What a Burberry and Coach merger would say about luxury retail

Burberry has been plagued with declining sales, announcing last week that wholesale revenues from sources like department stores dipped 14 percent overall, down 25 percent in the U.S. market alone. Likewise, Coach has struggled to retain its brand image, declaring this summer that it planned to scale back offerings at mid-tier department stores in an effort to move toward a more high-end image.

While an impending merger may be little more than just a rumor, here’s some important context:

Brand incongruity is telling 
While acquiring Coach could help expand Burberry’s reach, William Susman, managing director of investment firm Threadstone Advisors said he ultimately doesn’t foresee the sale coming to fruition. He cited an incongruity in brand image — one a mid-level American brand best known for its handbags, and another a storied European fashion house — that makes it challenging to foresee Coach operating under the Burberry umbrella. Additionally, if the acquisition goes through, cultural differences could serve as a breeding ground for discontent.

“A purchase of Coach would be opportunistic and unlikely,” he said. “From Burberry’s perspective, it could offer scale, new geographies, and a different affordable price point consumer. However, it would dilute their commitment to being a luxury brand at the highest level. While affordable, I think a transaction would be unlikely.”

Though Coach’s stock prices have fallen this year, Susman said this shouldn’t necessarily be an indicator of long term performance or weakening brand loyalty, making it possible for the company to still succeed independently. “It’s important to differentiate between a weak stock price and a weak brand. Coach remains a strong brand and a strong company.”

Luxury retail sales are continuing to fall across the board
Burberry isn’t the only retailer experiencing challenges in the market — shares in global luxury goods are continuing to drop, down 13 percent in the last year, according to Bloomberg Intelligence. In July, luxury conglomerate LVMH sold Donna Karan International, the owner of DKNY, to G-III Apparel Group after several years of poor sales, indicative of continued industry challenges.

“Especially with these two languishing giants, I really see this as a difficult move,” said Elizabeth Elder, analyst at L2. “The apparel section and luxury have been hit hard in recent years, with the increase in terrorism and anxieties around the election. Retail across the board is getting hit.”

Burberry, for example, has tried to expand its consumer base through a number of digital-driven efforts, including increased efforts on social platforms like Pinterest and experimenting with Facebook chatbots that continue to generate press.

“Despite both of these brands having great digital presences, somehow the consumer isn’t happy anymore and it’s a problem all brands are trying to solve. Especially when profits and earnings are involved it gets murky.”

A weak attempt to find a middle ground
Elder said ultimately the merger is a last ditch attempt to make an alliance designed to improve brand image and sales for both companies. “Coach is trying to spin off its brand as a luxury brand again, while Burberry is winding down from a widely known mega luxury brand,” Elder said. “But [a merger is] not really that complementary, it’s more of a consolidation.”

“A merger of Coach and Burberry would primarily be a merger of problems,”Exane BNP Paribas analyst Luca Solca told Bloomberg. “M&A history in luxury has shown that mergers don’t obviously help in regaining brand traction and desirability.”

Update, October 24: The article was updated to reflect that rumors of a merger were just that: rumors.