Tag: retail

Post-IPO, John Idol on What’s Next for Michael Kors

Posted on March 28, 2012

The decision to transition the business behind Michael Kors’ fashion empire into a public company was a tough one for its CEO, John Idol.

“I didn’t want to go public,” Idol said during a speech at Wharton yesterday organized as part of Penn Fashion Week. “I’ve run four public companies, and the hardest thing to do when you run a public company is to not change the way you’re running the business because you have investors and, more importantly, Wall Street looking over your shoulder.”

But Idol and the firm’s leadership team ultimately decided to make the leap. The company debuted on the New York Stock Exchange in December, pricing its shares above estimates at $20 each, raising $944 million. The shares have more than doubled in value since, and last week the firm announced that it would sell more than $1 billion in stock in a secondary offering.

Michael Kors made the move with in order to build long-term value into the brand. “The hardest thing to say when you go public is that you’re going to do the right thing for the business over the next three to five years,” said Idol, who was previously an executive at Ralph Lauren, Donna Karan and Kaspar A.S.L. “Some investors don’t want to hear that. They want to hear what you’re going to do over the next quarter and the next month. But I guarantee that if you run a public company like that, you’re going to fail.”

When Idol and partners Lawrence Stroll and Silas Chou acquired the business in 2003, they, along with Kors, who acts as chief creative officer, had the goal of building it from a brand with a “cult following” to one that graced the closets of a global and multigenerational clientele. “[Michael Kors] was a $20 million business in 2004,” Idol said. “It was losing money and probably would have gone out of business had we not bought it.” The company now has a market cap of $8.6 billion. For the fourth quarter of 2011, it reported $373.6 million in revenue, a 68% increase over same time a year earlier, and net sales of $199.4 million, an 82.8% jump from 2010.

Michael Kors achieved his initial success designing apparel, but the company’s relatively rapid growth came from an unexpected source: accessories. “We looked for the white space in the market,” Idol said in an interview before his speech. “The pure luxury accessories market was a crowded field with Prada, Louis Vuitton and others, but in the accessible luxury market there was Coach and not a lot of other competitors.” Idol added that today, around 70% of Michael Kors’ business comes from selling shoes, bags, eyewear and watches.

The company bills itself as a purveyor of jet-set luxury, and Idol says the team always keeps in mind its target customer. “Michael has a simple saying. When I say, ‘Michael, who is our target customer?’ he says, ‘She’s 35 years old,’” Idol noted. “I ask him, ‘How do you know?’ and he says, ‘Any woman who is 50 wants to be 35 and any woman who is 25 wants the wardrobe of a 35-year-old.’”

Today, the company includes the signature Michael Kors line that walks the runways each season, competing with brands such as Gucci and Dolce & Gabbana, and the more affordable Michael line. In Michael Kors stores, $2,000 handbags share the display cases with purses priced at $200 or $300. Addressing the Penn audience of mostly 20-somethings, Idol noted that, “You guys will go into H&M or Zara and buy a top and buy a jean, but you’re also going to call your mom or dig deep into your savings and try to get a Gucci bag. You’re going to mix high and low, and you don’t feel embarrassed that you bought a Forever 21 top.”

Unlike many retailers that have reached a saturation point in the U.S. market, with around 180 or 190 stores nationwide (out of 230 globally), Michael Kors still has room to grow, Idol said. “When we get to 500 stores in the U.S., that will be an opportunity to have some dialogue. Coach is there today — they’re doing $2.7 billion or $2.8 billion in the U.S., and they’re probably not completely saturated in the U.S. because the handbag business, the accessory business, continues to grow. When you look at the market and see they’re doing $2.7 billion to $2.8 billion and we’re doing $1 billion in the U.S., then I think we’re at about the halfway point. It shows you can maintain a brand’s integrity and still grow to that size.”

The company is also eyeing more expansion into global markets, but Idol stressed the need for a measured strategy. “China today for us is the most expensive market to hire people in. Why? Because everybody wants to go to China, and for the mid- and upper-tier executives, it’s a field day. Secondly, real estate is insane. Why? Because everybody’s going there. Prices are through the roof, and the logistics are not easy. It’s not like the U.S. and Europe where the logistics have been set for years and years and years. This is the wild, wild West.”

In addition, brand awareness can’t be built overnight. “In China or Japan, people don’t understand what Michael Kors is; it literally means nothing,” Idol said. “It’s a very challenging thing, a very expensive thing, to do and you have to be patient and have the vision of 10 years. We’re a wealthy company, we have the money to do it and we have to do it because to be global we must undertake that endeavor. But you can’t enter a country and think you’ll be successful just because you’re a big, bad American company.”

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Mastering ‘Social Media Etiquette’

Posted on February 23, 2012

Thanks to social media, companies are able to forge a new, and often more intimate, relationship with their customers — and even with their own employees. But in an ever-changing medium, how can marketers and community managers figure out the best way to respond to queries or complaints, and also disseminate information about their goods and services?

At a panel discussion on social media held last week as part of a conference organized by Wharton’s Baker Retailing Center, participants from the retail industry discussed some of the ways their companies are mastering “social media etiquette.”

Saying ‘thank you’: Staff from online eyeglasses retailer Warby Parker send thank you notes to bloggers who write about the company, said Tim Riley, director of online experience for the firm. “It doesn’t matter if they have one or one million followers. We try to treat each blogger exactly the same,” he noted. “That helps us establish a relationship from the start. Hopefully people will then be more inclined to write about us on an ongoing basis.”

Getting personal: Panel moderator Kartik Hosanagar, a Wharton operations and information management professor, told a story about the personalized service that Zappos offered a customer who was going through a rough patch. A member of Zappos’ social media team read a blog post in which a consumer wrote about the recent death of her mother and mentioned that she didn’t have time to return a pair of shoes to the retailer. “Zappos had a truck sent to her place to pick up the shoes,” Hosanagar said. In addition, the company sent the woman a bouquet of flowers. “Customer interaction with retailers is ultimately transactional on the one hand, but with social media,you can create a one-on-one relationship.” Hosanagar noted, however, that the situation can also become challenging for retailers because they must extend the intimate relationship offline, when shoppers come to their bricks-and-mortar locations.

Targeted training: Dennis McEniry, president of Estee Lauder’s online business, said that the company provides targeted training and advice for employees interacting with consumers via social media. “Rather than trying to train our customer service people to speak online, we took makeup artists and beauty advisors and taught them” to give followers on Twitter, for example, suggestions and tips for using various products, McEniry said. The second group of people who speak online on behalf of Estee Lauder includes community managers who are in charge of social media for particular brands. “The third group is general employees. While we encourage them to speak on behalf of the brand they work for, we train them about what to say and what not to say,” and other do’s and don’ts during a two-day course, he adds. “We are more worried about what they say, or how they say it, than their active participation [in social media.] We also have a rule that any employees using these tools have to reveal that they work for a particular brand.”

For more insights on social media from the Baker conference, check out our previous post, “Making Social Media ‘One Giant Hangout.”

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Making Social Media ‘One Giant Hangout’

Posted on February 16, 2012

On a recent weekend afternoon, dozens of people showed up at the New York offices of Warby Parker, an online eyeglasses retailer. They were there to participate in a “photo walk” organized by the company. Every participant got a pair of novelty glasses to use in photos taken across the city. The company awarded prizes to images that received the most “likes” after being uploaded to Instagram, an online photo editing and sharing application.

“Up to that point, we had 700 photos on Instagram tagged with Warby Parker,” said Tim Riley, the company’s director of online experience. “Then the day of the photo walk, we had about 750 additional pictures tagged with our name. We also had 120 people in our offices and got to talk to all of them. It was a giant friendly hangout.”

As social media becomes an increasingly important part of retailers’ marketing and customer service efforts, it’s not just a matter of having the largest number of fans on Facebook or Twitter. Retailers also have to know how to engage users and how to turn those online conversations into positive offline interactions.

At a panel discussion on social media held this week as part of a conference organized by Wharton’s Baker Retailing Center, Riley and others from the industry discussed efforts to unlock the value in their online followings.

“‘Why don’t you have as many fans as Starbucks?’ is obviously a metric, but it isn’t the most important metric,” noted Chuck Hansen, vice president for media strategy at Macy’s. “We want to look at engagement level: When we create a post and look at similar posts across our competition, are we seeing a higher engagement level? And is it a positive engagement level?”

A key way to grow engagement is to figure out how consumers want to interact with the brand in question. For example, when Macy’s initially started its Facebook page, the company made the decision to focus on fashion rather than promotions. “But when we asked [our followers] what they wanted to talk about, they said promotions,” Hansen said. The retailer is now testing a beta program that allows coupons to be delivered via customers’ Facebook feeds.

Dennis McEniry, president of online efforts at Estee Lauder, noted that cosmetics brands can spend as much as $1 million to produce “how to” videos for different beauty products. But those videos typically get a fraction of the viewership on YouTube that amateur videos — those uploaded by individual consumers — do. “We’ve tried to switch to thinking about how to move the conversation to consumers doing videos, rather than necessarily having all of our brands make videos.”

Customers also want to feel empowered, panelists said and one way to do that is to get their input at the product level. Estee Lauder, for example, has solicited feedback about names for lipstick shades. Meanwhile, Macy’s ran a promotion asking followers to design a balloon for its annual Thanksgiving Day parade, and is running a different campaign allowing people to vote on songs that will be used for the mixtape that accompanies its July 4 fireworks display.

“Done well, social can be predictive,” noted Dan Clifford, vice president of marketing for Victoria’s Secret. “There’s a fine line between letting the customer drive the product too much, but there are definitely moments where we have sought feedback, whether it’s about names or certain functions built into a product. When done well, [the feedback] has matched the real-time testing we’re doing in stores. But it’s also a matter of getting the merchant comfortable [with] hearing from the world at large.”

In some cases, consumers also have to get comfortable with that kind of mass feedback. Warby Parker allows customers to have a selection of frames sent to their homes so they can try them on and pick the one they like best. The company started encouraging people to post pictures of themselves wearing each pair of glasses so staff from the company could weigh in. “The customer becomes empowered, and when someone else posts a picture and asks, ‘Hey, what do you think about these glasses?’, the person we helped before will start answering on our behalf,” Riley said.

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A Setback for FDI in India’s Retail Sector

Posted on December 6, 2011

Foreign direct investment (FDI) in multi-brand retail, which was supposed to be the harbinger of a new generation of economic reforms in India, has turned out to be a two-week wonder. On November 24, the Union Cabinet cleared 51% FDI in multi-brand retail and 100% FDI in single-brand retail. On December 3, Congress Party ally Trinamool Congress, which is part of the ruling combine at the Center, announced that it was not to be: The government, said Trinamool leader Mamata Banerjee, who is Chief Minister of the state of West Bengal, had given in to her demands. This was later confirmed by Union Finance Minister Pranab Mukherjee. “Retail FDI put in cold storage,” said morning daily The Times of India.

There was much action between those two dates, of course. And inaction, too. Opposition parties protesting against FDI in retail ensured that Parliament remained suspended most of the time. On December 1, there was a bandh (shut down) across the country by traders and mom-and-pop stores. With the Right (the opposition Bharatiya Janata Party — BJP) and the Left (the communists) joining forces with various elements of the Congress combine, Prime Minister Manmohan Singh really had no choice. To add to the pressure, some part of the Congress Party itself is opposed to retail liberalization.

Singh had thought one particular clause would defang the opposition: While allowing FDI, the Cabinet left individual states to make the final decision. If Banerjee in West Bengal didn’t want the Wal Marts and the Carrefours, she could keep them out. An analysis showed that, given the position that various states had taken, only about 25 of the top 50 cities would allow foreign retail. But in the end, the politicians didn’t bite.

Commerce Minister Anand Sharma also found no takers for his arguments. FDI in retail would create 10 million jobs in three years, he told newspersons in Delhi. Says a PricewaterhouseCoopers-Confederation of Indian Industry study: “Allowing FDI into the retail sector will usher in large global companies who will need to hire millions for their pan-India retail operations.” Sharma said farmers’ earnings would be doubled from current levels. But political opposition refused to give an inch.

Analysts note that the retail FDI brouhaha appears to have become a political game. The BJP is a party of traders. It had originally supported FDI in retail but has backtracked to pander to a key constituency. The Left and other parties want to take on the role of the saviors of the kiranas (mom-and-pop stores). But several studies have shown that modern retail and kiranas can exist together. The small shops have several advantages modern trade cannot match. They offer credit to customers. They deliver purchases home — even items costing a few U.S. cents. And they offer personalized service.

Informed opinion is also supporting FDI in retail. According to a recent study by apex chamber of commerce Assocham, 90% of consumers are for FDI. The study was conducted across the country. At the other end, 78% of the farmers also support FDI. So who’s opposing it? Assocham found that the naysayers were principally among the traders and middlemen, 80% of whom were strong critics.

Meanwhile, industry is building up the case for FDI in retail. In a paper released on December 4, industry doyens Ashok Ganguly and Deepak Parekh stated categorically that “the protests on FDI in retail are misconceived and unfortunate.” Titled “The False Dangers of FDI in Modern Retail Trade,” the statement said: “FDI in retail has not been a sudden decision taken by the government. On the contrary, the idea has been toyed with for over 14 years…. Modernization of retail trade is an essential part of India’s growth story…. To conclude, this is a call to the saner sections of Corporate India to come out and strongly support progressive measures….”

Just a few days ago, other voices were being heard on the issue. “Political differences and vested interests should never be allowed to stand in the way of India’s economic progress,” tweeted Tata Group chairman Ratan Tata. “The Indian government needs to work at a faster pace,” Reliance Industries’ Mukesh Ambani told delegates at the annual India Economic Summit in Mumbai. “Just because we live in a democracy doesn’t mean that we should feel paralyzed.”

The global retail majors, many of whom already have a presence of some sort in this country, are keeping out of the controversy by remaining silent. But actions speak louder than words. On November 28, Carrefour India announced the opening of a second cash & carry store. Said Jean-Noël Bironneau, Carrefour India executive director: “This second opening in Jaipur represents the next step of Carrefour’s implantation in the Indian market, which holds important growth opportunity. As well as our intention to expand in the cash & carry segment, we maintain our ambition to develop in other formats.”

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India Moves Closer to Allowing Foreign Firms into Retail

Posted on July 23, 2011

The new regulations on foreign direct investment (FDI) in retail are making slow progress through New Delhi’s government machinery. On July 22, a committee of secretaries (CoS) cleared the proposal for 51% FDI in multi-brand retail. It has now to go to the Union Cabinet for final approval.

Almost everyone in retail has welcomed this move. “This has been ongoing for the past four years so I am not really surprised,” Kishore Biyani, chairman of the Future Group, India’s largest retailer, told The Times of India. “But now we are more positive that this will become a reality. As far as the opening up of multi-brand retail goes, we as a retailer think it will speed up the business prospects of the overall industry.”

The foreign firms who are eyeing the Indian market are a shade circumspect. “We are waiting to get the details,” says Raj Jain, managing director and CEO of Bharti Walmart. (Walmart has a wholesale cash-and-carry and back-end supply chain management operation in India in a joint venture with telecom group Bharti.)

Jain is being cautious because there is still some distance to go. Though most of big retail has no problems with the entry of FDI and global majors – which means more competition – there is opposition from the mom-and-pop stores backed by the Bharatiya Janata Party (BJP). The BJP has already declared that it will not allow companies with 51% FDI to set up shop in the states that it governs.

The CoS approval comes with some strings attached. The government is likely to insist that the foreign investors earmark at least 50% of the funds for the back-end and the supply chain. Another suggestion is that the foreign retailers should be restricted to big cities with a population of 1 million plus. In these markets, small retailers already co-exist with the organized Indian companies.

FDI in retail is important because it will be a signal to foreign investors that the reform process has started again. Because of the large mom-and-pop constituency, this issue is politically sensitive (see FDI in Multi-brand Retail: The Next Big Thing in Reforms, but Roadblocks Persist).

What may get this key reform initiative over the hump is galloping inflation. Food inflation has come down to some 8% now, but it had crossed 18% earlier. A poor monsoon could bring it back to high levels.

FDI in retail is now being sold as a partial solution to the problem of rising prices. A committee appointed by the government has published a report which says that FDI will bring more efficiencies into the system. The rules do allow 100% FDI in supply chains and cold storage. But foreign investment has not come in as entry to the front end – multi-brand retail – has not been eased. Meanwhile, wastage in the food chain amounts to US$24 billion annually, says a PricewaterhouseCoopers report.

Observers believe that a calibrated entry of foreign capital would have been allowed by now. But a series of scandals (see Capital Plight: What Drives Corruption in India?) has hit the government’s resolve. The anger against repeated scams has now spilled into the streets, with an anti-corruption crusader and a popular yoga expert going on hunger strike. Police campaigns to evict them and their supporters have added to the climate of conflict. More of the powerful – the latest being former Union telecom minister and more recently textiles minister Dayanidhi Maran – have been dragged into the controversy. FDI in retail may not be high priority for the government in this environment.

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Trying for a Shot at India’s Java Market

Posted on June 2, 2011

With growth slowing down in developed markets, India is fast becoming a hot spot for coffee retailers across the globe. Homegrown brands like Cafe Coffee Day and Barista have increased their reach — and profits — significantly since India’s population eats out more often and the country’s sizable young adult demographic seeks a place to spend disposable income and establish social hubs.

“Companies have already established the café concept [in India], and the market is now beginning to look attractive to every coffee maker in the world. They feel they don’t have to start from scratch,” Ramesh Srinivas, executive director at consulting firm KPMG, told India Knowledge@Wharton.

Some firms, like the U.K.’s Costa Coffee and Gloria Jean’s of Australia have already gained a foothold. They set up shop in India a couple of years ago and are now in the process of expanding. Among those waiting to make a splash in the Indian market are players like U.S.-based Starbucks and Dunkin’ Donuts, London’s Coffee Republic, Australia’s Coffee Club and France’s Alto Coffee.

Until the mid-1990s, coffee consumption in India stagnated at 55,000 tons annually. It has doubled since then because of the growing coffee café culture. But unlike other markets, India’s coffee market still has plenty of room to grow — the predominantly tea-drinking nation’s per capita consumption of java is just 85 grams, compared to 4.5 kilograms in France, 4.6 kilograms in Japan and 6 kilograms in the U.S.

Seattle-based Starbucks recently completed an agreement with Tata Coffee, India’s largest coffee producer, to source and roast coffee from the Indian company and to set up retail stores in partnership with them. Starbucks (which recently unveiled a revamping of its U.S. brand) had initially planned a solo foray into India, but that effort was stalled by regulations that prohibit 100% foreign ownership in single-brand retail outlets. Dunkin’ Donuts, too, will partner with an Indian company — in that case, Jubilant FoodWorks, which also operates the Domino’s Pizza chain in India.

Like Western chains that have come before, both Starbucks and Dunkin Donuts plan to introduce a food menu that is relevant to Indian customers.

“The entry of Starbucks and Dunkin’ Donuts will energize the cafe market,” says Harish Bijoor, a brand consultant and visiting professor at the Indian School of Business in Hyderabad. According to Bijoor, there is bound to be a deeper degree of investment by the existing cafe players, which will help broaden and deepen the base for coffee in India. “Add to it the different formats that will enter. Dunkin’ Donuts worldwide is a pick-and-go play. On-the-go coffee consumption is still nascent territory in India, despite the population being peripatetic within cities. This will add more zing.”

Read more about India’s growing coffee shop market at India Knowledge@Wharton. Check back tomorrow for a post on a battle for dominance in the home-brewed coffee market in Europe.

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A New Era for China

Posted on April 14, 2011

For the past few decades, the availability of cheap goods from China “has pretty much subsidized the standard of living in the developed markets,” according to William Fung, managing director of Li & Fung, the Hong Kong-based trading company that sources and coordinates supply chains for about 30% of the brands found in the average American shopping mall.

During a recent appearance at Penn Fashion Week with designer Vera Wang, Fung detailed the new complexities his company is facing as retailers experience greater pressure to keep up with changing trends, expand into new markets and streamline production.

In a video interview with Knowledge@Wharton (which can be viewed in its entirety below), Fung discussed in more detail what he sees as one of the key changes for the next generation of retail — China’s transition from a significant source of goods to a consumer market that sets the trends for the rest of the world.

“China works in 30-year cycles,” Fung noted. “If you look at 1949 to 1979, from the founding of the People’s Republic to the opening up of China by Deng Xiaoping, during that 30 years, the world had no China. The world lost China. China closed itself off…. As a result, everybody did their commerce and went about their business very much without considering China.”

After Deng opened up the Chinese labor market beginning in the 1970s, however, “China burst on the world [growing the global labor force by] 20% to 25%.] China was “very productive, very aggressive, they knew that they were behind and they were trying to catch up,” Fung said. As a result, the world was hit with an onslaught of low-priced goods; meanwhile, “the China effect” kept the lid on labor costs in other parts of the developing world.

“But now that era seems to be ending,” Fung told Knowledge@Wharton. “What has happened is that China understands, first of all, that it needs another model for growth…. [Leaders in China now] understand fully that they have to raise the standard of living among their people. Now the country is moving into an era of consumer spending, domestic consumer spending, as a real alternative engine for growth in China.”

As consumer buying power in China grows, Fung predicted that demand for top-of-the-line goods will begin to increase among the country’s population. “As a result, there will be a lot of innovation and design that’s specifically tailored for the Chinese market. When that happens, that will also influence the rest of the world,” just like Americans’ increase in consumption after [World War II] meant that many products were initially created for the American market, Fung said.

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Farewell, Shanghai Barbie

Posted on March 8, 2011

Let us mourn with Mattel. Ironic as it may be on the 100th anniversary of International Women’s Day, the Barbie doll, the company’s iconic product celebrating womanhood, has suffered a setback in China, the world’s largest consumer market. After spending millions of dollars, Mattel yesterday closed its flagship Shanghai Barbie store.

Opened in March 2009 on Barbie’s “50th birthday,” the Shanghai Barbie store spanned six floors and featured a stairway decorated with more than 800 dolls. It was intended to show that for Mattel – as for other U.S. and European firms with prominent, upscale brands – China was a critical growth market. Sales were slowing in the West, in part because of the slowdown triggered by the 2008 financial crisis. The prospect of serving more than one billion Chinese customers, with their vaunted fondness for western brands, was both alluring and exciting. High hopes and hoopla marked the store’s opening, as this 10-minute documentary film about Shanghai Barbie indicates. Clearly, for Mattel, Barbie’s future lay in Asia’s emerging markets, and Shanghai was just the first step.

After two difficult years –- Mattel lowered sales targets by 30% in 2010 — Shanghai Barbie’s failure shows that China’s consumer market is more complex and risky than it might appear. Explaining what went wrong, retail analysts point out that while the Barbie is well known in the U.S., with girls and their parents understanding what the doll represents, Chinese consumers had no such cultural connection. “In China, nobody really knew what Barbie stood for,” a market researcher told BBC News. He also told CNN International that Mattel might have had better luck if the company had tried distributing Barbie through stores in malls, and built brand recognition, rather than setting up a high-profile dedicated store that included a restaurant, tea lounge, bar and spa.

Mattel’s experience is a cautionary tale for executives who believe that just because a brand has wide appeal in the U.S. and Europe, that Chinese (or Asian) consumers will accept it. As a report about luxury brands in China Knowledge@Wharton had noted in 2008, “Opening new retail outlets is an increasingly costly undertaking, as land, labor and construction costs rise across the country driven by competition for sites and by the steady appreciation of the RMB currency. Those higher costs will be passed on to…consumers. [It is unclear if] Chinese buyers will pay these higher prices, or whether the luxury companies can sustain their current pace of expansion as costs rise.”

Mattel says closing the Shanghai Barbie store does not mean the company is pulling out of China. Executives are said to be exploring a new “brand strategy.” In other words, we might still see millions of Chinese girls playing with their Barbie dolls some day in the future. Now, isn’t that a heart-warming image to ponder on International Women’s Day?

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