Michael Kors, a fashion giant that is planning to reach a $ 4.25 billion in 2018 has announced the closure of around 125 stores in the world due to poor recent performance of the Brand.
Is it a surprise? Very unlikely. Michael Kors is a company founded by the designer in 1981. It opened the first retail store in 2006 and in 2016 the number of stores worldwide was raised to 770. Quite a large network, indeed. In such a short time.
King of affordable luxury, Michael Kors, despite a luxury, jet setting image positioned the Brand in the premium segment competing with the likes of Coach and Kate Spade.
Rapid growth fueled by store openings worldwide and affordable products like bags placed Michael Kors in the club of billionaire designers.
Clearly a phenomenon. Clearly a risky business.
The higher the short term profits, the quicker the growth and the more unsustainable the business performance in the long term.
Easy come, easy go.
Which are the KEY RISK FACTORS of such a business model (yes, it is a business model, it’s not misfortune)?
1 The bigger the network expansion, the higher the fixed costs that will deeply impact the profit and loss when the sales growth will inevitably slow down
2 The short time growth will become unsustainable due to the rigidity created in the system. When the economy cycle reaches a low, the Company very likely will not be able to act in a flexible way and to reduce fixed costs accordingly
3 The Luxury positioning of the Brand was not mirrored by the Product and collections positioning. The discrepancy between Brand and Product positioning determined a clear weakness.
4 Affordable Luxury means lower prices and higher volumes. To keep the pace (and the margins) in the long term is almost impossible.
5 Lack of innovative communication. Red carpets, jet-setter advertising campaign, fashion shows de-luxe do not help with the engagement of the proper target of young women who approach fashion and luxury for the first time in their life. It sounds too ’80s and not up-to-date
6 Expectations. The higher the speed of the growth, the higher the expectations, the bigger the risk of an abrupt breakdown when the economy naturally slow down. This happens when financial expectations don’t meet the industrial pace of growth.
7 Commoditization of the product and the Brand. When the Brand is too much squeezed to fuel the expected financial growth, it risks to lose the Dream and to treat the product as value for money. If we speak about Luxury, even about Affordable Luxury, we must never forget to always nurture a Realistic Dream, a dream that it is proper to the Brand and Product positioning, that is authentic and smart, unique and empowering.
When all this happens in a Brand, it becomes very difficult to set up a proper recovery.
The alternative is between a slow death or a business model and establishment shake up.
It seems an easy choice. Unfortunately it isn’t so as so many recent examples can prove.