NEW YORK, United States — "What we are doing is creating the first New York-based house of modern luxury lifestyle brands," said Coach Inc. chief executive Victor Luis to BoF, hours after the company announced the acquisition of Kate Spade & Company for $2.4 billion on Monday. After months of speculation that saw Kate Spade's shares rise by 17 percent, Coach Inc. made good on its promise to continue to expand the company beyond its namesake brand, positioning it as the new fashion conglomerate to watch — and Luis as a new power player in American fashion.

Once the deal closes in the third quarter of 2017, Kate Spade will join Stuart Weitzman — which Coach Inc. acquired for nearly $600 million in 2016 — in the company's stable of mid-market brands.

The triumvirate will cement Coach’s ambitions to play seriously on a global stage. And yet, a US company has never managed to rival Europe’s greatest conglomerates in terms of financial success, or prestige. Can Coach Inc. succeed where others have failed?

“I think that if we’re not successful in a few years, you can ask the question,” Luis said. “I’m very excited about this space because, quite frankly, it differentiates us from the traditional luxury brands. Given the huge potential with the middle class in Europe, in the United States and across Asia, India and South America, the opportunity for modern luxury brands — brands that are about approachability, not just about exclusivity — is huge. And that’s our focus.”

The opportunity for modern luxury brands — brands that are about approachability, not just about exclusivity — is huge.

Even though it delivered sales growth in 2016 — up 11.2 percent to $1.38 billion — Kate Spade has struggled to navigate the challenges facing retail today: a reliance on promotions, the rise of off-price retailers, a shift in spending habits that favours the very cheap and very expensive, and the decline of wholesale channels. In 2015, Kate Spade announced the closure of the Saturday brand and Jack Spade physical stores, signaling publicly that the company would not reach its ambitious goal of $4 billion in sales on its own.

“What is attractive to us about Kate Spade is that it is not overly distributed,” explained Luis, describing that brand as less susceptible to department store struggles. “It has a very clean wholesale distribution in North America and it has a very clean distribution globally. And that means tremendous opportunity for growth as we help them drive their business.”

"They are not buying something that's overstored, they are buying a brand," agreed Oliver Chen, a managing director at investment management firm Cowen & Co. "Kate Spade is still not that well known… I think you can't ignore the global story — it's huge."

What's more, while mid-market apparel suffered in recent years as pressure from fast fashion brands escalated, the handbag business has been less impacted because of its higher margins, added Chen. “The brand is healthy and if anything, the modern luxury perspective enables you to have a broader addressable market,” he said, adding that the average unit price across the handbag market is between $300 and $400. Kate Spade has “done a good job pricing goods at access price points, $100 to $200, or super premium,” he added.

And while Kate Spade could be seen as a competitor to Coach, particularly in the handbag space, Luis says the former’s novelty lines and younger consumer base are important differentiators. Only 15 percent of Coach shoppers bought something from Kate Spade in the last year, according to NPD Group’s Checkout Tracking.

Coach, the brand, saw sales of $4.15 billion in fiscal year 2016, up 2 percent year-over-year on a constant currency basis. It returned to growth last year after several quarters of decline as a transformation strategy took hold — but the turnaround is not yet complete. “The main Coach brand, while in much better health, still needs much nurturing and care in a very tough environment; as such the company will need to keep a dual focus on both its new and established businesses,” said Neil Saunders, managing director of GlobalData Retail, in a note to investors.

Luis sees Coach’s cooler New York “fashion attitude,” as distinctive from Kate Spade’s positioning. “Kate Spade plays much more on whimsy and fun, and much more on its lifestyle positioning with a very broad array of products within its store concept, and attracts an especially stronger millennial consumer,” he said.

"We also see the strength of the Kate Spade relationship with millennials through the strength of their digital engagement," added Luis. The brand was one of the first to test Instagram's in-app shopping functions, and has stood out in the market for its episodic campaign videos starring actresses such as Anna Kendrick and Zosia Mamet.

“The most important thing here is about the brand being innovative and creating great emotional connections," said Luis, calling out Deborah Lloyd’s leadership as creative director of Kate Spade. "That takes constant change, that takes constant evolution, that takes a lot of creativity on behalf of our creative teams. Great brands do that — they don’t become commoditised and that is the strategy for us.”

To that end, Coach Inc. plans to reduce Kate Spade’s exposure in off-price and online flash sales channels, as it did with the Coach brand, to protect it for the long-term.

The conglomerate model, of course, also provides opportunities for increased efficiency. Chief financial officer Kevin Wills explained that Coach Inc. plans to realise about $50 million in synergies within three years of the deal closing, coming equally from savings of cost of goods and from selling, general and administrative expenses.

“Obviously, the timing on that will vary as we have a lot of work to do,” Wills said. In addition to leveraging shared corporate structures, as well as finances and human resources, he added there are synergies to be found in the supply chain, both in Coach’s leather goods raw materials and manufacturing and in Kate Spade’s ready to wear and outerwear production. “They have a longer experience there than Coach does,” he added.

Chen also sees opportunities for increased leverage in retail real estate negotiations, both in the US and abroad.

In addition, Coach Inc. is planning to migrate all three brands onto the same content-optimisation marketing platform to leverage previous investments in customer analytics.

We don't believe in the traditional luxury strategy... that expensive prices [are] what drives specialness.

For Luis, an understanding of the customer’s position in the market is key to understanding the potential he sees for Kate Spade and the group as a whole. “We don’t believe in the traditional luxury strategy about being about country of origin or based on exclusivity, and that expensive prices [are] what drives specialness,” he said. “We think that today’s modern consumer is not about that. They are about authentic brands, they want great quality and certainly they want great experiences, but the consumer is always looking for value.”

Whether or not Coach will find yet another "authentic" brand to add to the group will depend on what's available. Reports surfaced in May that the company is evaluating London-based footwear brand Jimmy Choo, following rumours late last year that Burberry rebuffed its advances. While Luis did not comment on any specific targets, or how many he hopes to acquire, he made Coach Inc's global ambitions clear.

“We are based here in New York, it is our home for our company and where we are publicly traded, but this does not preclude us, longer term, from having brands that are modern luxury brands… that could be based in Europe or other parts of the world,” said Luis. “Certainly, we believe there is more opportunity.”

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