How Coach scaled from a single store into a global icon

Introduction

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2:15He said, well, I have a friend from childhood who has a small pocket company called Coach.

2:29It's $6 million 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.

3:02I mean, titles are free. Isn't that great?

Lou Frankfurt Interview

3:03Titles 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. When 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.

3:39Lou, 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. And 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.

4:15And 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. How 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.

4:51And 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 Head Start programs in 1976, when it was the poster child for inefficiency and corruption, people thought of me.

5:25What attracted you to the challenge of reforming these massive and massively important programs? I really believe in daycare and Head Start 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 tenth. It doesn't matter. We need to welcome them, and we need to create opportunities.

5:56And 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. So they employed unqualified relatives. They, in many instances, sadly, were also corrupt.

6:28And it made headlines. So this was a turnaround. I mean, really, it was a turnaround. It was a turnaround. Right. And so you're coming and 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.

7:04I 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.

7:45Ed 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. And 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.

8:18And 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.

8:54Only 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.

Coach Company

9:28After 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. And 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.

10:01He 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. I mean, titles are free, isn't that great? Titles are free. What I did in considering Coach was to do a deep search as to what is Coach.

10:38And I went to the end user. And what I learned in my interviewing process where I pretended to be a Business Week 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 Business Week, I would have access to most people.

11:16Divisional managers, GMs, maybe even presidents. 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.

11:51So 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. So 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.

12:30And 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. And when I looked at Louis Vuitton as a luxury brand, I thought to myself that Coach could become one day a democratized luxury brand.

13:05And rather than being accessible to the top 1% 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.

13:35So in my mind's eye, I saw a growing audience of a rapidly growing middle-class population. With 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.

14:06The 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.

14:38Why 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.

15:20So people went into a bespoke environment. There 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.

15:52I 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. So 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. It was – we ultimately did $10,000 a square foot in that space. I mean, we did $4,000, $5 million. I mean, we did $4,000, $5 million. I mean, that's a Tiffany's number.

16:23Insane. I mean, that's a ridiculous number. Even today. So you launched the Madison Avenue store. It's doing a million dollars in a business that was only doing $6 million top line two years earlier. What's the next step in the evolution of Coach? Well, by the spring of 1984, we were $20 million. 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.

16:54And 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. But 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.

17:26What 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? Well, along the way, they unsuccessfully tried to use the power of Coach to help get brands into locations where they wanted open shops.

18:01I 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.

18:32And so they came to me to push me to do that. And I, of course, declined. I was prepared to have them terminate me rather than do things that made no sense. I was summarizing many discussions over time, but there was a handshake between me and the CEO, chairman of Sarah 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.

19:04Okay. 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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20:56Hey, listeners, Bob here. If you listen to Rapid Response on Masters of Scale, you may be missing half the show. Because every Friday, we release a second Rapid Response exclusively in the Rapid Response feed. The guests and topics are just as compelling and timely, from Ford's CEO to NASA's administrator to the lessons from The Devil Wears Prada. It takes about 10 seconds to find. Just search Rapid Response wherever you listen to podcasts and hit follow to make sure you never miss an episode.

21:30I hope to see you there.

21:34Welcome back to Masters of 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?

Scaling Coach

21:49First, 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.

22:20And 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.

22:59Well, 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. And 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.

23:30On bags in Japan, they spent at the time six times as much as the average American spent. And why Japan has an X-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. I 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.

24:10And 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.

Leadership Lessons

24:29One of the things that strikes me, you've 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. Of course. Well, you say, of course, but there are a lot of people out there who will tell 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.

24:59I 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. And another aspect of magic is being adaptable and nimble.

25:29And 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.

26:02At 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. Yes. Right? Rather 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.

26:44So 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. And so many companies, whether it's American Express 30 years ago under Ken Chenault or Disney, they have to be reinvented. You've got to throw it up in the air.

27:17And it's not a surprise to either of us. You know, when you talk about a founder, sometimes the second generation built 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.

27:48What 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're 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.

28:35And as stewards of the brand, they have really leaned into the zeitgeist and are very forward-minded. And 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.

29:10It 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. Well, 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.

29:41Since 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 the 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.

30:11What'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? It 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.

30:42So 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.

31:13And look for a boss who you believe can be a mentor, it 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.

31:44And 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.

31:58The 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.

32:12It's been a joy. It's been a joy. It's been a joy. It's been a joy. You are a joy. Masters of Scale is a wait what original. Our executive producer is Eve Treau. Senior supervising producer is Tricia Bobita. Associate producer is Masha Makatonina. Video editor is Noah Wolstein. Senior talent executive is Stephanie Stern. Mixing and mastering by the audio boys Aaron Bestinelli and Brian Pugh. Original music by the legendary Ryan Holiday. Our head of podcast is Leetal Molad.

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