U.S. Handbag Wars: Who Will Survive?

The premium handbags and accessories market in the U.S. continues to grow, but what could worry retailers is the slowing growth rate for this market. Although this segment is expected to grow 3% to $11.7 billion in 2015, according to Barclays, this growth rate has declined from 8% in 2014, 11% in 2013, and 16% in 2012. ^[1] Coach (NYSE:COH) is in the midst of a rebranding and transformation plan, prompted by the continuously slowing sales numbers, and Michael Kors is losing its ‘cool’ factor. Kate Spade, on the other hand, reported impressive earnings in the third quarter of 2015. It witnessed a growth in its comparable direct-to-consumer net sales of 16.0% year-over-year, and its North American segment reported a rise in its average revenue per square foot of 5%. ^[2]

Analyzing The Luxury Handbags Industry

Competition is strong in the luxury handbags industry, with a number of players operating in this segment. Coach was the pioneer and broke new ground in the American affordable luxury industry. Despite a growing handbags and accessories market, the company’s market share has declined consecutively, from over 35% in fiscal 2008, to 23% in fiscal 2014. A number of new entrants, such as Michael Kors, Kate Spade, and Tory Burch, are cutting into its share. Same-store sales have been steadily eroding for Coach, while that for Kors and Kate have been rising. Coach has failed to spot numerous fashion and pricing trends over the past few years, which is why the company might be losing market share.

Key Trends Seen In The Industry

One of the main factors attributed to slowing sales by Coach is the shift in consumer preferences from larger bags to smaller ones, which are sold at lower prices. In the latest earnings call, John Idol, Chief Executive of Michael Kors, claimed the demand for smaller size handbags has resulted in lowered average unit revenue. ^[3] Kate Spade has been able to cope with this trend. While Kate continues to sell totes and other large bags, it also offers a variety of simple and creative clutches and cross body purses. Millennials being their target market, Kate Spade has also adjusted its products to a more colorful and whimsical look, with subtle logos. Unlike Coach and Michael Kors, which have been known for their loud logos, Kate Spade bags include a tiny stamp with its brand name. The former two companies are also now moving away from logos due to increasing preferences among millennials of clothing and accessories without labels or logos, with such bags now accounting for just 5% of Coach’s overall handbag sales.

Another factor working against these retailers is the wide availability of exclusive luxury brands. According to a Goldman Sachs’ report, Coach, followed by Michael Kors, is the most ‘well-owned’ brand among girls in the age group of 13 to 29. ^[4] The two brands are highly accessible to the masses due to their presence in thousands of department, retail, and outlet stores. However, this has resulted in the loss of their exclusivity factor which seems to be working against them. According to Sarah Quinlan, Senior Vice President of Market Insights for MasterCard Advisors, spending by consumers at businesses with annual revenue of $50 million or less grew faster than the total retail sales year-on-year in March 2015. ^[5] This highlights a move towards shopping in small stores, to hunt for more unique products. Victor Luis, Chief Executive of Coach, said that the company is taking steps to differentiate itself, and has added new products, including a line called Coach 1941, that falls back on its leather heritage.

Lower Gas Prices Leads To Increased Spending

Sustained low levels of gas prices have resulted in extra income for U.S. consumers. However, instead of incurring expenditure on goods like clothing and accessories, shoppers are spending more on entertainment and on other services, especially those they had to forgo during the recession. At times when consumers choose to indulge in bags and accessories, they are shying away from big brands, and moving towards more distinctive ones. Furthermore, as these retailers cater more to millennials, and not baby boomers or Gen Xers, they face huge risks, as millennials don’t spend as much money. They are encumbered with more debt and less wealth, as a result of student loans and protracted effects of the recession, and choose to spend their money on expenses like rent, mobiles, and services. Baby boomers, on the other hand, are the biggest spenders due to extra cash from decades of saving and investing. Pam Danziger, a luxury expert, stated that ‘HENRYs’-high earners, not rich yet- could be the biggest threat to the industry. These people make over $100,000; nevertheless, they make informed decisions when it comes to spending. ^[6] As they aren’t spending on luxury brands, these designer companies are feeling left out.

However, with continued high levels of discretionary income, a rebound on luxury spending might be inevitable. A recent trend that has been emerging is that with a rise in disposable income, consumers are spending more on affordable luxury products than on premium luxury products. ^[7] Online sales of handbags are also on the rise in the country. Improving rates of Internet penetration are also stimulating a demand for e-commerce. So, sales of luxury bags and accessories could see a boost in the next couple of years, on the back of continuously rising incomes, with customer spending biased more towards the relatively affordable luxury items.

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Hot handbags lose some cachet [↩]
2. Kate Spade- 10-Q [↩]
3. Three surprises from Michael Kors’ second quarter earnings [↩]
4. American women are abandoning a longtime status symbol [↩]
5. Consumers are spending like never before [↩]
6. What do HENRYs want [↩]
7. United States handbag market 2015-2019, news release [↩]