Michael Kors Holding Limited Research Essays Example
Michael Kors Holdings Limited (MKHL) is international, publicly traded company, which works in three segments: retail, wholesale, licensing. The company’s products are offered in two collections: Michael Kors collection and the MICHAEL Michael Kors collection, the last one is positioned as accessible luxury collection. The products offered in both Michael Kors collections are accessories, including handbags and small leather goods, apparel and even footwear (Reuters.com).
The company positions itself as a rapidly growing luxury lifestyle brand. The brand named Michel Kors was established over 30 years ago and at the beginning of the brand history it was an American luxury sportswear house. As of the beginning of year 2014 the retail segment of the company accounted for about 48% of total revenue, the wholesale segment accounted for about 47% of the company’s total revenue, the remaining revenue of the company was generated through licensing to third parties (Michael Kors Holdings Limited 10K Report 2014).
Through retail the company directly offers its products and licensed products to consumers and the company has three main retail store formats: collection stores, lifestyle stores and outlet stores. Collection stores are located in shopping areas, lifestyle stores – in commercial shopping locations and outlet stores – in shopping malls. The company distributes its products through various department stores in North America and Europe for the consumers who traditionally buy goods at department stores. Finally, third parties use the Company’s brand name and a trademark according to company’s licensing agreements. The goods that are produced and sold under licensing agreements are watches, eyewear, fragrances and jewelry (Reuters.com). For example, in 2003 Michael Kors joined The Estee Lauder Companies (elcompanies.com).
Michael Kors apparel targets mainly to women in different age groups, yet there is a recognized high demand for the company’s goods among the younger age groups. Main MKHL competitors are Coach, Burberry, Ralph Lauren, Gucci, Marc Jacobs, Hermes, Louis Vuitton, Chloe, Tori Burch and Prada (Reuters.com). The competition within these companies is based on different factors which are: brand-name recognition, product quality, growing market share, setting appropriate price for the products, building the retail chain and organizing department stores system and protecting intellectual property. Moreover, many companies mentioned above are much bigger and have better diversified collections of goods. MKHL main competitor COACH is a company with a longer history: founded in 1941, has strong management reputation, similar strategy and position on the financial markets. COACH operates more than 500 stores in North America and about 300 stores in Asia, markets that are also targeted by MKHL (Coach.com).
Industry information and outlook
During the last 20 years luxury goods industry has faced growing demand and the number of luxury goods consumers has almost tripled. One of the key indicators of the developments on the luxury market is the Standard & Poor’s Global Luxury Index, which provides the investors with information on value line survey for the industry. The index includes 80 publicly traded luxury goods makers and service providers. KORS adjusted weight in this index is 4,3%. In 2014 the performance of the index went downward: in November the index fell by 5.4% if compared with gain of 10.4 percent for the S&P 500 and general 2014 index total returns were -4.55%, the lowest ones since 2008. For comparison, in 2013 index general total returns were 35.54 %. As of February 27, 2015 the S&P Luxury Index trailing P/E was 20.71, projected P/E – 20.8, dividend yield – 1.96% and P/Cash flow – 19,63 (US.spindices.com). According to MKHL 10 k report KORS shares grew similarly to the S&P Luxury Index, Russell 1000 Index (RUI), Standard & Poor’s 500 Index (GSPC), S&P Retail Index (RLX), the NYSE Composite Index (NYA), and a peer group index (Coach, Inc., Guess, Inc., PVH Corp., Limited Brands, Inc., and Ralph Lauren Corporation) and showed a trend for decrease in return since the beginning of 2014, yet for KORS return on 100$ investment was significantly higher. For example investment of 100$ invested into peer group index at the beginning of 2011 gave return of about 120$ at the beginning of 2014, at the same time similar investment into KORS gave return of 400$ (Michael Kors Holdings Limited 10K Report 2014). To sum up, it should be said that luxury industry performance has seen its peak at the beginning of 2014, than it started fluctuating, stagnated and now a small rise in stock performance may be expected, what is a good sign for investors. These changes in growth trend that started in 2009 and almost never changed may be attributed to several factors.
2013 has become a challenging year for the luxury industry: the growth rate was mainly led by US and Chinese consumption and was supported by progression of the online channel (EY.com). Previous growth of luxury market was mainly supported by Chinese demand, but continued depression in European demand, anticorruption policy in China and devaluation of the Yen established new rules on the market. Yet, forecast figures for future years expect growth to be between 6% and 8% (Coste-Manière and Hoffmann). These figures became disappointing for the financial markets and for the investors who quickly got used to high profitability of the companies that are included into S&P Luxury Index. Luxury companies have to face these changes with new ideas and solutions.
According to Bain&Co and Altagamma study the market will see new trends that will determine the companies’ behavior and further market segmentation. The role of Chinese consumers is constantly growing: tariffs on luxury goods in china are high enough and Chinese consumers are seeking for new retail channels to meet their demand. To reduce the price gap between Chinese mainland and Europe and US producers have substantially increases prices for homeland buyers, who in response started to seek for new, accessible offers. Chinese are very attracted to traveling and the luxury producers develop their travel retail chains to find a new way to offers their goods to Chinese consumers. Next point is digitalization of the industry, internet has become a new way to communicate and sell luxury products that are famous everywhere, but still, are not available everywhere. Finally, many luxury brands started producing their goods in emerging countries, what dramatically influences the client’s attitude to the brand as a whole and to the item that carries the name of the brand (Bain & Company’s 2014 Annual Global Luxury Study). It may be projected that the key development areas for luxury industry executives will be Chinese market, digital sales that should attract new consumers worldwide, consolidation between different brands, sustainability issues and intellectual rights protection.
Now let’s conduct a Porter’s five forces analyzes. First point is the bargaining power of suppliers. For luxury industry this power is small, and the main reason for this are costs for the company’s goods. MKHL and its competitors belong to a specific segment of the luxury industry, which is characterized with low material costs. Huge part of product prices for the goods of these companies is attributed to brand name, exclusiveness, design. Additionally, for this industry segment, volume is critical to suppliers: their profits directly depend on the volume of the order and they have no power to rise prices, as another supplier will be easily found in this case.
Second point is bargaining power of customers. Buyers of luxury goods are known to be extremely addicted to the products they usually buy. This loyalty positively affects the industry, by giving opportunity to increase prices without losing customers. Additionally, in some segments of the industry the number of clients is small and thus crucial, but in the case of apparel production the number of customers is big enough and they do not have that much influence.
Third point is intensity of existing rivalry. As we have already found out the luxury industry have seen quick and stable growth since 2009. According to Porter, in fast growing industries competition is not that tough, what positively affects the industry.
Next point, threat of substitute is minimal for luxury industry. The products and brands usually unique and exclusive, moreover, each luxury brand usually has its own story, position and segment, and it is difficult for loyal customers to substitute the product.
And finally, threat of new competitors in the industry is low: it is very expensive to create and build a competitive brand, luxury customers are reluctant to switch to new brands and existing competitors have the best geographic location.
In its annual reports MKHL states that the company’s goal is to increase revenue and profits and strengthen global brand. Based on this goal the company has developed its strategy which includes several areas for development:
Increase brand awareness. The company plans to continue expanding new markets, creating new retail locations and maintaining its advertising position. Special attention will be paid to China market.
Expand retail store base in North America and Europe. The company sees new opportunities for expanding retail stores in these regions and plans to increase its stores in these regions to approximately 600 locations, mostly in high traffic areas.
International expansion. Continue expansion throughout Europe and in other key international markets.
Communicate the main brand message with the help of existing marketing tools and thus to distinguish the company among the competitors, by establishing two different collections: premium and accessible, and sighing new licensing agreements (Michael Kors Holdings Limited 10K Report 2014).
The most pressing and widely discussed issue with MKHL is its stock prices downturn. Markets quickly got used to the company’s stable high performance and recent changes became a pressing issue for investors as well as for the management. MKHL is widely criticized for creating the MICHAEL Michael Kors, a collection that has decreased the brand image value and changed the consumers’ view of the company’s goods. These changes heavily influenced the position of the brand on the market and the future strategy developed by the company. Experts even fear that MKHL high-end department stores, middle-class market brand and discount outlets may start competing with each other. Finally, the company’s inventories are constantly pilling up what results in stock prices decrease. Yet, MKHL managers state that the main reason for this is new digital strategy of the company, but yet there is a little hope that these goods may sell.
Luxury industry research 2014 by Bain & Company; 2) Luxury Market vision by PWC; 3) http://luxurysociety.com/; 4) Global powers of luxury goods 2014 report by Deloitte; 5) Tsan-Ming Choi, Fashion Supply Chain Management: Industry and Business Analysis; 6) Michel Chevalier, Gerald Mazzalovo Luxury Brand Management: A World of Privilege;7) Kumar, Devika Krishna, Lackluster Forecast Overshadows Michael Kors' Profit Beat, Reuters 2015; 8) Nguyen, Vi, Analysis Of The Luxury Goods & Apparel And Footwear Industry; 9) Wahba, Phil, Michael Kors' Original Investors Head For The Exits, Fourtune 2014; 10) Verbeke, Alain, International Business Strategy.
The article released in February 2015, analyzes the financial results of the company and makes an attempt to find out whether the company’s management is appropriate to its position on financial markets: “Michael Kors continues to execute at a high level, but the underlying realities of a maturing brand are starting to catch up with the company”( Cheng). Such developments may directly influence the company’s lending activities: inventories are rising, and as it is projected will remain high in future, at the same time shares of the company fell by 6 percent. Yet, Michael Kors still managed to report a 30 percent rise in revenue and 32 percent rise in third-quarter profit and outperform its main competitor: COACH (Cheng).
Bain & Company 2014 Annual Global Luxury Study. 2014. Web. 22 Mar. 2015.
Cheng, Andria. 'Michael Kors Realities Are Catching Up'. Market Watch 2015. Web. 31 Mar. 2015.
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