Handbag makers struggle in face of declining sales and retail markdowns, neglecting the creativity that may save them

Michael Kors, Prada, Louis Vuitton and Burberry all reduced the number of new styles last quarter, which analysts fear may make it harder for the sector to recapture the excitement of shoppers

PUBLISHED : Friday, 13 January, 2017, 5:03pm
UPDATED : Tuesday, 17 January, 2017, 5:51pm

Handbag makers are busy battling waning demand and markdowns at stores, and that may have diverted their attention from what could make them successful in the long run: creativity.

Michael Kors, Prada, LVMH’s Louis Vuitton and Burberry Group all reduced the number of styles introduced last quarter, according to Edited, a company that provides fashion industry analysis. Though manufacturers and retailers are worried about being saddled with too much merchandise, the lack of innovation will make it tough to recapture the excitement of shoppers, says Milton Pedraza, a New York-based luxury consultant.

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“There’s a feeling of doom out there in the industry – everything is defensive and not offensive,” adds Pedraza, who runs the Luxury Institute. “What you’re seeing is a tremendous amount of copying, less innovation and less creativity, at a time when exactly what you need is to be bold.”

Demand for high-end products took a hit in the US last year from a strong dollar and global economic woes. Terrorism fears also crimped tourism, a big source of luxury spending. Shares of upscale brands suffered. Michael Kors, Coach Inc. and most other rivals underperformed the Standard & Poor’s 500 Index in 2016. Ralph Lauren Corp. was down 19 per cent last year.

Prada was the rare exception, rising 9 per cent in Hong Kong last year, to outperform the Hang Seng Index’s 0.4 per cent gain. The Italian luxury goods maker, which saw its stock price plunge from its 2013 peak of HK$81.50 to a low of HK$21.50 last March, has rebounded since August after chairman Carlo Mazzi forecast a return to growth in 2017. Prada stock closed at HK$30.35 on Wednesday.

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At many stores, the handbag selection from several high-end labels was significantly smaller over the holidays. In the final three months of 2016, the number of new styles introduced by Michael Kors dropped 24 per cent from the preceding quarter. Prada and Louis Vuitton rolled out 35 per cent fewer new designs, while the number at Burberry dropped 8 per cent, according to Edited, whose clients include Ralph Lauren and luxury e-commerce retailer Net-A-Porter.

Michael Kors didn’t have an immediate comment on the reduction. LVMH, Prada and Burberry declined to comment, although in November Burberry said it was simplifying its offerings and tailoring innovation for “local needs”.

Rolling out the right number of styles is no easy task. Brands need to strike a careful balance between creating a glut of inventory – so-called “dead stock” – while ensuring there’s enough trendy, new merchandise to entice consumers, says Katie Smith, a senior fashion analyst at Edited.

“Dropping newness too low could certainly threaten sales,” she says.

A few brands, including Kate Spade & Co. and Ralph Lauren, did introduce more new designs in the fourth quarter, Edited found. But many tried to ride out the holidays without breaking fresh ground.

Fashion is an unpredictable industry, but handbag makers have relied on innovative features and flourishes – mini bags, for instance – to get the attention of shoppers. With fewer designs hitting shelves, there’s less opportunity to hit on a hot trend.

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The past year also brought high-level personnel changes in the luxury industry, which may have affected new product output. Both PVH Corp’s Calvin Klein label and Yves Saint Laurent replaced their creative directors. Ralph Lauren chief executive officer Stefan Larsson shook up management last year, including bringing Coach chief financial officer Jane Nielsen on in the same role.

Handbag makers have faced other challenges as well. Younger consumers are demanding faster availability of the latest trends, and some are showing preference for shoes and jewellery over bags.

Macy’s partly blamed poor handbag sales when it released dismal holiday season results last week. The largest US department store company also said it would cut 6,200 jobs and push ahead with a plan to close 100 underperforming stores.

Macy’s has struggled to stock enough of the market’s top-selling handbags. Popular top handle bags, for instance, made up just 8.7 per cent of Macy’s total bag offerings, according to London-based Edited. That compares with 33 per cent at Barneys New York and 20 per cent at Nordstrom.

“They’re missing out on the critical products that can drive full-priced sales,’’ Smith says.

That’s forced the chain and other retailers to rely on discounting to move merchandise. And consumers have now been trained to expect markdowns, says Simeon Siegel, an analyst at Instinet. Macy’s discounted almost 2,500 handbags last quarter, while both Neiman Marcus and Barneys New York marked down at least 900 items, according to Edited.

“They need to figure out a way to operate in a new normal” of discounting, Siegel said.

Sales growth in handbags is estimated to decelerate to 3.1 per cent by 2020, from 16 per cent in 2012, according to market research firm Euromonitor. The slowdown has prompted companies to diversify. Michael Kors is expanding into menswear, and Kate Spade is growing in other categories such as home goods.

That’s not to say that handbag makers are throwing in the towel. Coach is augmenting its in-store experience with craftsmanship services, letting customers design their own bags at its Fifth Avenue store in New York. It also named actress-singer Selena Gomez as the face of the brand, aiming to appeal to millennials. Coach also opened an adjacent Fifth Avenue store for its Stuart Weitzman shoe label, which it acquired in 2015.

The sad state of the industry is spurring companies to take action, says Pedraza.

“For the first time in many years, there’s a real sense of threat,” he says. Companies are focused “on survival and dismantling the old structure”.