How Coach scaled from a single store into a global icon

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2:08He said, well, I have a friend from childhood who has a small pocket company called Coach.

2:17It's six million dollars in sales. He's 60 years old, and he's looking for a protege. And he's looking for someone who has two qualifications. One, they have no fashion experience. That was me. And the second was good values. And I said, well, I got good values, I think. What did you join Coach as? What was your role coming in? Effectively, as an assistant to the CEO, I got the title VP for Marketing and Special Projects. I mean, titles are free. Isn't that great? Titles are free. This is Masters of Scale. I'm Jeff Berman, your host today on the show, Lou Frankfurt. Lou spent decades as CEO of the iconic brand Coach.

3:02When he started there, the then small New York City handbag maker was doing about$6 million a year in sales. Under Lou's leadership, Coach grew into a billion dollar brand and an international icon known for a new category of accessible luxury. In his new memoir, Bagman, Lou reveals fascinating insights about how to scale, and he shares some of those insights with us here today. Lou, welcome to Masters of Scale. Delighted to be here with you, Jeff. One of the many reasons that I've been looking forward to sitting with you is you and I have a couple of things in common. I'll flatter myself. And one of them is we both started our careers meaningfully in public service.

3:43And I'm curious just how you got started in government. I'm a product of the 60s and I came of age thinking that my generation would create a better world. John Lindsay was mayor and he was recruiting young people, idealistic people who wanted to go on a journey with him. And after one year, I decided I was either going to leave city government because I was surrounded by people who were looking to just get to Friday or get to vacation. And I was looking to improve things. So I thought I would take a chance with one more job. So I looked for a mentor who really wanted to make a difference. And I found that person.

4:30How did you go about seeking a mentor? I networked in city government and asked about who's smart, who cares, and who can get stuff done. And there were two people that were mentioned at the time. One was this guy, Herb Rosenzweig, and I reached out to Herb, and he hired me. And I went with him as he moved to different positions, and ultimately my profile was high enough so that when the city was looking for someone who might be able to go in and try to fix the daycare and headstart programs in 1976, when it was a poster child for inefficiency and corruption, people thought of me. What attracted you to the challenge of reforming these massive and massively important programs?

5:20I really believe in daycare and headstart services. I believe in creating as much opportunity as possible for the underclass and the central fabric of who we are, not just then, but today. Our country is based on immigrants, and we may be third generation or second or first or 10th. It doesn't matter. We need to welcome them, and we need to create opportunities. And the program was really in danger of collapsing. Why was it at risk of collapsing? Because it was not administered well. So when audits occurred, they found in many instances only half the kids were eligible. And they found this community-based program frequently run by people for their self-interest, not for the greater interest of the community.

6:09So they employed unqualified relatives. They, in many instances, sadly, were also corrupt. And it made headlines. So this was a turnaround. I mean, really, it was a turnaround. Right. And so you're coming in, you're dealing with incompetence, you're dealing with corruption, you're dealing with bureaucracy. And one of the challenges of these situations, unlike particularly a smaller private company that's a turnaround, is you don't fully control it. I mean, you've got to deal with a lot of people, a lot of systems, a lot of laws, a lot of regulations. How did you attack the problem? First thing I did was look to recruit a coalition of leaders who felt purpose, who had similar values as me.

6:53I wanted to maximize the number of children that would be able to stay in care with quality service. So I brought in what would be called a rainbow group of staff. We worked 24-7, and we got the programs to a place where no eligible child was denied service, where we were able to manage to a lower budget, improve the quality of care. And ultimately, HEW, which had identified us as the worst program in the United States, complimented us and said other programs should follow our example. Ed Koch was mayor at the time, and he passed me over for a job that I felt particularly qualified for. And when I met with him, he said to me, Lou, you're too principled.

7:50And I knew exactly what he meant. What did he mean? Well, three years earlier, when he was a congressman in Manhattan, he came to my office, the only congressperson that came to my office to ask me to save a program outside of his district and did not want to know why they were being defunded and expected that based on our meeting, I would just save this program. And I knew he was coming. It was the one call I got from City Hall where they said, you must meet with Congressman Koch. He's very influential. And they gave me a heads up on the program. And I said, I'll meet with him. But based on measurable standards, metrics, it was in the bottom 10 % of all programs.

8:43Only 15 % of children were eligible. Out of every 100, 15 had income low enough. The other 85, they didn't provide standards or they had a higher income. And the mayor said this to me when he was a congressman. And I said, Congressman, I'm not sure I can do, there's anything I can do. And he said, you know what I want? I said, I understand. And of course, I went on to defund the program. So basically, he came around a few years later as mayor and said, you know, you're not my guy. After that run in with Mayor Ed Koch, Lou knew it was time to move on from city government. Luckily for him, it was pre-Uber, and he shared a cab with exactly the right friend one dark night.

9:30And he said, well, I have a friend from childhood who has a small pocket company called Coach. It's$6 million in sales. He's 60 years old, and he's looking for a protege, and his children aren't going into the business, and he's looking for someone who has two qualifications, which I asked. He said, one, they have no fashion experience. That was me. And the second was good values. And I said, well, I got good values, I think. And four interviews later, I gave notice and joined Coach. What did you join Coach as? What was your role coming in? Effectively, as an assistant to the CEO, I got the title VP for Marketing and Special Projects.

10:16I mean, titles are free. Isn't that great? What I did in considering Coach was to do a deep search as to what is Coach. And I went to the end user. And what I learned in my interviewing process where I pretended to be a Businessweek reporter and spoke to the buyer from Bloomingdale's, someone from Bonwit, someone from Macy's, and went into a handbag store on 72nd Street. I learned Coach had a cult following. And people loved Coach. And you were pretending to be a reporter because you were worried that they wouldn't tell you the truth if they knew you were actually from Coach. Well, I felt if I identified myself as a reporter from Businessweek, I would have access to most people.

11:05Divisional managers, GMs, maybe even presidents. Yeah. So everyone took my call. And I asked for meetings. and I was writing an article about this small private company coach. And so what did you learn? One, I learned that women are particularly loyal to bags because it's a very personal object. It's a vessel. They open 50, 60 times a day. And in the case of coach, we had a beautiful, and still do, natural leather that develops a patina over time, like a baseball mitt. So over time, it would never wear out, it would wear in. And the bags were sturdy and well-made, durable, and I thought great value, and people loved their coach.

11:52So take us on the journey from this tour as a posing Business Week reporter and the insights that you're getting to then how you deploy those insights against the business to begin to grow it. The first notion I had was that we had a loyal consumer base. I then went to look for models outside the United States where handbag manufacturers were also selling directly. And in Europe, there was a very well-established luxury group of brands led by Louis Vuitton. It was a relatively small brand. And I admired them because they controlled their destiny. They only sold in their own stores at one price, controlled the merchandising, the staffing, the service levels, all the policies.

12:44And when I looked at Louis Vuitton as a luxury brand, I thought to myself that Coach could become one day a democratized luxury brand. And rather than being accessible to the top 1 % or 5 % of the population, we could be broadly accessible to the top 20 % to 40 % of the population because we offered a product that was unique, had a lot of grit, very much American natural leather. We coined the term 20 years later, accessible luxury. Well, and I feel like this concept of accessible luxury wasn't even really in the marketplace at the time. So in my mind's eye, I saw a growing audience of a rapidly growing middle class population.

13:34With the benefit of hindsight, when you look back on it, Lou, what was the inflection point? The magical moment occurred in 1981. So I was only a coach 24 months, and I convinced the founder, or I convinced the founder's wife, to allow me to open a coach store on Madison Avenue. The first Christmas, we opened in October of 1981, 450 square feet. So narrow, 11 feet wide, 40 feet deep. It cost us$50 ,000 to fixture the store. We needed to do$300 ,000 to basically break even. That Christmas, we had lines out the door to the corner, and we did over a million dollars in year one. And I knew that there was something special.

14:27Why did you have lines out the door? What happened? Well, I had started a catalog business 18 months earlier. And it was clear based on my early marketing in terms of speaking with consumers, visiting with consumers, looking in their closets about what bags they carried. How many bags did you have in your closet? What role did coach play? What would encourage you to buy a second bag? It was clear to me that if we were able to put our entire assortment in one place and have seasoned salespeople in our store, the aroma of leather, natural leather, permeated the space. So people went into a bespoke environment.

15:13There was nothing cookie cutter. Miles and I designed the store ourselves and was uniquely coached. By that time, we had a file of about 100 ,000 people through our mail order business that I had, catalog business. And we invited 20 ,000 of them to the store. They lived within 100 miles. We had special events. And they came because they believed and loved Coach. I feel like this is such an important point to drill down on because you didn't just say, well, we think we have a brand. We think we have a story to tell. We've got a theory of the case in terms of Madison Avenue and accessible luxury.

15:52So we'll open it and then we'll hope it works. You already had built the engine. I had real clarity it would be successful. I never dreamt from the start would be as successful as it was. We ultimately did$10 ,000 a square foot in that space. I mean, we did$4 ,000 or$5 million. Which is a crazy number. I mean, that's a Tiffany's number. Insane. I mean, that's a ridiculous number. So you launched the Madison Avenue store. it's doing a million dollars in a business that was only doing six million dollars top line two years earlier what's the next step in the evolution coach by the spring of 1984 we were 20 million dollars and the channels that i started were about 50 of the business the founder miles decided that i'm going to sell the business lou rather than make you and the others my partner and if If you stay through the transaction, I'm going to recommend that you become CEO because I'm going to leave the day of the sale.

16:54But I want you to know, Lou, between us, you're not ready for this. And I said, I understand, Miles. So there were several groups interested, and I was able to negotiate the best price from the group that I thought would be the best for the future of Coach, which was a big conglomerate called Sarah Lee. What did Sarah Lee do right, both in acquiring Coach and integrating Coach into Sarah Lee, and what did it get wrong? They got everything right at the beginning. First was building a team. They were really focused on making sure that I had the right people in the right places. What did they get wrong?

17:35Well, along the way, they unsuccessfully tried to use the power of Coach to help get brands into locations where they wanted open shops. I remember once they came to me when JCPenney was still a very strong mass brand eating department stores lunches. JCPenney wanted to bring Coach in and our customers candidly weren't shopping there. At least not yet, they weren't. And I declined. At the same time, Sarah Lee wanted to open Hanes and Champion shops in JCPenney. And they said, if you get coach to come in, we'll open the shops. And so they came to me to push me to do that. And I, of course, declined.

18:27I was prepared to have them terminate me rather than do things that made no sense. Summarizing many discussions over time, but there was a handshake between me and the CEO chairman of Sara Lee that if I could get them a billion dollars, they would give us our freedom. Not bad, given when they bought you, you were hoping to get to 25 in revenue. They paid 30 million. Okay. That's a pretty good return on investment. Not bad. Still ahead, how Lou Frankfurt blended magic and logic to scale Coach to new heights.

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19:49Creative planning where wealth works together. Learn more at creativeplanning.com slash mastersofscale. Welcome back to Mastersof Scale. You can find this conversation and much more on our YouTube channel and be sure to check out the show notes to find a link to our newsletter. So how did you get it to a point where you could spin it out of Sara Lee? First, I recruited the right business leaders. Second, we aligned as a team on what we needed to do to prepare to go public. And third, we went about doing it in a very systematic way. And by the time 1999 rolled around, it was clear to me through the green shoots that we had measured that we were on the cusp of a breakout.

20:45And I wanted to get out as quickly as I could before the numbers grew so that the benefit would accrue to the coach shareholders, not to the Sara Lee shareholders. Right. There's a sweet spot. In the spring of the year 2000, we agreed that we were going to go public. We engaged with Goldman Sachs. And even though the market went through a dip in the middle of the year and there was some discussion of pulling the IPO, I was able to deliver numbers that gave Goldman confidence that they could take us public successfully, which we did. Well, one of the interesting things about the timing is as the dot-com bubble is bursting, you are very much not a dot-com stock.

21:30And the other thing was we needed to develop storytelling that would make sense. And we coined the term accessible luxury. And the business grew very, very rapidly. We revamped our entire supply chain. We broadened the personality of Coach. We introduced major new collections that had very broad appeal in Asia on bags. In Japan, they spent, at the time, six times as much as the average American spent. And why Japan has an egg-shaped economy, particularly back then, everyone was middle class. Right. And the number one possession was a European luxury brand. Yeah. I didn't go in to target the European luxury brands.

22:20I went after the young female professional who was looking to be emancipated, not get married right away, but travel, be independent, break the glass ceiling. And I was able to offer her a bag at 40 ,000 yen while the European competitors were 100 ,000 yen, and she could save that 60 ,000 yen and go to Korea for a weekend hotel and airfare. I want to focus in on some of the leadership lessons from your career. One of the things that strikes me, you got a lot of companies right now that will tell you that they're data-driven. At our company, one of the things we talk about is being data-informed, not data-driven, because data can't be everything.

23:06Of course. Well, you say, of course, but there are a lot of people out there who will tell you, You look at the numbers and you act on the numbers. Help us understand how you've approached integrating data and logic and sort of traditional left brain with vision and creativity and imagination, more traditional right brain. I coined the term magic and logic, and it's now language we continue to use at Coach. My successors use it today, and it's part of embedded in our culture. magic is having belief, having vision, seeing something that doesn't exist, curiosity that you're going to probe and learn.

23:47And another aspect of magic is being adaptable and nimble. And lastly is also using instinct and intuitive. And on the logic side, the hardest things from a culture perspective, in my mind, is to build a greater good mindset where you bring people together towards a purpose. They're in service of something. And we built a culture with everyone in mind that we wanted to build a powerful franchise. We wanted consumers to love us, to believe in us. At its essence, that's what great brands do. People have belief in them. And so many companies work in silos, right? They build things that are literally called divisions, right?

24:37Rather than figuring out the integration. The reality is that larger companies, they don't have the right people with the right mindsets. You need an entrepreneurial mindset. You can't just create a new projects division within a company. And the reality is that most of the people in these large companies, perhaps not the CEO or the number two, but often, yes, they have grown up in this company or grown up in the industry. So they are used to a certain way of working. They want to meet their plan. They want to get their bonus. They want to go on vacation when they want to go on vacation. they won't speak truth to power because they don't want to jeopardize their jobs and they may not want to work 24-7.

25:28And so many companies, whether it's American Express 30 years ago under Ken Chenault or Disney, they have to be reinvented. You got to throw it up in the air. And it's not a surprise to either of us. You know, when you talk about a founder, sometimes the second generation builds it and the third generation ruins it. Right. And while they may not ruin it among very large companies, when you have scale and you have process and you have protocols and it's very tough to move things. Lou, Coach is having a real moment with Gen Z right now. It feels like every couple of weeks I see some news where Coach is breaking through, where it's popping on TikTok.

26:13talk. What is it like not being in the business day to day, but being so inextricably tied with Coach, seeing what's happening with the brand right now? It's very rewarding for me, particularly because I know the leadership team and I know their values. And the two people who lead Coach, Todd Kahn, the CEO, and Stuart Vivas, both of whom I recruited, are not only very good people, They feel they're stewards of the brand. They feel they have the temporarily in charge of the brand and that it belongs to the investors. It belongs to the employees. It belongs to the community that uses it. And as stewards of the brand, they have really leaned into the zeitgeist and are very forward-minded.

27:08And for me, seeing Coach reach all-time highs, we're in our ninth decade now. And under my watch, we peaked at$20 billion in market cap. And it took 10 years after I left to get back to 20 and surpass us. So I can honestly say that Coach is truly a legacy brand. It lives in the hearts and minds of consumers and can withstand the ups and downs of times. It will be here in the next century. When it feels like the companion to magic and logic is tradition and innovation. There's a real legacy there and also not a fear of trying new things. Yeah. And understanding your DNA. And so I'm wildly proud of the team and love the product that's coming out.

28:06Since my retirement, I've not been as engaged as I have been since Todd became CEO now six years ago. I'm also just struck, Lou, by the extent to which your principles run through your career, both in terms of decisions you make about where to go work and what to do and how to approach the work. But Ed Koch passes you over for a job that you're passionate about doing in your public service because you're too principled. Sarah Lee is asking you to do things that you just don't think are right. You don't do them. What's the advice you're giving to people who are coming up in their careers about when to tow the company line and do what they're asking you to do and when to stick to your guns?

28:46It depends on where you are on your journey and where you are on Maslow's hierarchy. If you're in a place where you are fortunate enough to have discretion, I encourage people to be mindful of where they are working, where they're looking to work. So I encourage people to look for organizations, whether it's service or product, where you believe in the purpose. Second, to look for a culture that is affirmative and that encourages curiosity and openness, something that is not heavily siloed or hierarchical, where you are able to see people rising quickly if they perform. and look for a boss who you believe can be a mentor.

29:45It doesn't mean in all areas, but where you can learn from and who has reasonably high emotional intelligence. Because if you don't, you could get into a situation where you don't respect your boss. Do your best to find something that has purpose, where you can be authentic. That's so important. And while you may not find your best destiny in that first role, there's a much better likelihood that you will feel fulfillment and you will be able to grow and thrive.

30:23The book is Bagman. It is a riveting and rollicking tale. I encourage everyone to pick it up. Lou, thank you so much for being on Masters of Scale. It's been a joy.