. Americans account for roughly half of the world’s polished diamond buyers, but it doesn’t just stop there. 114 Jewelry is among the list of most purchased items during the holiday season, as jewelry retailers rely on these final months of the year more than any other type of retailer, according to the National Retail Federation. In addition, one third of jewelers’ sales in the fourth-‐quarter happen within the 10 days before Christmas, claims Michael McNamara, the vice president of MasterCard Advisors’ SpendingPulse. 115 Despite these staggering statistics, jewelers – especially luxury jewelers – are often the category of retail most affected by economically adverse times. Luxury jewelers often find their businesses stuck during recessions, as they become laden with debt due to the back stock and slow sales of high-‐priced jewelry. To incentivize sales, jewelers often drop prices. However, not all retailers can continue to compete on the low-‐priced strategy over an extended period of time. “You’re seeing the traffic fall off a cliff at all price points,” said Stacey Widlitz, a retailing analyst at Pali Research, in regards to the jewelry prices during the Great Recession. 116 This 114 Haynes, V. Dion & Lakshmi, Rama. “The Jewel Trade’s Fading Luster.” WashingPost.com. The Washington Post. March 28, 2009. <http://www.washingtonpost.com/wp-‐ dyn/content/article/2009/03/27/AR2009032702935.html?hpid=topnews>. 115 Timberlake, Cotton. “Tiffany Keys, Blue Nile’s Tuxedo Pearls Show Reviving U.S. Consumer Demand.” Bloomberg.com. Bloomberg. December 13, 2010. <http://www.bloomberg.com/news/2010-‐12-‐13/reviving-‐consumers-‐snap-‐up-‐tiffany-‐keys-‐blue-‐ nile-‐pearls.html>. 116 Rosenbloom, Stephanie. “In a Downturn, Jewelers Aren’t So Precious.” NYTimes.com. The New York Times. July 7, 2009. <http://www.nytimes.com/2009/07/07/business/07jewelry.html?pagewanted=all&_r=0>. 53 drastically affected the luxury market, as thousands of jewelers nationwide continued to go out of business each year the recession progressed. The future didn’t look much better for luxury jewelers either: “Jewelry is often the last category to turn upward. It’s probably the most discretionary of all categories purchased in a store,” explained Milton Pedraza, the CEO of Luxury Institute. 117 Many luxury jewelers opted to slow their new store growth and cut capital expenditures, inventory and advertising budgets as a way to weather the recession and minimize a loss in profits. A bright spot for luxury jewelers in the Great Recession was the recession-‐ resistant engagement and bridal niche, since this category’s demand does not falter during recessions. The executive editor of National Jeweler, Teresa Novellino, believed that engagement sales would continue to hold strong: “In a recession, people might not be buying a fancy diamond necklace or a sapphire cocktail ring, but they are still getting engaged.” 118 While this remained a positive for the jewelry industry, consumers did alter their purchase preferences when it came to engagement jewelry. The majority of consumers opted to spend less for an engagement ring than they would have if the Great Recession had not been a factor. This trend drastically cut high-‐end jewelry retailers’ margins. The Diamond Information Center reported that the number of 117 Timberlake, Cotton. “Tiffany Keys, Blue Nile’s Tuxedo Pearls Show Reviving U.S. Consumer Demand.” Bloomberg.com. Bloomberg. December 13, 2010. <http://www.bloomberg.com/news/2010-‐12-‐13/reviving-‐consumers-‐snap-‐up-‐tiffany-‐keys-‐blue-‐ nile-‐pearls.html>. 118 “Economic Reality: Scaled-‐Down Engagement Rings.” ABCNews.com. ABC News. June 1, 2009. <http://abcnews.go.com/Business/Economy/story?id=7710554&page=2>. 54 engagement rings sold in 2009 held steady, however the group was not able to give detail on the prices of these sales in relation to years past. 119 Yet, the luxury jewelry industry did experience positive growth in one sector throughout the recession: men’s jewelry, which doubled its market share from 2007 to 2010. More than 20 percent of high-‐end jewelry expenditure in 2010 was men’s jewelry, a surprise category for most retailers due to the nontraditional niche. 120 As men continued to purchase jewelry, more luxury jewelry companies began to target this group of affluent consumer in hopes of revitalizing flat sales results and creating a new line of revenue. TIFFANY & CO.’S BRAND Charles Lewis Tiffany and John B. Young founded Tiffany & Co. in 1837 in New York City, with aspirations of becoming a highly respected American retailer. The company’s strong heritage, based on the highest standards of quality and design excellence, quickly positioned Tiffany as a leader in the luxury jewelry marketplace. As Tiffany grew, international recognition and the status of being the first American school of design set Tiffany apart from its competitors. By 1870, Tiffany was known as the premiere silversmith and purveyor of jewels and timepieces in the United States. 121 119 “Economic Reality: Scaled-‐Down Engagement Rings.” ABCNews.com. ABC News. June 1, 2009. <http://abcnews.go.com/Business/Economy/story?id=7710554&page=2>. 120 Tulshyan, Ruchika. “Men’s Jewelry: A Recession-‐Proof Luxury.” TIME.com. TIME. July 27, 2010. <http://content.time.com/time/business/article/0,8599,2006189,00.html>. 121 “About Tiffany & Co.” Tiffany.com. Tiffany & Co. <http://press.tiffany.com/ViewBackgrounder.aspx?backgrounderId=33>. 55 After being bought by Avon Products Inc. in 1979, Tiffany was immediately challenged due to vicissitude in the market that slowed Tiffany’s success. By 1984, after numerous attempts at turning the direction of the company, Avon sold Tiffany in a management buy-‐out. Tiffany went public in 1987 under the New York Stock Exchange ticker, TIF. 122 While the company’s growth elevated after going public, tradition proved to be a strong factor in Tiffany’s success, as the company continually relied on strong branding to attract customers. The success of Tiffany is showcased annually in the Blue Book Collection, an annual compendium of Tiffany’s and the world’s finest jewels. The Blue Book archive provides a detailed chronology of Tiffany’s evolution in the diamond industry. First published in 1845, the collection started as a method for the merchant to directly communicate with customers by showcasing Tiffany’s most prestigious offerings. The signature Tiffany Blue color was used on the cover to distinguish the Blue Book, and has now become world famous. The iconic color is a representation of style and sophistication that reinforces Tiffany as the world’s diamond authority. 123 As Tiffany built its reputation throughout the years, it became synonymous with life’s most treasured events: engagements, weddings, births and anniversaries. Hollywood helped build Tiffany’s strong reputation through the company’s network of celebrity clientele and its placement in major Hollywood motion pictures, most 122 Hollie, Pamela. “Avon to sell Tiffany, 5 years after it took over.” NYTimes.com. The New York Times. June 20, 1984. <http://www.nytimes.com/1984/06/20/business/avon-‐to-‐sell-‐tiffany-‐5-‐ years-‐after-‐it-‐took-‐over.html>. 123 “Blue Book.” Tiffany.com. Tiffany & Co. <http://press.tiffany.com/ViewBackgrounder.aspx?backgrounderId=30>. 56 notably “Breakfast at Tiffany’s,” a 1961 version of the 1958 Truman Capote novella starring Audrey Hepburn in New York City. 124 In 2014, Tiffany has over 200 stores worldwide and has expanded product lines to include a wide variety of jewelry, handbags, home goods, and men and women’s accessories. 125 Tiffany continues to expand its product lines, which has altered the company’s image within the jewelry industry. Once perceived to be the leader within the luxury jewelry market, the brand took a severe hit to its image in the early 1990s when the luxury retailer introduced jewelry lines at lower price points to attract a larger market. While this line proved to be very successful by drawing a wider customer base, high-‐end clientele felt that the brand had tarnished its pristine brand image and proceeded to look elsewhere for their luxury jewelry. RECESSION OUTLOOK FOR TIFFANY & CO. Tough times are not unknown to Tiffany, since the company had fought through both internally and externally adverse times throughout its history. At a retail conference in 2008, CEO Michael Kowalski stressed that the company would again broaden its customer target market by introducing lower-‐priced product lines through its silver designs intended to increase store traffic. The company believed this was a key to success. John Loring, a design director at Tiffany, explained that now anyone “can participate in the Tiffany mystique, whether it’s a $12 wine glass 124 “Breakfast at Tiffany’s.” IMDb.com. IMDb. <http://www.imdb.com/title/tt0054698/>. 125 Banerjee, Devin & Lachapelle, Tara. “Tiffany Engagement Worth $12 Billion in Takeover as Alliance Up: Real M&A.” Bloomberg.com. Bloomberg Businessweek. September 23, 2011. < http://www.bloomberg.com/news/2011-‐09-‐22/tiffany-‐engagement-‐worth-‐12b-‐real-‐m-‐a.html>. 57 or a $1 million necklace.” 126 Unfortunately, high-‐end customers value exclusivity and shy away from mass marketed brands. To avoid tarnishing its brand image, Tiffany refused to negotiate prices with haggling consumers that looked to get a deal. Instead, Tiffany held true to its set price points of its various product lines and avoided any discounts or negotiations – a tactic that many of its competitors turned to in an effort to boost sales. As the Great Recession continued, customers attempted to negotiate prices more often and would even walk away from purchasing jewelry if their bargaining efforts were not successful. However, Kowalski remained adamant that “the price is the price is the price.” 127 Despite these struggles, Tiffany planned to ride out the recession, even though many jewelers were going out of business and clearing out inventory by deeply discounting items or running flash sales. Due to Tiffany’s strong history and gross market share, Bob Drbul, a retailing analyst at Barclays Capital, believed that “Tiffany has the balance sheet to really withstand a prolonged period of weakened demand.” 128 However, the last half of 2008 caught Tiffany by surprise. The company had relied on end-‐of-‐the-‐year holiday shopping in November and December for sales, which usually accounted for about 85 percent of the year’s total sales. Additionally, 126 T., Kristie. “Continued growth? Tiffany & Co. trying to put a ring on its legacy.” USCAnnenberg.com. University of Southern California: Annenberg. May 5, 2013. <http://mmm.uscannenberg.org/?p=1857>. 127 Sivaraman, Aarthi. “Recession brings hagglers to Tiffany.” Reuters.com. Thomson Reuters. June 11, 2009. < http://www.reuters.com/article/2009/06/10/us-‐luxury-‐summit-‐tiffany-‐ idUSTRE5596NF20090610>. 128 Rosenbloom, Stephanie. “In a Downturn, Jewelers Aren’t So Precious.” NYTimes.com. The New York Times. July 7, 2009. <http://www.nytimes.com/2009/07/07/business/07jewelry.html?pagewanted=all&_r=0>. 58 Tiffany also relied on its flagship store in New York City for a large percentage of its overall sales. As the Great Recession took its toll at the end of 2008, Tiffany woke up to a harsh reality by experiencing a 21 percent drop in holiday sales, including sales falling by one third at the flagship store in New York City. 129 With tumultuous economic times ahead, Tiffany needed to strategize a plan to ride out adverse times, as consumers in New York City – and the nation – cut spending drastically. WHERE TIFFANY & CO. SUCCEEDED With a tough start to 2009, Tiffany needed to bounce back with a reliable, strategic plan. While many competitors in the luxury jewelry market turned to discounting prices, Tiffany kept its eye on the long-‐term success of the brand. “You either chase the consumer downstream or you stay the course. Tiffany is staying the course,” explained Ms. Widlitz of Pali Research. To mollify Tiffany’s bleak outlook, the company released a new line of Tiffany Keys, opened smaller, more casual stores, focused on engagement merchandise, and expanded internationally to help combat the downfall of the Great Recession. Vice President of Investor Relations at Tiffany, Mark Aaron, shared the company’s views on the Great Recession: “We’re going through a business cycle. There will eventually again be a rising tide of affluence around the world.” 130 129 Carney, John. “Tiffany’s (TIF) Admits: The Recession Ate Us for Breakfast.” BusinessInsider.com. Business Insider. January 14, 2009. <http://www.businessinsider.com/2009/1/tiffanys-‐tif-‐admits-‐ the-‐recession-‐ate-‐us-‐for-‐breakfast>. 130 Rosenbloom, Stephanie. “In a Downturn, Jewelers Aren’t So Precious.” NYTimes.com. The New York Times. July 7, 2009. <http://www.nytimes.com/2009/07/07/business/07jewelry.html?pagewanted=all&_r=0>. 59 I. TIFFANY KEYS Tiffany introduced Tiffany Keys in 2009, with price points ranging from only $150 to an outstanding $35,000. 131 In an attempt to attract aspirational shoppers, the lower price points positioned Tiffany within the affordable luxury segment that strategically intended to draw more customers into its stores. From the onset, the line was positioned as high-‐end, despite the lower priced pieces. Tiffany’s selectively chose to host the launch party for the key collection at Los Angeles hotspot Chateau Marmont, with Kelly Wearstler and Vogue contributing editor Lauren Santo Domingo, in the penthouse. 132 Guests, which included celebrities and tastemakers, sipped champagne as they perused the collection on display and viewed items that were showcased on models. The event allowed the marketing and public relations teams to align Tiffany Keys as a premium, desirable jewelry line. The Tiffany Key collection was offered in gold, silver and platinum, showcasing intricate designs and complex detail. The collection also played on symbolism, as keys represented mystery, privilege, secrecy and most importantly, security – something that was hard to come by during the Great Recession. 133 The collection was so successful that it temporarily sold out in 2010, after demand skyrocketed. Hollywood’s elite tastemakers were seen around town 131 Anderson, Mae. “No recession for the rich: Tiffany 4Q profit quadruples.” USAToday.com. Associated Press. March 22, 2010. <http://usatoday30.usatoday.com/money/companies/earnings/2010-‐03-‐22-‐tiffany_N.htm>. 132 “Tiffany unlocks key collection and Ginnifer Goodwin hosts a dinner for up and coming Aussie designers.” LATimes.com. Los Angeles Times: All the Rage. June 12, 2009. <http://latimesblogs.latimes.com/alltherage/2009/06/tiffany-‐co-‐unlocks-‐key-‐collection-‐and-‐ ginnifer-‐goodwin-‐hosts-‐a-‐dinner-‐for-‐up-‐and-‐coming-‐aussie-‐desig.html>. 133 Scott, Annie. “Tiffany Keys.” Luxist.com. Luxust. April 9, 2009. <http://www.luxist.com/2009/04/09/tiffany-‐keys/>. 60 wearing an array of Tiffany Keys, from Leighton Meester to Anne Hathaway, Jessica Biel to Kristin Scott Thomas. 134 While the lower priced items attracted aspirational customers, the more expensive pieces in the line attracted luxury retail’s finest customers. This allowed Tiffany to capitalize on multiple market segments, and avoid alienating the two important target markets. In an effort to avoid this alienation, Tiffany focused on the high-‐tier pieces in the collection. Drawing the media’s focus towards the elite pieces attracted true luxury customers, while also proving extremely appealing for aspirational shoppers, which were keen to possess such a high-‐class piece – even if it was the cheapest Tiffany Key in the collection. This success was a standout hit for the struggling company. “From a merchandising perspective, it’s probably appropriate to call 2009 the year of the key,” said Aaron in 2010. This success helped Tiffany quadruple profits in the fourth quarter, which concluded on January 31, 2011. This boost in holiday sales provided Tiffany with an optimistic outlook for the future. Kowalski said that Tiffany had “begun the year with worldwide sales growth exceeding our first-‐quarter plan which calls for a high-‐teens percentage increase.” 135 134 “Tiffany & Co.’s Key to Hollywood’s Heart.” RadarOnline.com. Radar Online. August 5, 2010. <http://radaronline.com/exclusives/2010/08/tiffany-‐cos-‐key-‐hollywoods-‐heart>. 135 Anderson, Mae. “No recession for the rich: Tiffany 4Q profit quadruples.” USAToday.com. Associated Press. March 22, 2010. <http://usatoday30.usatoday.com/money/companies/earnings/2010-‐03-‐22-‐tiffany_N.htm>. 61 II. ENGAGEMENT RINGS Engagement rings are a longtime staple for Tiffany. Through millions of sales, Tiffany engagement rings provide an image of happily ever after, and customers are willing to pay a steep mark-‐up for the manufacture of perfect memories. Just as the wedding dress is important, Tiffany’s signature blue box with an engagement ring signifies quality and eternal trust. The New York Times even claimed that customers feel “there is a kind of assurance that buying your ring at Tiffany inures you from bad marital juju.” 136 As the recession cut consumer spending on optional jewelry purchases, the number of sales from engagement jewelry held strong as people still looked to purchase wedding rings. However, the demand altered. Consumers were looking to spend less overall on engagement rings, by opting for smaller carat sizes or less-‐ expensive platinum settings. Thus, Tiffany announced that it would lower prices on engagement rings by 10 percent in 2009. Aaron explained that Tiffany would keep its eye on building a long-‐ term relationship with its customers in hopes of payoff down the road: “We’re not going to discount or run short-‐term sales. We’re simply going to take a little bit less gross margin in the engagement category. It was our gesture to a young couple. We just made it a little bit more affordable.” 137 136 Kuczynski, Alex. “A Story in Every Box.” NYTimes.com. The New York Times. February 8, 2007. <http://www.nytimes.com/2007/02/08/fashion/08CRITIC.html?fta=y>. 137 Rosenbloom, Stephanie. “In a Downturn, Jewelers Aren’t So Precious.” NYTimes.com. The New York Times. July 7, 2009. <http://www.nytimes.com/2009/07/07/business/07jewelry.html?pagewanted=all&_r=0>. 62 For the benefit of its overall brand image, Tiffany’s public relations team strategically kept the price reductions on engagement rings quiet after the initial announcement to avoid publicity. While salespeople would tell interested customers about the lower pricing, there were no outstanding publicity efforts to draw attention to the new, customer friendly pricing. Kowalski said, “It’s about maintaining the long-‐term value of the enterprise. If we were to abandon that, the consequences would be significant.” However, Aaron insisted that Tiffany had nothing to hide, saying, “It was our acknowledgement of the environment. It was a gesture that we made to customers.” 138 While it is common for brands to seek as much publicity as possible, in this case, avoiding PR and withholding marketing efforts proved significant in maintaining Tiffany’s brand cachet. Flying under the radar allowed Tiffany the opportunity to keep its strong reputation in engagement jewelry, while also showing compassion and an effort to build lifelong relationships with its customers. III. SMALLER STORES After a rough start to the recession, Tiffany planned to bring a new style of stores not previously known to the Tiffany brand. Traditional Tiffany stores, such as the flagship store in New York City, were very formal – something that Tiffany executives believed dissuaded customers from casually browsing stores. In an 138 Burnsed, Brian. “In Luxury Sector, Discounting Can Be Dangerous.” Businessweek.com. Bloomberg Businessweek. July 23, 2009. <http://www.businessweek.com/magazine/content/09_31/b4141049551979.htm>. 63 attempt to attract a wider target audience, Tiffany opened a smaller store in Glendale, CA. that was more casual and customer friendly. 139 The Glendale store opened in a 2,600-‐square-‐foot space – about one-‐third the size of traditional Tiffany stores. 140 Depending on the demand at this store, Tiffany announced plans to open 170 additional small stores nationwide to attract more entry-‐level customers. In a statement, a Tiffany representative said that the smaller stores gave it “the potential to significantly accelerate U.S. sales growth over the medium to long-‐term and enhance profitability.” 141 With the smaller store concept, Tiffany offered a lower-‐price range of jewelry by focusing on gold and silver collections. Thus, the store would not carry any engagement rings or high-‐price statement jewelry, which had a lower turnover rate. Stifel Nicolaus & Co. analyst David Schick believed that the smaller stores would give Tiffany a high return on capital, as the high-‐margin silver jewelry would appeal to a broader market base. 142 By introducing the smaller store format, Tiffany’s executive vice president, Beth O. Canovan, believed it gave consumers “a new way of looking at Tiffany.” 143 In the small stores, customers were more enticed to try on jewelry, as merchandise was showcased in open displays instead of locked in cabinets behind glass. In 139 Cheng, Andria. “Recession, dollar take shine off Tiffany profit.” MarketWatch.com. The Wall Street Journal. May 29, 2009. <http://www.marketwatch.com/story/recession-‐dollar-‐take-‐shine-‐off-‐ tiffanys-‐profit>. 140 Sanchez, Jesus. “Smaller stores in store for Tiffany.” LATimes.com. Los Angeles Times. February 28, 2008. <http://latimesblogs.latimes.com/lanow/2008/02/tiffany-‐co-‐may.html>. 141 Earnest, Leslie. “Tiffany will try out smaller-‐store concept.” LATimes.com. Los Angeles Times. February 29, 2008. <http://articles.latimes.com/2008/feb/29/business/fi-‐tiffany29>. 142 “Tiffany small store expansion gains praise.” CrainsNewYork.com. Associated Press. October 18, 2007. <http://www.crainsnewyork.com/article/20071018/FREE/71018005>. 143 Earnest, Leslie. “Tiffany will try out smaller-‐store concept.” LATimes.com. Los Angeles Times. February 29, 2008. <http://articles.latimes.com/2008/feb/29/business/fi-‐tiffany29>. 64 addition to a new look, Tiffany also capitalized on its smaller store investments by gaining benefits such as lower inventory costs. While it would have been natural to label the smaller stores as less prestigious, Tiffany’s publicity efforts showcased the stores fresh, friendly environment. The stores were inviting and marketed towards a younger, energized generation. This brand flexibility allowed Tiffany to expand, while still staying true to its regal, traditional reputation by maintaining the historical ambiance at its flagship stores. Following the Glendale store success, a second small store opened in Seattle, WA. at the University Village in 2009. The doors of the building were made of glass, instead of the traditional stainless steel. The layout was Tiffany’s “way of being more inviting,” said store manager Belinda Kearns. The store also invited a new style for customers: “It’s designed to let people explore and play a little bit with their own style,” she added. 144 The overwhelming success of the smaller store layout enticed Tiffany to continue with this trend. In Tiffany’s 2013 annual report, the company cited the smaller store format as a key strategy. 145 Having these smaller layouts increased each store’s productivity, enabling Tiffany to capitalize on a wider market share and an increased growth potential. 144 Allison, Melissa & Martinez, Amy. “Less formal Tiffany store opens today at University Village.” SeattleTimes.com. The Seattle Times. September 4, 2009. <http://seattletimes.com/html/retailreport/2009803032_retailreport04.html>. 145 “Form 10-‐K for Tiffany & Co.” Yahoo.com. Yahoo Finance. March 28, 2013. <http://biz.yahoo.com/e/130328/tif10-‐k.html>. 65 IV. INTERNATIONAL EXPANSION In September 2011, Tiffany had expanded its market capitalization to $8.6 billion – an increase from its $3.1 billion share in June 2009. 146 While Tiffany was able to successfully escape from the Great Recession that crushed many of its competitors, it looked to continue its growth in emerging markets. To ensure a successful global expansion, Tiffany hired Frederic Cumenal in 2011 as an executive vice president. After luring Cumenal away from French luxury goods giant LVHM Moet Hennessy Louis Vuitton, he was expected to lead international expansion by doubling Tiffany’s presence overseas. The plan for new international stores would include smaller layouts, with less storage space and less large jewelry, as a means to lower overhead costs. “We have better capabilities to replenish inventories, so we don’t need the extra space,” explained Aaron. 147 The international expansion was expected to help both international and domestic sales for Tiffany. By benefiting from the strength of the Chinese consumer, Tiffany would also appeal to traveling international consumers that would become more familiar with the brand. THE FUTURE FOR TIFFANY & CO. As Tiffany assesses the future, promising sales growth overseas – mainly in China – remains a bright spot, as sales in America have remained stagnant. Sales in 146 Banerjee, Devin & Lachapelle, Tara. “Tiffany Engagement Worth $12 Billion in Takeover as Alliance Up: Real M&A.” Bloomberg.com. Bloomberg Businessweek. September 23, 2011. < http://www.bloomberg.com/news/2011-‐09-‐22/tiffany-‐engagement-‐worth-‐12b-‐real-‐m-‐a.html>. 147 Pasquarelli, Adrianne. “To maintain luster, Tiffany turns to overseas markets.” CrainsNewYork.com. Crain’s New York Business. March 31, 2011. <http://www.crainsnewyork.com/article/20110313/SUB/303139971>. 66 Asia, outside of Japan, now account for 20 percent of overall revenue for Tiffany, in comparison to only 11 percent five years ago. 148 Sales at Tiffany’s flagship store on Fifth Avenue in New York City are holding strong, although executives believe this success is in large part due to tourist spending. While Tiffany has enjoyed great success overseas, the company continues its quest to find the right dynamic of expensive, top line jewelry for which the company is traditionally known for and less expensive silver jewelry, which spurred sales throughout the Great Recession and broadened Tiffany’s customer base. Tiffany has recently shown its versatility by capitalizing on both its premium lines and its lower cost merchandise by creating a jewelry collection based on the feature film “The Great Gatsby,” a film adaptation of F. Scott Fitzgerald’s novel set in the Roaring 20s. Tiffany partnered with Catherine Martin, the film’s costume and jewelry designer, to debut a collection of jewelry from the movie. Aligning with “The Great Gatsby” was the perfect fit for the company: “Tiffany was the established jeweler of New York in the period, and F. Scott Fitzgerald was a customer,” Martin said. 149 This collaboration helps align Tiffany with pop culture, both currently and historically. However, Tiffany has also recently drawn headlines for a different story. Vice president for product development, Ingrid Lederhaas-‐Okun, admitted to stealing 148 Reuters. “Tiffany Raises Profit Outlook on Strength of Sales in China.” NYTimes.com. The New York Times. August 27, 2013. <http://www.nytimes.com/2013/08/28/business/tiffany-‐raises-‐ profit-‐outlook-‐on-‐strength-‐of-‐sales-‐in-‐china.html?ref=tiffanyandco>. 149 Belcher, David. “’Gatsby’ Replicas for the Life of the Party.” NYTimes.com. The New York Times. May 15, 2013. <http://www.nytimes.com/2013/05/16/fashion/16iht-‐acaj-‐ gatsby16.html?ref=tiffanyandco>. 67 about $1.2 million in jewelry from the company. 150 As the drama has drawn national attention, Tiffany declined to comment on the matter. While this is not a situation that Tiffany will take lightly, the recent attention has placed Tiffany in a media spotlight. 150 Weiser, Benjamin. “Ex-‐Tiffany Executive Pleads Guilty to Stealing Jewelry.” NYTimes.com. The New York Times. July 26, 2013. <http://www.nytimes.com/2013/07/27/nyregion/ex-‐tiffany-‐ executive-‐pleads-‐guilty-‐to-‐stealing-‐jewelry.html?ref=tiffanyandco&_r=0> 68 CHAPTER SEVEN: CONCLUSION After analyzing the varying effects that the Great Recession had on each of the case studies, it becomes clear how important navigating adverse times is for the long-‐term success of brands. While the affordable luxury segment is the most vulnerable section of the premium retail market, these companies must always be prepared to face challenging times. For public relations practitioners working with affordable luxury brands, the daily decisions that they make throughout crises are among the most important for the long-‐term success of the brand. Public relations specialists engage with all of the company’s stakeholders. For luxury brands, this position’s significance is exemplified due to the heightened importance of a brand’s image. Perception is everything for affordable luxury brands because consumers buy into the lifestyle of the brand, and without this connection, the brand losses its relationships with its audience. While Rock & Republic, Coach and Tiffany each made numerous tough decisions during the Great Recession, the levels of success for each company after the downturn varied drastically. These decisions that were made during the Great Recession have had lasting impacts on each company, and their respective futures. There are three main areas that are important for public relations practitioners to take away from each case study: the importance of understanding the market, maintaining brand image and achieving brand flexibility. 69 I. UNDERSTANDING THE MARKET The first, and arguably the most important, feature drawn from the case studies is the importance of understanding the market in which a brand competes. For Rock & Republic, losing touch with its consumer market by aligning with Rock Racing and Vision Racing was costly. Both Rock Racing and Vision Racing were not communicated strategically to Rock & Republic’s customers, as Ball repeatedly spoke to the media about how ‘cool’ these ventures were. The affiliation proved to be unsuccessful, as Rock & Republic moved away from its strong brand image. Unlike Rock & Republic, both Coach and Tiffany understood their respective markets. Coach continually showed its vast understanding for not only the industry, but for its target market, which was made possible through intensive market research. This factored into decisions such as improving its digital initiatives to cater to a younger target market. Public relations and marketing fostered Coach’s digital presence by implementing a holiday blog, and effectively boosting Coach’s social media presence through strategic messaging that effectively resonated with its target market. For Tiffany, its crucial decision to lower the overall price of its engagement rings showed an in-‐depth understanding of the economic climate. While this decision had the ability to tarnish Tiffany’s pristine brand image, avoiding publicity helped the brand survive its temporary price restructuring without losing its high-‐end customers. In this instance, Tiffany showed a vast understanding of the market by avoiding publicity and marketing that would draw attention to this decision – even though doing so would attract more sales in the short-‐term. 70 II. MAINTAINING BRAND IMAGE The single biggest reason that Rock & Republic failed during the Great Recession was because it lost its edgy, rock n’ roll image that attracted consumers nationwide. By releasing its line of recession denim and communicating its affordability, Rock & Republic immediately lost its clout. The line was positioned for consumers as a sign of the times, which Ball repeatedly stressed during interviews with the media. However, Rock & Republic’s target markets were not attracted to the lower-‐priced, less exclusive brand image. However, there were ways to lower price points without turning the brand’s target market off the brand. Coach found this possible when it released its Poppy line. Targeted towards a younger target market with lower prices, Poppy was a smashing hit. The public relations and marketing departments successfully communicated the line’s youthful demeanor, by emphasizing the fun, exciting line as a reenergized version of Coach’s traditional brand. It revamped Coach’s brand image by positioning it as a younger, revitalized brand that was fresh and exciting. Tiffany also found success in restructuring price points while maintaining its brand image. Tiffany Keys were introduced to the market with prices ranging from the mid-‐100s all the way to $35,000 per piece. However, Tiffany’s PR and marketing efforts focused on the upper tier pieces in the collection. By creating desire for the premium pieces, aspirational shoppers became more attracted to the affordable pieces without turning off high-‐end clientele. 71 III. ACHIEVING BRAND FLEXIBILITY It’s important for brands to be flexible, especially when the market is transforming under challenging times. With that said, there is a point at which a brand becomes too flexible and loses sight of its core capabilities. When Rock & Republic merchandise was found at Canadian Costco stores, the company failed to communicate the situation to its most important publics. The flexibility of the brand was too much for Rock & Republic’s customers, as the once exclusive jeans were adapting to the economically challenging times by expanding its distribution. By not communicating, Rock & Republic’s distributors and employees were isolated and the vision of the brand became lost in uncertainty. In contrast, Coach displayed its brand flexibility during the Great Recession by capitalizing on a growing menswear market. In true Coach fashion, the decision to open the men’s store in New York City was thoroughly researched and strategically catered for men. Coach’s public relations and marketing teams built consumer buzz for the store by highlighting the store’s features and masculine décor. By transforming the Coach brand, it gained a new target market and showed its ability to adapt its brand to changing times. Tiffany exhibited its brand flexibility during the Great Recession by opening new store locations that were smaller and more casual. The stores carried Tiffany’s less expensive merchandise; however, Tiffany’s communications team positioned the stores as youthful and relaxed, instead of drawing attention to the overall lower prices of the jewelry. This maintained Tiffany’s premium image while satisfying a more lucrative market. 72 While the future is unpredictable, affordable luxury companies must be prepared for adverse times. There has never been more at stake for these companies, as new competitors and innovative business methods are being implemented in the quest to secure market share. It’s no secret that each segment of the luxury retail industry has its weaknesses, however, the affordable luxury segment remains the most vulnerable because of the reliance on entry-‐level customers. Public relations practitioners play a major role in the success of affordable luxury brands, as consumers buy in to the overall lifestyle of a brand. 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Asset Metadata

Creator Jenkins, Michelle (author)

Core Title The luxury appeal: analyzing affordable luxury brands through the Great Recession

Contributor Electronically uploaded by the author (provenance)

School Annenberg School for Communication

Degree Master of Arts

Degree Program Strategic Public Relations

Publication Date 04/17/2014

Defense Date 04/17/2014

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag denim,Handbags,Jewelry,luxury,Marketing,OAI-PMH Harvest,recession,retail

Format application/pdf (imt)

Language English

Advisor Lynch, Brenda (committee chair), Floto, Jennifer D. (committee member), Le Veque, Matthew (committee member)

Creator Email mjenkinsusc@gmail.com,mkjenkin@usc.edu

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c3-380155

Unique identifier UC11296308

Identifier etd-JenkinsMic-2373.pdf (filename),usctheses-c3-380155 (legacy record id)

Legacy Identifier etd-JenkinsMic-2373.pdf

Dmrecord 380155

Document Type Thesis

Format application/pdf (imt)

Rights Jenkins, Michelle

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the a...

Repository Name University of Southern California Digital Library

Repository Location USC Digital Library, University of Southern California, University Park Campus MC 2810, 3434 South Grand Avenue, 2nd Floor, Los Angeles, California 90089-2810, USA

Abstract (if available)

Abstract This paper examines the impact of strategic business decisions made by luxury retail companies during an economic recession. While the Great Recession impacted many businesses worldwide, the luxury retail market acted as a harbinger for the overall status of the economy. The purpose of this paper is to investigate business decisions made during economically turbulent times, through analyzing three leading affordable luxury companies, as this is the most vulnerable segment of the luxury retail industry. The key issues discussed in this paper include the Great Recession, the landscape of the luxury retail industry and three affordable luxury case studies. Results reveal three main factors for public relations practitioners to consider when faced with a crisis. The principal conclusion is that luxury brands need to place the upmost importance in the preservation of brand image, as perception is reality—especially when the stakes are high.