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Coach President & CEO Todd Kahn Talks Focus on Gen Z, New Customers & Power of Pricing
00:32:43
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- [00:03]
A
Bloomberg Audio Studios, podcasts, radio news. Todd, it's great to see you here. We're in Coach House right here on fifth Avenue in New York City to really talk about what I guess has become a bit of a revival for the Coach brand itself. Sales have taken off sales growth, I should say. And a lot of that has to do with the laser focus that you and your team have put on Generation Z and their shopping habits. And I wonder if you can maybe start off by just talking a little bit about what exactly you learned about what they wanted.
- [00:38]
B
Yeah. Well, thank you. And thank you for joining me in Coach House. We love having you here. It is our home, it's our global flagship and it's probably the best representation of the brand. So come visit. That's the quick editorial. No, we, we focus very much on trying to figure out Gen Z. I often say we're an overnight success story, six years in the making. And Stuart and I many years ago recognized among other people at Coach as well, that we, we were too much often considered a brand for everyone and hence a brand for no one. And we became extraordinarily focused on Gen Z. And part of our focus was listening, learning, doing a lot of sometimes what I call big data and little data. Big data is we're a direct to consumer business. We have millions of customers, we have a lot of data from them. Little data is sometimes going into people's houses, doing shop alongs with them. They don't often know what brand, which, which brand they're speaking with and listening to them. And we gain real insight from them. And so what I often say is I don't want to supplant the gut of our creatives. I just want to create an informed gut. So that's what we're doing. And, and that's what you're seeing working.
- [02:02]
A
There is a great line by your predecessor, Lou Frankfurt, who ran Coach and as a company for years. You talked about the idea of never assume, always ask. And I am curious about the balance between asking the consumer what they want and just looking at the hard data. What is sort of the, the line where those two intersect.
- [02:24]
B
That's such a powerful place to talk. Lou's a mentor, a dear friend. I had the opportunity to be hired by Lou. I worked with him for many years. He's still somebody I talk to often. We launched his book party at Coach when it first came out. We talk a lot about balancing logic and magic and that's the art you, you want to hear from the consumer. But I don't want the consumer to create a bag. Okay, we'll get their input, we'll co create with them. But we have an amazing creative director, amazing designers and merchants. I want them to be informed. But ultimately I don't want to outsource our commercial judgment or our business judgment or creative judgment. And finding that balance is where the magic takes place.
- [03:22]
C
I think that's really interesting because it sounds like basically you're saying that you don't want to be too reactionary. You know, you think about fashion, you think about handbags and you know, this is actually a conversation we've had with Lou. I mean how much of it is being that tastemaker, trying to anticipate where the trends are going to go versus, you know, following the logic, following the data and seeing what is resonating with Gen Z, for example.
- [03:48]
B
Yeah. So what we do, again, Lou said it. We have to remain curious. Also what I often talk about, we have to remain humble. We don't have all the answers. We have a sense of where fashion is going. We pick up cues. Our creatives, our designers, our merchants are shopping the streets of Shanghai, of Tokyo, of New York, of la and seeing and listening to trends. We are not just following trends. If you're just in the following trend business, you're not really a, a significant fashion house. So we're listening to what they like. We understand there's functional needs and coach, I will say in our 85 year history, excel at having an incredibly high functioning bag. But what draws you to our category? No one needs our category. You can carry your stuff in a paper bag, you can carry your stuff in a $50,000 pack. Of course there's material differences, but ultimately it's an emotional purchase. We want to make sure our bags talk to the person, connect emotionally with them and that's what we do. I think when we do it well, we, we're doing it our best.
- [05:08]
C
Well, you mentioned that global perspective and I do want to bring that back to the conversation around Gen Z since you know, that's a nut that many are trying to crack. You think about Gen Z and it seems like looking at their shopping trends that it's much more about items. They're more comfortable, you know, buying luxury, buying affordable luxury. Whereas millennials, which is my generation, it was much more and it still is about experiences. Travel, for example, comes at a premium. But the American Gen Z shopper, does that profile apply around the world as well?
- [05:42]
B
So it's interesting something we've learned about Gen Z. First, they're the Most connected generation in history. The influences somebody sees in Seoul, in Shanghai or New York are similar. If you think about some of the number one music or movies, they're similar across all geographies. And because we're all so connected socially, there are likes and dislikes are often very similar. Now many Gen Z will tell you they love experiences just as much as you love experiences. The difference I think is they're very, very thoughtful about their purchases. And sometimes people talk to me a lot about, wow, people are shopping in the real world again and they're going to malls again. Malls are alive and, you know, thriving. Why is that? And one of the reasons I think because maybe during some very formidable years, Gen Z because of COVID were shut in. So they're very much engaging in real life experiences and community experiences. Shopping is a social event today. You'll see, you'll come into Coach Store, you'll see Gen Z shop, they'll be with their friends or they'll quickly be on their phone showing their friends the bag they want. Mostly they've already come in with a great understanding of what it is they want and then they focus a little bit more when they're here.
- [07:15]
A
But with regards to that connectivity, particularly on a global basis, as Katie alluded to, I assume to a certain extent that makes your job a little easier. But I'm also wondering if that also raises the risk that if I see coaches over every social media platform, Tik Tok and Reels and everything else, at some point, does it become saturation, even if that's not the reality?
- [07:34]
B
Yeah. So one of the issues is, and our investors talk about this all the time, you know, fear of ubiquity, what I love in this last quarter we grew 25% top line. No single family accounts for more than 10%. So the platforms we have to create different self expression which is really our goal to inspire Gen Z for their full expressive self. We have the Tabby family, we have the Terry family, we have the New York family. I call it tnt, which leads to explosive growth. Those three platforms alone are magnificent. Not even talking about some of our traditional platforms like Signature C. Right now we're having a moment of a Y2K moment. You probably see that trend back to that era, which obviously something that we love because was one of the, probably the original heyday of Coach. Now we're in a new heyday of Coach. So I feel very good about the number of ways you can engage the brand. The other thing we're very focused on because we're focused on Gen Z and we're particularly focused on actually very soon, on Gen Alpha point of market entry. We want to be her first back. When I think about in those terms, there are 25 million women who will turn 18 every year in the markets we play for the next five years. That's a massive TAM that we want to be their bag of choice.
- [09:08]
A
We'll talk a little bit about that TAM and the expansion of it. 25% growth for any company is not necessarily going to be stable long term. I mean, that's a phenomenal growth rate. Maybe it is. You can tell me different.
- [09:19]
B
The new customer, it's a phenomenal.
- [09:21]
A
Okay, but the new customers you're bringing in now, how much can you count on them to be customers 10 years from now or 20 years from now and for that matter their children or grandchildren to be customers as well? Is that something you're factoring in to this total addressable market?
- [09:36]
B
So a couple of things. We brought in 2.9 million new customers in our last quarter, the holiday quarter.
- [09:43]
A
So these are people that had never.
- [09:45]
B
Never coached 2.9 million. And again, those are markets we know. I don't often know wholesale markets. A new customer coach. What we're finding is their frequency of purchase, especially Gen Z, is slightly higher than other cohorts. Again, not all 2.9 were Gen Z, but a large portion were Gen Z. We often talk about if you have a good first date, you then have multiple dates in the future. And we know this to be true even if you go back 20, 30 years. I've been a coach for 18 years. I can't tell you the number of times I've heard somebody say my first bag was a coach bag. My memory was a gift, self purchase. Something that inspired me. When we can create that kind of goodwill, I think we have them for a long period. But what I said to our investors, you don't have to believe that retention is, is higher than in the past. If I keep the retention rates that I have historically had, but I'm bringing in so many new customers, your overall tam, your overall market penetration goes substantially up.
- [11:01]
A
But does that require creating more products mean meaning a wider variety and a higher number of products to offer?
- [11:08]
B
We are very disciplined. One of the things we did six years ago is we cut the number of SKUs by 40%. You know, I often say a good bag is a good bag everywhere. One of the things we did and we learned from traditional European luxury, we were killing off some of our best bags too early. And I'LL give you the classic example. Tabby, one of our number one bags, I think it's all over the room. That bag was starting to slow down in the winter of 20. What typically would have happened is we would have exited it, gone through a markdown cycle a year later. Magically, a bag that looked very similar, maybe called Gabby, would start the cycle over again. Instead, we focused on animating that bag with first, it was pillow, tabby, different materials that enhanced the franchise. Today, again, it's still less than 10% of our total business, but it's a massive driver of new customers.
- [12:08]
C
Well, speaking of new customers, you mentioned Gen Alpha and I think that would make a lot of people's head spins. And when it comes to targeting Gen Alpha and hopefully bringing them in as new customers, I mean Gen Alpha, they're spending their parents money. You know these, these are teenagers and younger. So how, how do you reach them and start to build that brand loyalty at a young age?
- [12:34]
B
Oh, it's New York. I'm surprised it took this long. Katie, we'll take the question again too when that goes by. Okay, hold on one second.
- [12:47]
C
I hope it's okay out there, whatever's happening.
- [12:49]
B
Yeah, that was minor.
- [12:54]
C
Speaking of new customers, you mentioned Gen Alpha and Gen Alpha. I don't have the exact stats, but I believe we're talking about teenagers and below. So how do you go about even reaching them? Because they're spending their parents money in a lot of cases. It's not like Gen Z, which a lot of them have jobs at this point. So how do you target them and how do you start to go about building brand loyalty with that cohort?
- [13:18]
B
Well, first as a father of a Gen Z or they still spend their parents money. Okay, the bank of mom and dad is real.
- [13:25]
C
Fair enough.
- [13:26]
B
But beyond that, we're learning about Gen Alpha now. So depending on who you talk to, gen alpha turns 18 in 2027, 2028. So we're engaging, we're learning, we're understanding them. And yes, they will spend some of their parents money. But what's interesting about both Gen Alpha and Gen Z, particularly Gen Alpha now, they all seem to have a side hustle. We used to say when I was younger you babysit or maybe you got to work like I did in my parents shop cleaning the counters. They are micro influencers. They do all these things in the Internet and digital economy. That is so interesting. And they're very. One thing we've already heard and some of this could be AI related. Not only are they tech savvy but they're kind of business savvy too. And that's true for young Gen Z. So we like that about them and we're learning about them. And one of the things that is so powerful about Coach, we stay in the sweet spot of 2 to $500 while we have bags that are much higher. That's our sweet spot. And I get off asked the question often. Well, because traditional European luxury now is 10x what we are when historically it was 3 to 5x, isn't there so much white space? Shouldn't you go after that space? And there's opportunities there. But we don't want to miss out on the opportunity to be that first bag for that Gen Alpha or that Gen Z customer to engage them in a price point that makes sense.
- [15:08]
C
And I do wonder, you know, how if at all, some of the Coach coffee shops play in when it comes to Gen Alpha because obviously a croissant, a cup of coffee, you know, it socializes the idea of Coach, but it's much more affordable than a handbag.
- [15:22]
B
Yeah, it starts to introduce the experience. And experience today is incredible, incredibly important to younger, I think all generations. But we are focused. We have 20 coffee shops globally. We have four in North America. By the time we end this fiscal year in June, we'll have another four, usually in high traffic areas. And they do a number of things for us. First, the coffee shop themselves are great Coach experiences for exactly the reasons you said. We sell croissant, but what's really popular is the tabby cake that looks like a tabby bag. Incredible social media moment to capture. Little Miss Jo is compelling. So we have that part. We have unique merchandise that you can only get at Coach coffee shops. My head of food and beverage, yesterday I had a meeting with him and he's saying there's really demand for Coach merchandise across the fleet. I'm like, for now, you can only get it in a Coach coffee shop. I want that unique call to action that you have to go to a Coach coffee shop to buy this compelling Coach coffee Shop merchandise. The other benefit, the linger time for the shoppers where there's a Coach coffee shop is significantly increased. So I don't just do coffee shops for marketing or social purposes. It's really good business for us.
- [16:46]
A
I do want to talk about marketing and particularly ad spending. It's grown pretty significantly. If you look at least at Tapestry, the parent company, you've gone from basically 5% of sales of ad spend to I think above 10%. Now you're the CFO of Tapestry talked about this on the most recent conference call. That that is a big part of the success in being able to attract Gen Z and for that matter, Gen Alpha. How much more do you think you need to spend?
- [17:13]
B
So you're. You're exactly right. So if I go back to FY19, right before I took over for the Coach brand, we were spending about 3% on marketing. And that was true since the early 2000 through FY20. We started to spend more, particularly first during COVID digitally on lower funnel activity and we learned our way into it. Today the Coach brand spends 11% on marketing. We're doing that mostly with mid to upper funnel long format campaigns about the brand. We find that that is compelling. We are getting close to sufficiency in certain markets. So it doesn't mean I have to spend 15 or 20% where we are very demanding, disciplined on understanding what our ROI is on that spend. So as I said to my cmo, you know, we'll spend close to a billion dollars next year telling our story in long format fashion in key markets. That's a moat for our brand and for Tapestry that not everybody can replicate. And we are very focused on acquisition of new customers in the their marketing stories. That becomes very compelling. So I think that gives us longevity and we measure it. And that is the, if you will. You know, if you ever made a fire, you. You put a lot of wood in it to make a great fire. We have a roaring fire right now.
- [18:45]
A
Well, part of that fire too is some of the brand ambassadors. You have, the celebrities, if you will, all from kind of different sort of tiers. I am curious how much of that is organic. How much of that is basically just striking an agreement on paper with whoever that is to get them to, you know, sports your brand.
- [19:03]
B
So we have a whole team that looks at this and Stu and I are very involved. Often they bring me people I don't recognize, which is usually a good sign. My 28 year old often tells me, you need to get this one and more. She's more right than wrong. But.
- [19:20]
A
Well, I looked up some of your brand. I had to.
- [19:22]
B
You had to look. A couple of them are universal, like Elle Fanning. You, you know, you know who she is, she's up for an Academy Award. So we do a couple, we do a number of things. First of all, we have to have brand ambassadors. We call it Constellation. So it's not just one or two single stars. We want a group of ambassadors, friends of Coach, friends of the house, as well as People we put in our major campaign. So at any given time we'll have 20 or 30 in total. We also, we want them to look like our customer base. So we don't want a singularity of look or attitudes. We, we want people to relate to them. Stuart and I have also, also, excuse me. Stuart and I have also talked about we like working with nice people. We like working with people who, who are engaged, who are thoughtful, who truly represent the values of our brand. You don't always get that, right. I'm not saying every celebrity I've ever worked with is like that. But right now, the cohort we have today are amazing. They're lovely people, they represent a global community and they're excited to work with us.
- [20:35]
C
I do want to talk about pricing a little bit because one of the things that seems to be unique about Coach is that you've managed to break out of the promotional cycle, which for a lot of brands turns into a downward cycle. And I want to talk about how that strategy relates to what you're doing in your outlet stores. Because it's interesting, you've actually dropped the word outlet altogether from a lot of those locations. And within them you're actually selling at full price in many instances, which is interesting. So walk us through the strategy there. And you know how that's impacted how people shop at those former outlet stores.
- [21:11]
B
Yeah. So this started from consumer insight. Consumer insight for younger generations. Very different from what I learned. You know, I've been in this business for 30 plus years. We spent 30 years distinguishing between outlet and retail. And you'd go to the outlet for a deal and you'd go and buy last year's product or made for outlet product. What we learned is Gen Z don't see channels, they see brands. Sometimes the quote unquote outlet store is the best mall in their neighborhood. Sometimes if I'm traveling from Brazil and I happen to be in the Fort Lauderdale, Miami region, I may only shop at Sawgrass, which is a beautiful high end outlet mall. They come into our stores, they want tabby. So part of what we recognized was our value is so good, I don't need to discount our value of our product. And what we want to do is put our best product front and center. It does a number of things. First of all, it satisfies the demand that we have. It increases your aur as a business person, that's a fantastic thing. But it also makes everything around it look good. So maybe I come in and tabby, if I'm a young person, you know, $394.95 bag may be a little bit of a stretch, but maybe I'll buy a Terry bag, you know, at 2, 225 and still desire a tabby in the future. It makes the Terry more desirable. It creates the whole world of coach in a very engaging way and it's working. So you're going to see us do more and more of this. We don't talk about channel anymore. We talk about there are stores. Yes. And there's different ways we operate the stores, but we put collection or multi, multi channel product across the fleet. And I see this as a huge growth opportunity and we're extending it not just in bags, but we've done it in footwear. Fragrance has always been a one price point where you're going to see us do it in jewelry and other opportunities too. And from a business perspective, it's, it reduces your SKU count, it creates more universality and allows me to put the right product the right place to satisfy a consumer need.
- [23:39]
C
And what sense do you have of what pricing power looks like right now? Because mean, on the consumer side, we're coming off of several years of stubbornly high inflation. It seems like we've settled at least for right now. And I mean on your side as well, higher tariffs, that's hitting consumers and I have to imagine it's hitting your supply chain as well. So what is pricing power look like right now and how is that translating to margins going forward?
- [24:03]
B
Yeah, we, you know, we announced in our holiday quarter the best margin in our history and we're focused on that. But it's a balancing act. We love the sweet spot, as I said earlier, of the 2 to 500 range, there's a lot of room there. If I discount less at the bottom end, I raise my overall margins substantially. So we're not looking to do what some people did take price 3.4x what it was 4 years ago. I don't need to do that. We want our job and our mission is sustainable, healthy growth. So we should keep up with inflation. That should be your starting place. And then there's things that the consumer values. So we compare our product, our inputs, and we look at how the consumer perceives value. And there are certain classifications and materials that the consumer sees value in and we take a price accordingly. But we're very sensitive to having price points that work for our core, timeless Gen Z customer.
- [25:18]
A
On the issue of cost, I mean, have you ran into any issues as of late with regards to being able to source your leather Whether it's because of tariffs or the cattle shortage we hear about, or even just the idea that, you know, the people, the expertise and being able to tan leather is the number of people who can do that these days is a lot different than what it was when you guys were founded in 1941.
- [25:36]
B
Yeah. So fortunately we're a substantial house. We have deep resources. We started as a manufacturer, so we still have a manufacturer mindset. We have leather experts in our company. We source leather from around the world. We get that, we work with the best tanneries. Our units are significant. So people want to work with us. So we do get the choice to get what's the best out there. We have not seen an issue with our, our leather suppliers, nor have we seen an issue with our make manufacturers. We are making coach product with some of the same people we've made for 20 or 30 years. We have very deep relationship. Of course tariffs are an issue. But one thing about our company that you need to bear in mind, we see in the next three years 70% of our growth coming from international. So when I'm selling internationally, tariffs are no longer in play. Now we've had phenomenal growth in North America. Last quarter we did 27% top line growth in North America. That's phenomenal. We also saw 37% growth in China and, and I'm sorry, 37% growth in Europe and high 20% growth in China. So we had substantial growth across the world. That takes the tariff issue out of play.
- [27:02]
A
Talk a little bit more about China. You have several stores there now. I think on the last conference call there was some discussion about the number of stores that you plan to open there in 2026.
- [27:12]
B
Yeah. So we have, we've been in China literally for. Sorry, sorry. Let's, let's try that one more time.
- [27:19]
A
Sure. Thanks.
- [27:19]
B
Outside of the world.
- [27:20]
A
Okay. You already have a big footprint in China. There was some discussion on the most recent earnings call about expanding even further into that market. How many stores are you, are you planning to add in 2026?
- [27:34]
B
So what we said public is over the next few years, we think we'll add about 100 stores in China. China. And that may be the number, give or take. And part of it is China's so vast and there's so much opportunity to go into places that historically coach didn't go into traditional luxury, went into high end malls in different cities around the country. Last year I went to Wuhan. Wuhan is a City, has 6 million university students. I mean, massive city. So much Opportunity there. I think at the time we have three stores. You know, we can triple the number of stores there. Actually, we might have a little bit more than that, but the reality is those are opportunities. That said, I'm still very focused on productivity of our stores. Having a store in a great location gives us opportunity to. To enhance our productivity. Now, what I started to say was we're also able, because our focus is on Gen Z, we can go into neighborhoods that others may not. We'll go into a cool young neighborhood that may have a street location that. I am not worried today. If traditional European luxury is on the left and right of me, it's wholly irrelevant to me.
- [28:55]
A
I do have to just ask you, given that we're filming this interview at the start of the lunar New year, have you seen any sort of increase in sales as a result of that? Are these types of holidays, do they become moments for Coach, or is that not part of the strategy?
- [29:08]
B
They're always moments for Coach. We love celebrating key moments. And this is now the year of the horse.
- [29:15]
A
The fire horse.
- [29:16]
B
Fire horse is correct. The fire horse. I'm not sure what the difference is, but it sounds cooler so than fire Horse. And it's a phenomenal period for us. We're very happy with the reaction the Coach product is receiving. We did an interesting collab with a street band in China called Clot. Very relevant product to this younger generation. And if you haven't seen the ad campaign, the marketing, it's phenomenal. It's, it's. I don't want to know what the production costs were for this thing, but it was amazing.
- [29:51]
C
Yeah. Something's better left unsaid.
- [29:52]
B
Yeah.
- [29:53]
C
I do want to talk a little bit about Europe because you mentioned your growth there. And I wonder, you know, who are you necessarily taking share from? Because you think about the European luxury handbags. Have to imagine they have a huge presence there. So are you seeing, you know, you actually, you know, taking a little bit of their slice of the pie, or is the pie growing?
- [30:14]
B
Well, it's an interesting phenomenon. So again, let me focus on last quarter. We grew 25%. The category would have shrunk but for Coach. So we grew the category. I don't think that just people who would have bought a traditional European luxury bag. I think we're bringing new people into the category. I think sometimes we used to talk about share of wallet. I think our share of wallet has been enhanced because of the compelling nature of our product.
- [30:43]
A
Product.
- [30:44]
B
So the value equation is massive. When you see the quality of our leather. Sometimes people Forget. As an 85 year old house, we're older than many traditional European luxury houses. So our authenticity cuts through. And our authenticity, both our value and values resonate with a European client. And what's interesting is we're sort of just getting started. We're. We have a very strong business in, in England. We have a nice business in France. We're starting to expand both digitally and through our wholesale channel. And we're getting very, very good responses to what we're seeing all over the world. Hmm.
- [31:32]
C
And there is this idea out there. I think it was Dana Telsey who said, the fact that you have seen some of those European handbag makers raised their prices, that maybe that's given you a little bit more room, especially when it comes to that 200 to $500 range, to bump up your prices as well. Is that something that you agree with? And how much time do you spend, you know, paying attention to what exactly your competitors are doing when it comes to their pricing?
- [31:58]
B
We look at everything, so. But it doesn't drive what we do, you know, on a very personal level. We look at everything, but it doesn't drive what we do. On a very personal level. I find it offensive that somebody has to save four months of salary to buy a handbag. Okay. That's not a business I want to be in. I love that you can walk into a coach store anywhere in the world and buy something compelling and you don't have to make the choice of, of missing out on something you would have saved for four months. That's powerful to me. So I like our position and we play our own game.