Coach Is Buying Kate Spade Because People Still Love Buying HandbagsLuxury handbags aren’t cheap. Even the most “basic” purses from popular manufacturers sell for around $150 to $250. If you want a high-end, luxury handbag, expect to pay upwards of $1,000 or more. When you’re shelling out lots of cash for something less practical and one-fifth the size of a backpack, it’s no wonder people counterfeit these items like crazy!
Nonetheless, the luxury handbag market is still worth billions. According to Wall Street Journal/Barclays report in 2015, the North American women’s handbag market was worth approximately $11.7 billion during the same year. This figure actually represents a slowdown in growth, though still an incredible demand for expensive designer bags.
Handbag companies are doing a couple of things to combat this slowdown and consolidate their sales. First, luxury designers are pulling their stock from department stores, a major source of handbag sales. Since department stores aren’t doing so hot these days, they started discounting handbags to get people into their locations. Designers and manufacturers see this as a devaluation of their brand, and are instead sending their stock to their own stores or high-end, luxury retailers.
If this approach doesn’t work, these companies could always buy each other and reduce competition. For Coach, a leader in the handbag industry, that’s exactly what they’re doing to rival Kate Spade New York. Yet like their handbags, the cost of acquiring Kate Spade doesn’t come cheap.
Coach will soon pay $2.4 billion for Kate Spade.
Kate Spade ($KATE) is a publicly traded company. This means Coach ($COH) will buy their rival’s shares for $18.50 a share, or a smidge higher than they’re currently worth. Kate Spade’s board already approved the deal, but regulators will have the final say on Coach’s acquisition. If it goes through — which is highly likely — then the Kate Spade brand will belong to Coach later this year. All profits, revenues, and other business involving Kate Spade will belong to Coach.
Coach wants to increase their presence on the handbag market.
Kate Spade purses cost between $100 to $500. Coach purses sell for much higher than that. By purchasing Kate Spade, Coach gets to make money on high-end purses and lowish-end purses at the same time. This could eventually help their profits and growth in an industry where growth is slowing down.
Coach needs to compete with Amazon and other retailers.
Amazon and other low-cost retailers sell designer-quality handbags for much less than Coach. By buying Kate Spade, Coach gets to set a firm price of the company’s merchandise (which are popular on Amazon) and compete with low-cost alternatives. They get to remain a valuable brand, make money in a new space, and hopefully edge out their competitors.
Should you invest in Coach?
If you invest in Kate Spade’s stock right now (currently priced at $18.40), you’ll likely make 10 cents per each share you invest. This is if Coach successfully buys the company and at the share price of $18.50. If you buy Coach’s stock, you’re buying into a changing company that will be better suited to compete in the modern handbag industry. If you think Coach will be successful in their attempts to compete with Amazon and other retailers, be sure to do your research before you invest. If you think investing in handbags is a losing battle, simply invest elsewhere.