Kate Spade’s aggressive China expansion strategy has elevated it to the likes of global powerhouses such as Chanel, Gucci and Louis Vuitton. Just not in the way the New York-based brand might have intended.
While counterfeiting concerns have long been a headache of luxury labels able to have their handbags and leather goods cheaply copied and produced in Chinese factories at a fraction of the cost and distributed on the ground and online, market darling Kate Spade has remained mostly absent of such concerns, with it’s coveted logoed goods available for purchase solely in its branded stores.
But the company, which made the strategic decision in January to close lower-priced Kate Spade Saturday and Jack Spade and start a joint venture with the Lane Joyce Group’s Walton Brown division to accelerate growth in China, might find itself soon in the uncomfortable position of needing to divert resources to beefing up its anti-counterfeiting legal team. With the rise of online marketplace AliExpress, which has brought the ability to conveniently purchase fake knockoffs to the living room of aspirational luxury goods shoppers everywhere, this week, Curbing the Catwalk uncovered Kate Spade handbags – retailing for as much as $420 a pop – available for purchase for as low as $80. Thanks for the business, says China.
In order to expand its foothold in the region, Kate Spade paid $36 million to E-Land Fashion China Holdings Ltd for its 60 percent stake in the China venture, with Walton Brown paying $21 million to E-Land as part of the transaction. That’s not including the roughly $5 million in restructuring costs Kate Spade expected to incur as part of its Asian push. It’s clear from its growing presence on AliExpress that the brand is getting noticed, in the same way that having your publicist leak advantageous stories about your rising celebrity fame on Blind Gossip to boost your star power and then getting pissed about a leaked bearding report from one of your frenemies can slap a blip on your otherwise happy strategic L.A. expansion.
At the time of the deal, Craig Leavitt, Chief Executive Officer, said, “This partnership is a pivotal next step as Kate Spade continues to advance along a key axis of our growth strategy – geographic expansion – while also continuing our partnered approach to margin expansion.”
Net sales of Kate Spade’s International segment in the third quarter, excluding wind-down operations, climbed 27.5 percent year-over-year to $41 million. On a reported basis, sales were 15.8 percent lower at $43 million. One wonders how that result might have looked had some of the factories’ latest production output not found its way from the back of a truck to their factory floor to the AliExpress market place.
Adjusted EBITDA for the group, excluding costs related to winding-down operations, was $5 million. While delivering the results, Kate Spade reiterated its sales guidance for the fiscal year in the range of $1.2–$1.275 billion and adjusted EBITDA of between $190 and $200 million, each excluding wind-down operations.
Adding to the Holiday cheer, the company was recently slapped with a proposed class action lawsuit alleging that the aggressive discounts on handbags at its outlet stores are not, in fact, discounts, amid claims that the “discounted” items were never sold at the higher “retail price” that Kate Spade outlets advertised.
Of the decision on who to partner with, Leavitt added, “Walton Brown is the right strategic partner as we position Kate Spade for sustainable growth, allowing us to take a holistic approach to expansion, influence consumers and leverage resources across the Greater China region. Walton Brown’s relationships, operations and marketing expertise will help us create a cohesive foundation of stores surrounded by a vibrant ecosystem to help deepen our connection with consumers in Asia.”
Walton Brown is a full service retail management business which partners with large-scale international brands to grow their businesses in Greater China by providing total geographic and channel coverage of the market including retail, wholesale, e-commerce, travel retail and outlets. One might assume that access to manufacturing plants that produce cheap knockoffs likely comes with the territory. Walton also manages the Juicy Couture brand in the region, and appears to be doing a stellar job. Upon searing the terms, ‘Juicy Couture’ and ‘China’, following the initial article from mid-2014 about its plan to close all U.S. stores to rethink its business in the country amid more pressing plans to expand on fashion’s new promised land: China, the second link directs readers to our new friend AliExpress, purporting to offer cheap knockoffs of the brand’s tracksuits, ‘designer’ bags and iPhone cases. Because, as Ben Affleck would attest, why buy the wife when you can bang the nanny for free?
