Todd Cody Eliason

B483

Kate Spade Case-based Essay

Situation Analysis

Kate Spade is a designer handbag company founded by Katy Brosnahan, Andy Spade, Elyce

Cox, and Pamela Bell. The company started in 1992 through bootstrapping and in 1997 its sales

grew to over $11 million. Already considered as a successful producer and retailer of luxury

handbags and accessories, the founders are now faced with the challenges of growth and

expansion. They are now considering whether they are apt to take progress further and become

one of the leading bag brands of the world. With the conservative type of business approach that

the founders are using, relying on their resources for the financial and human resources aspects

of their business, they are unsure whether they are willing to move on to the next potential phase

of their business.

Questions

What are the reasons why Kate Spade is successful?

In the context of OCPD (opportunity, context, people, deal) framework for entrepreneurial

success, Kate Spade had somewhat taken advantage of these four aspects to reach success. In

terms of people, the four key people who were there when the business started did their job well.

They contributed their time and talents, even sacrificing some comforts for the business to run.

The company also partnered with reliable suppliers and distribution channels which made the

business run smoothly.

In terms of opportunities, Kate Spade chose the stores carefully that would sell their products.

They made sure that the first bags they sold would land on the business place that they wanted

for the next decades of their business path. They wanted to belong to in-between upper-moderate

and luxury bags. Meaning, they only chose those opportunities that would generate them profit

while getting them on the right spot among the designer bags in the market.

When it comes to context, the period when Kate Spade started was the time when fashion and

accessory were becoming a trend. The style of the Kate Spade bags appealed to the customers

who were looking for designer bags that are of luxury look but not as expensive as the branded

bags. This market development made the business a success.

The last aspect was another reason why Kate Spade became successful. They were good at

making deals at the onset of their business. Kate and Andy were able to tag along two other

potential people into their business with the agreement that made them work hard for the

business. They also made good relations with their suppliers and their retailers.

These four aspects worked harmoniously for the Kate Spade business, enabling them to achieve

their business success.

What will it take Kate Spade to achieve its goal of $100M in revenues?

It is possible for Kate Spade to achieve a revenue of $100 M if they would have a more

substantial investment for more business growth. If they can acquire a larger fund, they can open

up more retail stores locally and internationally, hire more employees, have their manufacturing

base, and diversify their products.

What value would you place on Kate Spade at the time of the case? Hint: Use the data in exhibit

3 for comparable companies to estimate the value of Kate Spade.

At the time of the case, Kate Spade would have a market value of $13.5 million. Her revenues

and price offering values are similar to Retrospecttiva. It has the lowest revenue ($15.1 million)

and offer price ($6 million) among the companies listed in exhibit 3.

Evaluate each of the alternatives the company is considering. It might help you to create a

spreadsheet that includes the following for each:

The following table describes the four alternatives the company is considering:

Pre-money Money Post-

Description of the
Options valuation invested money Specific terms
investor/buyer
valuation
- wanted 40% minority
share
- willing to give
Investment group professional
which had guidance for a fee
$24 $16 $40
A financed designer - will take Kate Spade
million million million
companies in the to the public in the
past future
- will place
experienced CEO

An accessories - wanted 80% of the

business with $245 company in return
million revenues $10 $40 $50 for stocks
B
which had been in million million million - offered access to
the industry for 15 business people and
years peers
- wanted 100%
ownership
Publicly-owned
- willing to pay 30%
large fashion house $49 $21 $70
C upfront
with multiple million million million
- remaining 70% to be
brands
paid in an “earn-out”
provision
- wanted 60% majority
High-end specialty $24 $36 $60 ownership
D
retailer million million million - will use “put and
take” rights
Looking at these alternatives, each has its pros and cons.

Options Pros Cons

- on target business
operational plan - Not aggressive to
A
- access to experienced anticipate future growth
CEO
- Need care on the trade
not looking down on
- Marketing-driven
Kate Spade through this
B - Humble and conservative
merging
business approach
- Have to look at the long-
term run
- Good at branding and - Have to make sure that
distribution association with this
- Headquarters close to company will preserve
New York where Kate Kate Spade’s preferred
C
Spade is located position and price point.
- Had good relationship - Some questions on the
with fabric suppliers and “earn out”
fashion retailers - Seems unfair
- Some of their
competitors where Kate
Spade’s distribution
channels
- Going after the high-end
- Concern on the amount
designers instead of the
D of control (they had their
bridge or lower lines
own private label)
- Concern on not becoming
too corporate
- Put and call clause is
disagreeable

Which, if any, of the options would you recommend the company accept/pursue? Why? What are

the company's alternatives?

Among the options, the first one is more recommendable. The $40 million post-money valuation

is an adequate amount for Kate Spade founders. What is more critical with the first option was

the availability of an individual who would act as the company’s CEO. His experience in the

industry where a former $50 million company grew to become a $700 million one is what Kate
Spade needed at this time. As what Andy Spade mentioned, “More than the money, what we

really wanted was the person.” The 40% minority share will also give Kate the main control of

the bags’ design and other manufacturing standards that they have already set and which their

customers have loved.

Company Goals

Kate Spade is considering these alternatives to attain the following: company growth where more

stores can be put up, and more products can be manufactured and sold, more partnerships where

the company’s standards and vision will not be compromised, increase revenue to $100 million.

Steps to Undertake

For Kate Spade to achieve these goals, Kate Spade should do the following:

First, accept an investment offer where the additional funding can be used for business growth

and expansion. If Kate Spade would consider option A, the investment includes a new CEO who

would also help in the company’s progress. Then, the company’s business operations can be

handed over to the new CEO so that the founders can focus on their previous roles in the

business. Afterward, when the business operations are running smoothly, the company can put

up new stores and make partnerships with other designer bag retail stores for more revenues. The

last step would be researching product diversification which could provide more business

opportunities for the company.

Other Considerations

Although the new investment with the new CEO can help Kate Spade attain the $100 million

revenue, the new personality might not always be in line with the company’s vision. There might
also be external factors that can ruin the growth plans. However, with the type of business start-

up they had and the conservative business approach they used to get millions of sales on their

initial years, Kate Spade can go through these challenges and be as successful as other brand

names in the designer bag industry.