Michael Kors' initial public offering (IPO) in 2011 was a fashion first, raising $944 million for the retailer and eclipsing Ralph Lauren's then-record IPO from 1997. Yet, by 2015, investor confidence in the American fashion brand was ebbing. North American sales were showing signs of decline, and in May 2015 Michael Kors' stock price fell 24 percent, its biggest dip since going public. Was this just stock market volatility? Or were there signs that the company needed to redefine its strategy?
Maintaining an Edge
Michael Kors is the designer of expensive runway collections as well as "affordable luxury" for the aspiring middle classes, providing high-quality fashion at accessible prices. His eponymous brand is perhaps best known for signature leather handbags, which sell like hotcakes, though Michael Kors also sells other accessories, apparel and footwear. The typical customers are women between the ages of 25 and 54, with income in excess of $50,000.
In the 90 days following its stock market debut, Michael Kors' share price soared 144 percent. But it wasn't long before investors were worrying about the long-term prospects of the company. Two key shareholders made their exit in September 2014. Such actions present a sobering challenge for managers: how should the company maintain its competitive edge?
There were some who said that Michael Kors was operating in an increasingly saturated market: handbags. What's more, positioning the brand in the burgeoning "affordable luxury" category carries the risk of its handbags appearing on so many shoulders that the exclusivity of the brand diminishes, and so does its value in the eyes of the Kors customer.
Across the handbag category, other undercurrents are at play. Not only are there more players, but styles are changing with greater frequency than in the past. Previously, "evergreen" products -- whether Hermès with its Birkin bag or Chanel and its 2.55 quilted flap bag -- would bring in the sales, and much of the profits, year upon year. Now, expanding and innovating the product offer is the order of the day. How can a youngish brand like Michael Kors ensure that doing so does not simultaneously damage its existing prestige and quality?
Besides plans to more than double its number of U.S. stores, the company seems to have made international growth a priority, particularly in Europe and Asia. Like its competitors, Michael Kors is hungry for the lucrative Asian market. In Asia, its retail growth has been achieved largely through licensing agreements, with the exception of Shanghai, where it opened a flagship store in 2014, and Japan, where there are 10 new store openings planned for 2016.
Growth in Europe will require the company to compete with firmly established Continental competitors like Longchamp and Furla. It is not yet clear whether plateauing or even falling growth in North America can be countered by positive, upward trajectories in Europe and Asia.
In terms of expanding its product line, some question whether the brand is spreading itself too thin. From its niche in accessories, it has moved into apparel and then menswear and perfume lines. It licenses its brand to watches, jewelry and sunglasses, earning substantial royalties from these extended product lines. Where should Michael Kors draw a line?
Retail is a third expansion challenge. How should the company handle its outlet presence and, alongside that, how much discounting should it allow? Michael Kors operates across retail, wholesale and licensing channels, including watch and jewelry shop-in-shops and outlets. There is little sign of the company knocking numbers off its current outlet tally.
However, it would be worth drawing salient lessons from competitors such as Coach, which opted for a bigger presence in outlets, offering heavy discounting. This, say pundits, tarnished Coach's high-end image, leading to declining sales in 2013. Are Michael Kors' roots deep enough to withstand a similar fate?
The worst case scenario hasn't happened yet. Michael Kors' numbers appear healthy. But is it just a question of time before the brand implodes? How should managers safeguard the integrity of the brand in the face of market pressures on multiple fronts?