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Why a Burberry-Coach Merger Might Happen and Why It Could Work

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Burberry and Coach put paid to the notion put forward by financial blog Betaville that the two brands were in talks to combine, shortly after the story broke last month, but arguments for and against the idea still abound.

While one analyst described the suggested scenario as “a merger of problems,” others think a deal, if done right, could bear fruit.

“A lot of change is happening both on the retail side and on the brand wholesale side because the dynamics of the market are shifting in terms of buyers, size of market, what’s happening geographically. It’s all reshaping and redefining a market,” said Kathy Gersch, executive vice president of leadership consulting firm Kotter International, explaining to Sourcing Journal the possible thought process behind such a merger. “They’re in a broadly defined luxury space so as they’re trying to look at their own strategies and figure out how to compete, it’s not surprising that they might be in talks.”

But a note published by Exane BNP Paribas analyst Luca Solca disagreed: “Contrary to Coach, most of the efforts at Burberry in the past 20 years have gone in the direction of elevating the brand and moving it into mega-brand price territory, rather than squarely into accessible luxury,” he wrote. “M&A history in luxury has shown that mergers don’t obviously help in regaining brand traction and desirability.”

Both Burberry and Coach have been working to elevate their images by limiting distribution in the wholesale channel, which has put a dent in revenues. Coach ended the first quarter of fiscal 2017 with consolidated net sales of $1.04 billion, a mere 1 percent increase over last year, while Burberry’s Q1 revenue was down 4 percent to 1.16 billion pounds ($1.42 billion).

“It’s really a matter of whether they have synergies that can be explored and exploited, and what those are,” Gersch said. “Theoretically there could be some sourcing efficiencies. Theoretically there could be distribution opportunities, given that they have strengths in different markets that conceivably could benefit one another in that regard…I wouldn’t do it based on cost efficiencies because I think it’s likely the brands would continue to run very independently from a marketing and sales perspective, so I doubt they would gain anything there.”

However, she added, “the only way they win is if they win together,” pointing out that oftentimes mergers of this magnitude fail because “some finance guys put their deal together on paper and expect certain benefits” without engaging both organizations.

“The pitfall of a Burberry-Coach merger is really if they assume they’re going to get benefits such as sourcing efficiencies and negotiating power in supply chains but then don’t bring those teams in together to jointly define how they’re going to achieve this new vision together and instead just plop them together and expect a different result,” Gersch said. “It’s really important to engage both sides to create a new whole together, instead of having a winner or loser.”

Coach’s stock (COH) is up 10.51% year-to-date, while Burberry (BURBY) shares are up 4.97% for the same period.

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