CASE 7 - COACH INC. IN 2012: ITS STRATEGY IN THE “ACCESSIBLE” LUXURY GOODS MARKET GROUP 4 1 Executive summary Coach, Inc. is an upscale American leather goods company known for women’s and men’s handbags, as well as items such as luggage, briefcases, wallets and other accessories (belts, shoes, scarves, umbrella…). The firm was founded in 1941, in a loft in New York as a partnership called the Gail Manufacturing Company. As of July 2, 2011, the company operates in over 20 countries with more than 1,100 retail stores and around 15,000 employees worldwide. Today, Coach Inc. has distribution, product development and quality control operations in the US, France, Italy, Japan, Hong Kong, China and South Korea. From 2001 to 2011, Coach launched a series of activities to take great control over the brand in the Asian markets, and it also accelerated its European expansion with the help of its European joint venture partner in 2011. Continuous innovation and affordable price are two keys for Coach to conduct international business. In addition, owing to its multi-channel retail network, Coach, Inc. has successfully enhanced its brand image all over the world. Luxury goods industry is highly competitive due to a low market- entry barrier. It has experienced ups and downs during the 2000s. And in recent years, the industry has recovered and developed rapidly. More and more luxury goods corporations have expanded their operations in emerging markets through Internet and e-commerce. The future outlook of this industry is optimistic. The competitions in the luxury goods industry are pretty intense. Many competitors of Coach are from France and Italy such as Louis Vuitton, Hermès, Gucci, and Prada. Having superior brand recognitions and strong impacts on global luxury goods market make them become dangerous rivals of Coach, Inc. Even though Coach Inc. has come up with good strategy, it still suffered from harsh competition. The profit margin was still below the level achieved prior to the onset of a slowing economy in 2007 and its share price had experienced a sharp decline during the first six months of 2012. Due to the changing environment and harsher competition, it was not clear whether the company’s recent growth could be sustained and its competitive advantage could hold in the face of new accessible luxury lines launched by such aggressive and successful luxury brands as Michael Kors, Salvatore… Therefore, I recommend that Coach thinks about spending money working on TV commercials, or cooperating with some world-famous jewelry brands to raise the brand awareness. It also needs to consider expanding in China so as to cut down operating expenses and better meet the Chinese customers’ growing needs.
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CASE 7 - COACH INC. IN 2012: ITS STRATEGY IN THE “ACCESSIBLE” LUXURY GOODS MARKET GROUP 4
1
Executive summary
Coach, Inc. is an upscale American leather goods company known for
women’s and men’s handbags, as well as items such as luggage, briefcases,
wallets and other accessories (belts, shoes, scarves, umbrella…). The firm
was founded in 1941, in a loft in New York as a partnership called the Gail
Manufacturing Company. As of July 2, 2011, the company operates in over
20 countries with more than 1,100 retail stores and around 15,000
employees worldwide. Today, Coach Inc. has distribution, product
development and quality control operations in the US, France, Italy, Japan,
Hong Kong, China and South Korea.
From 2001 to 2011, Coach launched a series of activities to take great
control over the brand in the Asian markets, and it also accelerated its
European expansion with the help of its European joint venture partner in
2011. Continuous innovation and affordable price are two keys for Coach
to conduct international business. In addition, owing to its multi-channel
retail network, Coach, Inc. has successfully enhanced its brand image all
over the world.
Luxury goods industry is highly competitive due to a low market-
entry barrier. It has experienced ups and downs during the 2000s. And in
recent years, the industry has recovered and developed rapidly. More and
more luxury goods corporations have expanded their operations in
emerging markets through Internet and e-commerce. The future outlook
of this industry is optimistic.
The competitions in the luxury goods industry are pretty intense.
Many competitors of Coach are from France and Italy such as Louis Vuitton,
Hermès, Gucci, and Prada. Having superior brand recognitions and strong
impacts on global luxury goods market make them become dangerous
rivals of Coach, Inc. Even though Coach Inc. has come up with good
strategy, it still suffered from harsh competition. The profit margin was still
below the level achieved prior to the onset of a slowing economy in 2007
and its share price had experienced a sharp decline during the first six
months of 2012.
Due to the changing environment and harsher competition, it was not
clear whether the company’s recent growth could be sustained and its
competitive advantage could hold in the face of new accessible luxury lines
launched by such aggressive and successful luxury brands as Michael Kors,
Salvatore… Therefore, I recommend that Coach thinks about spending
money working on TV commercials, or cooperating with some world-famous
jewelry brands to raise the brand awareness. It also needs to consider
expanding in China so as to cut down operating expenses and better meet
the Chinese customers’ growing needs.
CASE 7 - COACH INC. IN 2012: ITS STRATEGY IN THE “ACCESSIBLE” LUXURY GOODS MARKET GROUP 4
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Question 1. What are the defining characteristics of the luxury goods
industry? What is the industry like?
Economics define a luxury good as one for which demand increase as
income increase. Luxury goods are said to have high income elasticity of
demand: as people become wealthier, they will buy more and more of the
luxury good. This also means, however, that should there be a decline in
income its demand will drop. Unlike inferior goods, they are related to price
and high-income individuals. A luxury corporation may establish its image
via pricing, exclusivity, limited availability, quality and location. High pricing
gives the product its prestigious nature, and implies high quality. Luxuries
may be services. The hiring of full-time or live-in domestic servants is a
luxury reflecting disparities of income. Some financial services, especially
in some brokerage houses, can be considered luxury services by default
because persons in lower-income brackets generally do not use them.
Luxury brands in general, relied on creative designs, high quality, and
brand reputation to attract customers and build brand loyalty. Price
sensitivity for luxury goods was driven by brand exclusivity, customer-
centric marketing, and to large extent some emotional sense of status and
value. The luxury goods market has been on an upward climb for many
years. The market for luxury goods was divided into three main categories:
haute-couture, traditional luxury, and the growing submarket “accessible
luxury”. At the apex of the market was haute couture with it very high-end
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“custom” product offering that catered to the extremely wealthy. Luxury
goods manufacturers believed diffusion brand’s lower profit margins were
offset by the opportunity for increased sales volume and the growing size
of the accessible luxury market and protected margins on such products by
sourcing production to low-wage countries. Eye-catching utilization of their
products by prominent figures in society leads to increasing demands for
luxury good items and it is a growing industry with the global luxury goods
market growing 9% per year. These consumers buy their products for
satisfaction and to boost their self-esteem rather than for ease or comfort.
All these components blend in the context of a successful business of the
luxury goods.
The industry has performed well, particularly in 2000. In that year,
the world luxury goods market – which includes drinks, fashion, cosmetics,
fragrances, watches, jewelry, luggage, handbags. The luxury-goods
business needs people to feel good about spending money. The luxury
goods industry is global in scope. In 2005, Italy (27%), Replica Armani
Swiss France (22%), Switzerland (19%), US (14%) controlled a combined
82% of the worldwide luxury goods industry sales. In 2006, the industry
was expected to grow by 7%. Much of this growth can be attributed to
increasing income and wealth in developing European countries, China, and
changes in consumer buying habits. Additionally, the entry of big box stores
into the distribution chain has opened the market to middle-income
consumers, who earn substantially less that the $300,000 household.
The luxury goods industry is under drastic change and at different
levels. This has an impact on Coach's business because they have two
different types of stores.
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Two different types of stores of Coach
On one hand they have factory stores who sell at a discounted price and on
the other hand they have full-priced stores or flagship stores which cater
to higher end consumers. While the factory stores are being hit by the
American financial crisis due to the lack of disposable income for the middle
class, full-price stores or flagship stores have brighter future with an
increasing number of millionaires.
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Question 2. What is competition like in the luxury goods industry?
What competitive forces seem to have the greatest effect on
industry attractiveness? What are the competitive weapons that
rivals are using to try to outmaneuver one another in the
marketplace? Is the pace of rivalry quickening and becoming more
intense? Why or why not?
The competition in the luxury goods is very strong. The financial crisis
(2007-2009) had a great effect on the luxury goods industry.
This led to a huge decline in sale in United States, Japan and Europe.
Therefore, the competition in old market and especially emerging market
is extremely intensive. In the emerging market (China, India and Southeast
Asia), from 2% of industry sales in 2001, they had 20% of industry sale in
2011. Thousands of companies compete in this fields, which are mainly
from Italy, France, Swiss and United states. According to Merrill Lynch, the
most valuable luxury brands in terms of annual revenues in 2011 were
Louis Vuitton, Gucci, Hermes and Cartier.
The competition in the luxury goods industry is extremely intense due
to a low market-entry barrier, that is, not all the corporations in this
industry can gain great achievements. Many companies had to withdraw
from the market because of being short of effective follow-up financial
support. Nowadays, this industry provides services for two types of clients:
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to the rational consumers, some companies choose to offer affordable
luxury goods which are classic styles and won’t be outdated for a long time;
and to the fashion-conscious customers, plenty of firms try to supply
higher-priced products whose designs are keeping up with the newest
fashion trends. Luxury goods industry has experienced ups and downs
during the 2000s. The world’s top brands such as Louis Vuitton, Gucci, and
Hermes all generated benefits of more than 100% at the end of 1999. In
2000, the industry continued performing well in the global financial
markets. However, the changes took place in the following years. Luxury
goods industry was strongly impacted by the adverse effects of wars,
diseases, and global economic recession. Fortunately, it soon started
recovering with the support of its loyal customers who were eager to buy
luxuries to demonstrate their wealth and status. Recently, with the rapid
development of Internet and e-commerce, more and more luxury goods
corporations have successfully marketed their products in emerging
markets. And they will constantly optimize their goods and services to meet
the international customers’ higher demands in the future. So on the basis
of above analysis, luxury goods industry is promising.
Coach Inc. is the biggest name of luxury goods in the United States.
Coach’s market share in the U.S. handbags market fell from 19% to 17.5%
between 2011 and 2012. This share was mostly grabbed by competitor
Michael Kors, whose market share has risen from 4.5% to 7% in the same
period. This discouraging trend hasn’t been reversed in the past year as
comparable store sales fell by approximately 15% in the holiday quarter.
This drop in sales was due to lower traffic in Coach’s stores as shoppers
were turned off by the lack of online flash sales over the quarter. Sales
have now fallen for the third straight quarter in succession and
management expects sales to fall further in the second half of the fiscal
year. The bright spots for Coach in this quarter were sales in China, which
were up by 25%, and the sales of handbags priced above $400, in North
America. The disappointing thing for the company is that these high-priced
handbags only comprise about a fifth of their handbag products and this
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means that the company is losing out to competitors on nearly 80% of their
product lines in this division.
The main competitor of Coach in the US is Michael Kors, having grown
its revenues between 58%
and 67% in the last three
years, posted a revenue
growth of 59% in the
holiday quarter. This
growth is an ominous sign
for Coach as Michael Kors
hasn’t reached its full store
capacity yet. The store
count for Michael Kors’ stood at 284 by the end of the previous quarter or
approximately 70% of its stated long term target of 400 stores. Without
having reached its full store capacity yet, it is possible that Michael Kors
isn’t meeting the full demand for its products and there is still potential
room for growth. This is a challenging scenario for Coach.
One of the competitive forces that have a great effect on industry
attractiveness is the threat of new entrants and how hard it is to build up
a brand name that can compete with the likes of Coach, Louis Vuitton, Dolce
& Gabbana, and Versace. It takes deep financial pockets and great
commitment to create luxury image with well-known brand and superior
quality. Thus making it costly for new entrants to gain exposure and market
share. Luxury items are known for their superior quality and to some
people, the status that they carry. New entrants must build this status from
the ground up, which can prove difficult without sufficient resources. Even
if new competitors enter the luxury goods market with high quality
products, they cannot compete with established fashion brands easily.
Another competitive force can be the bargaining power with
suppliers. A high end leather producer would like to be linked to the
luxurious brand names of Coach and Louis Vuitton. The power industry
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members have over suppliers is in favor of the globally known luxury brand
which is known to produce quality goods.
Competitors use many weapons to beat the competitors in the luxury
goods industry. The competitive weapons that rivals are using to try to
outmaneuver one another in the marketplace mostly lie in the mode of
pricing and offering economy levels of products. Higher quality is a must
use weapon in the luxury industry.
Higher quality is one of the most important weapons
First is to hire celebrities to build a stronger brand image to help sell
products and obtain a higher status. For instance Louis Vuitton, who utilizes
celebrities such as Jennifer Lopez, Uma Thurman, and Naomi Campbell to
promote its brand image, Or other brand name, Gucci, use Camilla Belle,
Salma Hayes or Brad Pitt for advertising their name. Introducing new
fashion trends and product innovation is another weapon used in the luxury
industry. Big brands such as Hermes always held a fashion show annually
in France to promote their late trends, and many people follow this trend
to feel more confident and fashionable. But perhaps the most overlooked
weapon is customer service, where some industry members are failing.
According to the Luxury Institute, more than half of luxury store shoppers
are unhappy with their shopping experience and that could lead to losing
customers. Providing superior customer service like companies such as
Giorgio Armani, who topped the Luxury Institute's research, can not only
lead to customer satisfaction but brand loyalty as well.
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The pace of rivalry quickening and becoming more intense nowadays.
No companies want to lose their market shares. All of them have the
impressive strategy to develop and pass their competitors. Moreover, the
globalization makes a chance for the product can easily export and import,
therefore they can reach to emerging market with new customers, such as
China, Southeast Asia or India. Moreover, the handbag market
encompasses dynamic players and an expanding consumer base, which is
expected to flourish due to increasing demand from emerging markets and
strong performances by the international luxury brands. It is true that the
rivalry is quickening and becoming more intense because not only the
differences between the companies are becoming less but also because the
market is expanding by a great pace and it is important to engulf a better
part of the market share to maintain sustainability.
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Question 3. How is the market for luxury handbags and leather
accessories changing? What are the underlying drivers of change
and how might those driving forces change the industry?
The market for the luxury handbags and leather accessories is highly
competitive. Recently, Coach Inc. is the market leader in the US market.
But the market for luxury handbags and leather accessories is now
changing rapidly because of many reasons. Firstly, the middle class is
expanding and become younger and they are gaining disposable income to
spend on luxury goods with different agendas than previous generations.
Secondly, they also have different perspective on change, financial smarts,
and have a very strong opinion and style on dressing up. Industry members
need to account for the differences between the two, specifically how these
differences affect their luxury goods buying habits. Finally, there has been
the change in generations. The change from Generation X to Generation Y
consumers has arrived and they are gaining disposable income to spend on
luxury goods with different agendas than previous generations.
Coach was founded in 1941 and began producing ladies handbags
with simple and extremely resilient to wear and tear, but over the next 40
years, Coach was able to grow at a steady rate by setting prices about 50
percent lower than those of more luxurious brands, adding new models and
establishing accounts with retailers such as Bloomingdale’s and Saks Fifth
Avenue. In 1996, Reed Krakoff – a top Tommy Hilfiger designer as a
Coach’s new creative director believed new products should be based upon
market research rather than designers’ instincts about what would sell, so
the design process launched new collections every month to be satisfy with
customers. By 2000, the changes to Coach’s strategy and operations built
the brand into a sizeable lead in the “accessible luxury” segment of the
leather handbags and accessories industry and made it a solid performer in
Sara Lee’s business lineup. Therefore, the market for luxury handbags and
leather accessories has changed through time from the beginning to now,
also the changing has depended on both the favor of customers and the
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difference from existing handbags to be unique ladies Coach’s handbags
and new creative monthly collections.
The value of the global personal luxury goods market was reported
at $191 billion for 2011 by Bain & Co. up 10% from the previous year. In
the same report luxury leather goods are estimated at $28 billion for 2011.
Luxury leather goods are a rapidly growing category, with a 16% growth
from 2010 to 2011. The leather goods category is at times also grouped
with luggage, with bags, wallets and purses accounting for 57.1% of the
global luggage and leather. The market for luxury handbags is rapidly
growing in the U.S., which has helped Coach a great deal, seeing that 36%
of its revenues come from handbags as seeing in Exhibit 4 (C-77). From
2002 to 2006 the overall market size for U.S. handbags grew doubled and
has been a main contributor for Coach's growth personally. Some analyst
believe that this can be linked to consumers trading up from brands such
as Banana Republic and DKNY, while others link it to the rise in wealth.
The world is now full of information. This gives consumers some
bargaining leverage. With the internet and other technological advances,
consumers are well informed and can know the latest fashion trends at the
click of a button. A research done in 2007, surveyed 7,705 college students
in the US and their findings were that 97% owned a computer, 94% owned
cell phones, 34% use websites as primary sources for news, and 28% write
blogs. This means that a large majority of the new generation is heavily
entrenched in technology and able to do extensive research on their
products before making purchases. They not only have internet search
engines like Google or Yahoo, but they have each other to communicate
from an end consumer's perspective. There are even websites set up to talk
about the experience when buying luxury goods found at Style.com.
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Style.com - Leading US fashion website
The demand for customer service is also increasing. When paying a
lot of money, they want superior customer service, not the average one.
The customers pay a high price, whether it is for quality or status, they
expect to get their money's worth. Because more and more people demand
luxury goods, they demand better customer service along with it. With the
demand for customer service becoming more apparent, industry members
can expect a more intense competition in regards to customer service to
satisfy this demand.
Also, changing societal concerns, attitudes, and lifestyles represents
another industry driving force for a number of reasons. First, changing
preferences by middle class consumers towards luxury goods inevitably
created a new segment in accessible luxury goods. Without the changes in
the way these consumers thought about the brands and wanting to own
something more elite without having an elite price tag, Coach (among other
companies) was able to capitalize on this opportunity. With new accessories
coming out in all shapes and sizes every day, it is absolutely essential that
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firms keep in tune with changes in the external environment – particularly
with one’s consumers.
Last, but not least, there is an increasing demand on services on
customers in the luxury goods industry so that customers are willing to pay
more money to receive good services with high prices, whether it is for
quality or status.
There are many other drivers of the luxury goods market as
mentioned below:
Tourists are changing their consumption habits, seeking out new
destinations (e.g., Dubai, South East Asia, Australia) and showing
more savvy in the items they purchase
Each year, more "HENRYs" (High Earnings, Not Rich Yet) become
potential customers, with ten times as many HENRYs as ultra-affluent
individuals
The rise of the middle class in emerging countries is polarizing the
competitive arena, becoming a "new baby boom sized generation" for
luxury brands to target.
Absolute luxury items (consisting of high-end products with no logo,
highest quality materials, and exquisite craftsmanship) lead the way
Despite some recovery of spending on apparel, leather goods and
other accessories will continue growing faster than other categories
Watch consumption has sharply decelerated as retailers de-stock and
as Chinese luxury consumers slow their purchasing
Cosmetics are slowing down in mature markets, while still delivering
growth in emerging markets
High consumer confidence among the affluent, increased store
openings in American cities, and intensive investment in linking
physical and digital shopping are all fueling United States sales
growth
The impact of 12 percent sales growth across Central and South
America (notably Brazil and Mexico) will result in overall growth of
five to seven percent in the Americas
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In Asia, growth in China is stabilizing to an expected seven percent,
while South East Asia will experience 20 percent growth driven by a
wave of new store openings, and increasing strength and relevance
of second-tier markets
Japan returns to a strong growth story of five percent as the country's
monetary policy depreciates the yen and pushes local consumption
Europe remains a challenge for the industry; as tourism slows, as
tourists spend less per visit, and as Europeans, especially in southern