In its latest attempt at revival, Michael Kors acquired Jimmy Choo on Tuesday morning in a $1.2 billion deal.
The merger is part of Michael Kors’s larger Runway 2020 strategy, a long-term plan to overhaul the company through tactics like diversifying its product mix. Details include growing categories like footwear, ready-to-wear and menswear, while scaling back on handbags. It’s also making moves to downsize stores and reduce discounting by 40 percent. These plans follow the company’s recent announcement that it will close 125 stores in the next two years and pull product from select department stores.
Michael Kors is joining the larger industry push toward consolidation, coming on the heels of mergers like Coach’s acquisition of Kate Spade and Walmart’s purchase of Modcloth and Bonobos. How do these mergers help beleaguered companies, and will Jimmy Choo succeed in breathing life back into Michael Kors? We took a look at the larger implications.
The Jimmy Choo effect
London-based Jimmy Choo has steadily built global brand affinity, thanks in large part to popular culture — including Princess Diana’s appearances donning the brand and its many mentions in “Sex in the City.” As a result, Jimmy Choo has established itself as a major high-end footwear player, competing with the likes of Christian Louboutin and Salvatore Ferragamo. At the end of 2016, the brand reported record revenue of nearly $460 million, up 2 percent from 2015.
Ultimately, Jimmy Choo may help Michael Kors regain the luxury cachet it’s sought to regain following several quarters of slumping sales due to brand dilution from extensive discounting: In the second quarter of 2017, it saw a drop in comparable sales of 14.1 percent.
“Jimmy Choo opens up fresh, new growth for Michael Kors, and vice-versa. But creating some scarcity, particularly for Michael Kors, would help reignite the ‘gotta-have’ feeling that catapulted it into women’s minds,” said Chris Paradysz, founder and CEO of PMX Agency.
Most importantly, acquiring Jimmy Choo helps Michael Kors make progress in several areas of its Runway 2020 plan, particularly expansion into other product areas beyond its storied handbag business. In its most recent financial report, Michael Kors announced it will produce 40 percent fewer handbags. while simultaneously integrating upward of 70 percent “more newness.” Other pillars of the plan include improving marketing communications, evolving its customer loyalty program, expanding digital flagships and refocusing the brick-and-mortar experience on quality, rather than quantity.
In addition to bringing luxury footwear clout, Jimmy Choo also has a growing menswear market, which has been another focus for Michael Kors. According to Euromonitor, sales of luxury men’s footwear has grown marginally faster than women’s, propagated by brands like Jimmy Choo.
“The current market environment feels like winners will benefit from scale,” said William Sussman, analyst at Threadstone Advisors. “Acquiring a second major brand, one with a different entry price point, affords Michael Kors the ability to leverage all aspects of the business.”
Move to merger
For customers, the merger likely won’t have a significant impact. While both Bonobos and Modcloth received backlash for joining Walmart, Michael Kors is mostly devoid of the social issues plaguing Walmart, such as unfair compensation and poor worker treatment.
In most regards, the acquisition is a clear ploy for Michael Kors to expand its customer base and recapture a segment of luxury consumers it’s disenchanted in recent years. Like Michael Kors, Jimmy Choo also has a robust influencer base and social media presence, including more than 25 million Instagram followers, which will be useful resources for connecting with shoppers across both brands, Paradysz said.
While any merger holds the possibility of going awry, Michael Kors will need to be particularly mindful of its digital strategy for both brands as it expands its consumer base, said Jim Fosina, founder and CEO of Fosina Marketing Group. “The biggest challenge to these brands, though, is beyond product and audience diversification. The key issue will be the ability of the new organization to engage meaningfully with customers that are increasingly shopping online, on all ends of the market segment.”
Paradysz echoed Fosina, and said an important focus moving forward will be digital advancement for both companies, including improving in-store technology and experimenting with emerging technologies like augmented and virtual reality.
“Both are leaders in social media and moving conversations to digital transactions, and driving this passion to stores has big-time potential,” he said. “Incorporating new digital technologies can really pile on more of that special sauce. They’ve earned their brand credibility, but they need to exploit it with technology.”