How Michael Kors can change its current direction

Michael Kors has certainly enjoyed its time in the limelight. Filling a gap in the market, the brand appealed to millions of consumers around the world who were ready to invest in luxury brands, but not quite able to afford their high prices. But a shadow over the company has been spreading as the brand’s popularity in its home market of the US continues to wane. Some say that the brand has lost its once shiny luster and consumer interest in Michael Kors is fading, causing comparable sales to decline and its share price to slip. These issues, coupled with an aggressive expansion plan that was set in motion when the company went public in 2011, means that Michael Kors is currently expanding at a faster rate than it’s business actually growing. With supply from the brand being larger than consumer demand, FashionUnited takes a closer look at the reasons behind these issues and how Michael Kors can turn things around.

Issues faced at MK: Popularity & Excess Stock

One of the issues linked to Michael Kors current woes could be tied in with what made it so popular in the first place: it's accessible product offering. Over the years, the brand has succeed in creating a very ubiquitous product assortment, with focus on its handbags in particular, which are now sold all over the world following the brand’s expansion plan. Although this undoubtedly led to Michael Kors popularity, it has also lead to the consumers waning interest in the brand. How? Once seen as a symbol of status across the globe, interest in owning the ‘it’ luxury handbag is now dying.

According to a recent study from Goldman Sachs and Teen Vogue, many brands linked to the accessible luxury handbag market are “falling flat,” as younger consumers favour smaller, less expensive handbags that are more versatile. This means that the once praised ‘it’ tote bag from Michael Kors is no longer seen as ‘new’ and ‘hip’ anymore amongst consumers - especially now shoppers everywhere have some version of the once highly coveted handbag and have one sitting in their wardrobes. With many consumers taking a step back from Michael Kors and his former iconic bags, the brand may have been given the “kiss of death.”

Another issue within the company is the brand’s rapid growth rate. Michael Kors has grown excessively over the past few years, expanding both its product range and its presence into new markets, and ultimately seems to have outpaced itself. Michael Kors ongoing expansion, in regards to both its store network sales capacity, means the brand has incurred mounting costs and a growing inventory it needs to maintain and oversee. The inventory for most healthy and stable companies tends not to be bigger than 80 percent of the total amount of cash held at the time, which is also known as the inventory/cash ratio.

From 2013 to 2014, Michael Kors managed to keep this ratio between 0.5 and 0.6. But as of the first quarter of its spilt fiscal year for 2016 (June 28, 2015), this ratio increase to 0.75. Although this growth is not alarming at first glance, by the second quarter of 2016 (September 28, 2015) this ratio skyrocketed to a whopping 1.65. During this quarter alone Michael Kors inventory has risen 37 percent, whereas its total cash decreased by 56 percent. This imbalance shows that the company is currently pushing its expansion plans forward, even though there is not enough market demand to fulfil or justify its expansion. This is reflected in Michael Kors sales, which only grew 6.8 percent during the second quarter of 2016.

Issues faced at MK: Social Media & Marketing

When it comes to social media and marketing, Michael Kors has been a pioneer for fashion brands. The company is one of the first accessible luxury brands to embrace Instagram as a social channel to run its ad campaigns and promote its products. Michael Kors love for social media only becomes clearer when studying its activity on several larger channels, such as Instagram, and the number of followers they have generated. According to FashionUnited most popular fashion brands on social media ranking, Michael Kors is not only one of the largest brands on social media channels and google search, but it also surpasses other higher end luxury fashion brands such as Louis Vuitton and Gucci in terms of followers. Only fashion giants such as Nike, Adidas, Victoria’s Secret, can say they are more popular on social media than Michael Kors.

At first glance, Michael Kors popularity on social media channels seems to make it the perfect platform for the luxury brand to run its ads on, as the brand is likely to connect with not only its target audience, but a larger audience in general. However, Michael Kors should take caution when overly relying on social media in general for its marketing, as it does come with a price. The high and low of social media hypes can act as a mirror image of the current problems faced Michael Kors. For example, once social media hypes arrive on the market, they feel new and unique and everyone wants to be on them. (Myspace anyone?)

But after a while, the hype slows down, interest fades and people begin to notice that everyone is on Facebook or Twitter and therefore start to look for the next big thing. Therefore, if Michael Kors continues pushing its ads on social media, its sales are likely to make quick jump, for a year or two, but afterward they will become tempered and wane once more. Michael Kors seems to be having difficulty grasping this notion at the moment and appears to be pushing itself too far, too fast and is struggling with after effects now. So how can Michael Kors turn the tide in its favour once more?

Solution: Tapping in New Trends (with caution)

After years of success, Michael Kors products have begun to saturate the women’s wear sector. Luckily the brand seems to have a new, growing trend to cash in on - men’s wear and men’s accessories. With more and more affluent men paying attention to how they dress and what they buy brand wise, luxury handbags for men, or owning more than one bag, appears to be a new, upcoming trend. A smart move for Michael Kors would be to tap this growing market to help boost its sluggish sales, which is what the company seems ready to do with the recent appointment of Don Witkowski. The retail veteran is set to join the company once more early next year as President of Men’s. Witkowski has been charged with continuing the evolution of Michael Kors men’ wear brand-building efforts and leading the category into “the next stage of growth.”

A word of caution, however. Although moving into a new market is likely to help boost sales, this does not mean that Michael Kors current inventory, which mostly consists of women’s wear and accessories at the moment, will decrease over night. Therefore, in order to shift more stock, the company might have to consider offering a higher discount on these items, or lowering their prices. Even though this would see the company losing some money on the products sales, it would mean that the products would also not cost Michael Kors anymore inventory costs.

Another thought Michael Kors should also keep in mind is the future of men’s wear and how long the hype for men’s wear handbags will last? For now there is still a niche market for men's handbags, but the market is likely to be saturated after approximately two years. Therefore Michael Kors will have to ensure it is also to keep consumer interest in the brand after these trends have reached their peaks.

Solution: Acknowledging its limitations

So, even though things may be looking gloomy for Michael Kors at the moment, the company still has time to turn things around and change direction. Best of all, Michael Kors does not have to sacrifice design, quality or expansion of product lines to do so. As the company becomes more and more conscious of how its overall brand popularity is wearing off as a result of its rapid expansion, Michael Kors Chief Executive Officer, John Idol, announced plans to stop rolling out more stores. This shows that the company has acknowledged its expansion limitations and is ready to turn over a new leaf and to focus on improving its current problems with cash and inventory.

Michael Kors is making a smart move by focusing on men’s handbags and is likely to benefit from it. However, their sales and marketing strategy are still linked to short hypes, such as social media. Therefore the company will probably do better if they focus on improving current product lines, expand others and limit distribution. In this way, Michael Kors can get back to healthy ratios and remain stable in the future.

Photo credit: Facebook.com
This is the fourteenth and final episode of a new series based on FashionUnited's unique business intelligence Top 100 Index.