Luxury Market Gets Tougher For Michael Kors After Coach Buys Kate Spade

Already facing struggling sales after rapid expansion, Michael Kors Holdings Ltd. must now deal with the merger of two of its biggest rivals.

According to Bloomberg Pursuits, Coach Inc.’s $2.4 billion acquisition of Kate Spade & Co. creates a powerhouse that will put pressure on Michael Kors. Both luxury brands are competing in a declining market for handbag sales, and Kate Spade’s vibrant styles give Coach an edge in the race for younger consumers. There are also plans to expand Kate Spade in Asia, which may curb Michael Kors’s aggressive growth in the region.

“When you have three key players and that was reduced to two, the third one will naturally be at a disadvantage,” said Adrienne Yih, an analyst at Wolfe Research LLC.

The merger comes at a tough time for Michael Kors, which is trying to shed its image as a lower-priced brand. The company, which expanded to 816 stores currently from 177 stores in 2011, has also suffered from rapid growth and overexposure. Sales at Michael Kors stores open at least a year have dropped in seven of the past eight quarters. The stock has tumbled 24 percent in the past year through Tuesday.

The company also became too dependent on sales from department stores, outlets and off-price channels, receiving about 46 percent of its sales from department stores and other retailers, compared with about half that percentage at Kate Spade and only four percent for Coach.

To help boost sales, Michael Kors announced last year that it was cutting back inventory at department stores, and has diversified beyond handbags and expanded its menswear business and smartwatch offerings.

“Michael Kors is trying to get away from the damage that was caused by being too ubiquitous and overexpanding,” said Neil Saunders, an analyst of retail analytics firm GlobalData Retail. “That takes some time to execute.”

And there is some good news for Michael Kors about the merger: It means the end of Kate Spade’s reliance on online flash sale sites, and some retail partners will also reduce the rampant discounting in the handbag industry. That will help Michael Kors’s own efforts to cut markdowns.

“They now have to make a strong comeback to differentiate themselves in very competitive commoditized market,” said Milton Pedraza, a New York-based luxury consultant. “Michael Kors has to get its own act together like Coach did.”