Why Michael Kors picked up Jimmy Choo

Michael Kors has picked out some new shoes to go with its handbags. On Tuesday, Michael Kors Holdings said it had agreed to buy the shoe company Jimmy Choo for £896 million, or about $1.2 billion, the latest push by an American high-end fashion house to find new sources of growth and what its chief executive characterised as the first step in building a bigger international luxury group.

Many upscale brands like Michael Kors have faced plummeting sales and tepid profits. Mall traffic in North America has declined sharply, while shoppers who have traditionally been loyal to the so-called middle market have gravitated toward brands at extremes of the style and price spectrum.

The trends have played well for e-commerce giants like Amazon, fast-fashion brands like H&M and Zara, and luxury houses like Gucci. But it has left companies like Michael Kors — once the runaway leader of the ‘accessible luxury market’ — exposed.

Jimmy Choo, which shot to prominence thanks to celebrity patrons like Princess Diana and the ‘Sex and the City’ star Sarah Jessica Parker, could give Michael Kors a new avenue for growth.

“Acquiring Jimmy Choo is the beginning of a strategy that we have for building a luxury group that really is focused on international fashion brands,” John D Idol, the chairman and chief executive of Michael Kors Holdings, said in an interview. Mr Idol said he was targeting more acquisitions, focusing on luxury companies that “lead in style and trend” but also “have got some size and scale” as well as “some heritage.”

Though both Michael Kors and Jimmy Choo are red-carpet favorites, they appeal to different segments of the population. Michael Kors, known for fashion-forward designs and competitive prices, is heavily reliant on outlets and department stores, where deep discounting is common. Leather purses sell for as little as $70 and handbags are available for $95.

Jimmy Choo occupies a higher price point: Open-toe slip-on sandals sell for $425, while crystal-encrusted shoes with the brand’s signature sky-high stilettos go for nearly $3,000. The brand brings not only a different range of customers, but also hefty profit margins and an upmarket aura.

The deal for Jimmy Choo came just months after Coach agreed to a $2.4-billion deal to buy the American handbag and accessories brand Kate Spade, apparently hoping that the combination of two affordable luxury brands could help it carve out new territory in a crowded market. Coach acquired its own upmarket shoemaker, Stuart Weitzman, in 2015.

Michael Kors is in need of an update.

The brand became a household name thanks to its charismatic and eponymous founder, who appeared for 10 seasons as a judge on the fashion-based reality television show ‘Project Runway.’ His approach to fashion focused on the idea that every woman wants to look “pretty and rich.” For years, Michael Kors enjoyed soaring revenues as customers embraced its glitterati-inspired accessories at affordable prices.

But the company has languished since going public in 2011 in what was, at the time, the most successful offering by an American fashion label. In May, it downgraded its sales forecasts for the rest of the year and said it would close as many as 125 of its full-price retail stores. Its share price has lost a fifth of its value in 2017 and is now $34.91.

Jonathan Buxton, the head of consumer and retail at Cavendish Corporate Finance, an advisory firm, said that for Michael Kors, “this deal presents an opportunity to enter the high end of the luxury market, to increase sales and to diversify away from its own brand, especially at a time when it is experiencing declining same-store sales.” There was likely to be more consolidation, he said, as other “affordable luxury” brands looked to move upmarket.

The deal would mark the first time Jimmy Choo has been owned by a company with expertise in fashion. The question now is whether it will expand into more accessible footwear, targeting new customers — perhaps ones more like those Michael Kors already has — or into new product categories. It has already made forays into fragrances and sunglasses and has tried to make inroads into the luggage market.

Jimmy Choo was founded in 1996 by Tamara Mellon, then the accessories editor at British Vogue, with the Malaysian cobbler Jimmy Choo. Its vampish aesthetic quickly caught the attention of the rich and famous, and more recently, Michelle Obama was frequently seen wearing its shoes.

Mr Choo left the company in 2001, and Ms Mellon sold her stake in 2011 after a bitter fallout with fellow board members about the way in which the company was being run. For years, Jimmy Choo was held by various private equity firms before becoming the first luxury footwear brand to list on a public market in 2014.

After the sale to Michael Kors, Jimmy Choo would continue with its current management team, including the chief executive, Pierre Denis, and Sandra Choi, Mr Choo’s niece, who took over creative leadership at the brand after Ms Mellon left. The shoemaker has more than 150 stores globally, as well as a presence in many of the world’s top department stores.