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Seek More Control and Higher Margins in Own Stores

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COLUMBUS, Ohio ( -- The blue suede Coach bag is stuffed on a clearance table with the markdown price of $88.90, a steal compared to the original price of $178. Nearby is a section of glass shelving stocked full of Coach purses, including a $328 pink suede satchel.
Only 11% of Coach's sales now come from department stores. The company is in the process of building its own national chain of 350 stand-alone stores.

Leave Nordstrom’s, however, and just three stores over Coach bags priced over $400 are displayed like museum pieces. It’s a world where a friendly and immaculately dressed sales staff always greets you, the music is always just right and absolutely nothing ever goes on sale.

$1.6 billion in sales
The contrast explains, in part, why in a little less than five years, Coach has cut its dependence on the department store channel -- down today to 11% of its $1.6 billion in sales from 15% in 2000 -- to build its own veritable retail empire, outlining ambitious plans to reach more than 350 stores over the next few years.

The strategy is much the same at other fashion megabrands like Polo Ralph Lauren, Guess and Liz Claiborne. Frustrated by an inability to control pricing and brand display and tired of competing with retailers’ proliferating private-label lineup, such brands are aiming to reduce their co-dependency on department stores.

“Great brands see they have to protect themselves and can no longer depend on department stores,” said Howard Davidowitz, chairman of Davidowitz and Associates.

Battling private labels
The shift comes as luxury brands increasingly compete with their distributors. Just 10 years ago, only 25% of apparel sales were private label, according to market research firm NPD Group. Today private-label penetration tops 37%.

“Luxury brands are opening their own stores to get 360-degree control, which on the luxury end is so critically important because this consumer wants care and feeding throughout the entire sales process,” said Pam Danzinger, author of Let Them Eat Cake: Marketing to the Masses as Well as the Classes. Indeed, Mike Tucci, president of Coach’s North American Retail Stores, said it “allows us to interact directly with our customer and to capture market share on a broad level.”

Retail boom
Polo Ralph Lauren’s fastest-growing segment over the last two years is by far retail. Although wholesale garnered $1.2 billion in sales in fiscal 2004, sales have increased only 1% since fiscal 2002. The brand’s retail segment, meanwhile, jumped almost 27%, from $924 million to $1.1 billion. In the company’s 2004 annual report, CEO Ralph Lauren outlined plans to open 70 to 85 stores annually over the next five years.

In 2004, comparative store sales at Guess rose almost 10% and the $730 million brand plans to open 24 new stores in 2005, while continuing to decrease shipments to department stores, according to Securities & Exchange Commission filings.

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