Coach Inc. - Is Its Adventure in Luxury Handbags Sustainable?

Table of Contents

Executive Summary

List of Abbreviations

List of Figures

1. History of Coach Inc

2. Luxury Good Industry
2.1. Characteristics
2.2. Competition
2.3. Luxury Handbags and Leather Accessories Market and Key Success Factors

3. Coach Inc.’s Competing Strategy

4. Coach Inc. SWOT-Analysis

5. Recommendation

ITM Checklist

References

Executive Summary

In 1941 Miles Cahn, a leather artisan, started producing women’s luxury handbags in a loft located in Manhattan, New York, which were simple in style but resilient and suitable for daily use. After 40 years in business the company named Coach was able to grow continuously by setting prices 50 percent lower than the competition and introducing new models every year. Coach established over the years accounts with retailers such as Bloomingdale’s and Saks Fifth Avenue for instance and achieved extraordinary growth rates. In 1985 the company was acquired by the Sara Lee Corporation and went thru a initial public offering in 2000.

In the luxury goods industry where market characteristic tends to be highly sensitive to economic up- and downturns, Coach had the ability to establish and maintain brand loyalty and reputation through various strategies. Coach’s immense success has been largely attributable to its focus on quality and stylish products with respect to consumer needs derived from their detailed marketing research. Its “affordable luxury goods” price strategy also assist to drive growth by attracting a wide range of consumers, while at the same time, correspond to changes in middle-income consumer behavior and lifestyle.

The Coach Inc. case study analysis the success of Coach and the luxury good industry in general. Further the external environment and internal circumstances as well as the competitive situation of Coach are discussed. The assignment concludes with recommendations for further success of the company and the ITM checklist.

List of Abbreviations

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List of Figures

Figure 1: Components of a Companies Macroenvironment (Thompson, 2008, p.51)

Figure 2: Global Distribution of Luxury Good Sales in 2005 (Thompson, 2008, p. C-103)

Figure 3: Five forces model according Porter

Figure 4: Mindmap of Coach's KSFs

Figure 5: Coach's Net Sales, Gross Profit and Net Income from 1999 to 2006 in million USD (Thompson, 2008, p. C-102)

Figure 6: Performance of Coach's Stock Price vs. the S&P 500 Index (Thompson, 2008, p. C-104)

Figure 7: Coach SWOT Analysis

1. History of Coach Inc.

In 1941, Coach Inc. was founded by Miles Cahn, a leather artisan, in a loft located in Manhattan, New York, garment district (Coach Inc., 23.01.2011). In 1960s the family-run business started manufacturing handbags and introduced their first collection which consisted of 12 different styled bags. The company was acquired in 1985 by the Sara Lee Corporation, a diversified food and consumer goods producer, which decided fifteen years later, in 2000, to spin off Coach through an IPO, an initial public offering (Wikinvest – Coach Inc., 2011).

After the acquisition in 1985, the Sara Lee Corporation followed the Coach’s strategy and operations but the company performance began to decline in the 1990s as consumer shifted preference to more stylish French and Italian handbags such as Gucci, Prada or Louis Vuitton. In 1996 Reed Krakoff, a former Tommy Hilfiger designer, became the new creative director of Coach who believed that new products should be based on detailed market research rather than on designer’s instincts (Coach Inc., 23.01.2011). The company conducted excessive research and held focus groups to ask customers about styling, comfort, and functional preferences. The outcome was that customers look for an edgier styling, softer leathers and leather-trimmed fabric handbags. These prototypes were tested in selected Coach stores for 6 months before announcing their official launch. This process allowed Coach to launch a new collection every month instead of twice a year (Coach Inc., 23.01.2011). The Coach stores were redesigned to complement the contemporary new designs and the appearance of the factory stores improved. The factory stores carry test models, discontinued models and special lines that sold with discount rates from 15 to 50 percent. The discounts were possible because of the company’s policy to outsource production to 40 suppliers in 15 countries (Thompson, 2008 p. C-101). The outsourcing agreements allowed coach to maintain sizeable pricing advantage relative to other luxury brands and enabled Coach to appeal to consumers who would not normally consider luxury brands, while the quality and styling of its products were sufficient to satisfy traditional luxury consumers.

2. Luxury Good Industry

The luxury goods industry (LGI) acts in a macroenvironment were different factors and forces are impacting a companies strategy and are defining a companies immediate industry and competitive environment (Thompson, 2008, p. 51).

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Figure 1: Components of a Companies Macroenvironment (Thompson, 2008, p.51)

2.1. Characteristics

The LGI is based on exclusiveness defined by the mostly high quality but always the high price of the product and sometimes limited availability on the market. The concept of luxury has been present in various forms since the beginning of civilization. Its role was just as important in ancient western and eastern empires as it is in modern societies. With the clear differences between social classes in earlier civilizations, the consumption of luxury was restricted to the upper class which means the definition of luxury was rather obvious. Whatever the poor cannot have and the elite can was identified as luxury (Paurav Shukla, 12.04.2011, What is luxury?).

The two probably most prominent characteristics of a luxury product are on the one hand side to show wealth and on the other hand to express oneself. The individual objective behind purchasing a luxury product may differ from dissipation to self profiling or simply of owning a status symbol and or brand recognition. The growth of the LGI is mainly based on worldwide increasing wealth but also on the economic expansion and situation of certain regions. The luxury industry is present in nearly any product and service category on the market and is expected to grow continuously. In 2006 for example, the global LGI was expected to grow from 105 billion USD in 2005 by 7 percent to reach 112 billion USD (Thompson, 2008, p. C-103). The 105 billion USD in 2005 were globally distributed as illustrated in Figure 2.

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Figure 2: Global Distribution of Luxury Good Sales in 2005 (Thompson, 2008, p. C-103)

2.2. Competition

The LGI is evolving and more and more companies are trying to be present and to become a major player. On the one hand side emerging markets in Asia or Eastern Europe are rising the demand for luxury products but also the lifestyle factor and prosperity in existing markets are raising it continuously. For the upcoming markets a annual growth rate of 10 percent is expected whereas the Chinese market is to be predicted to generate 24 percent of the global revenue in 2014, hence to become the world largest market for luxury goods (Thompson, 2008, p. C-105). In addition, the number of worldwide millionaires^[1]exceeded 10 million in 2009 and will grow further according the World Wealth Report 2010^[2]and will extend the market size even further.

A way to describe the competition in the LGI in detail is to apply the „Five-Forces“ model according Porter as shown in Figure 3 by answering the questions accordingly.

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Figure 3: Five forces model according Porter^[3]

The five forces according Porter are:

1) Industry competitors
2) Threats of new entrants
3) Bargaining power of suppliers
4) Threats of substitution
5) Bargaining power of buyers

Summarizing the analysis, the competition in this market is growing steadily and basically two factors have to be considered in this regards. Firstly, the well known luxury brands such as Versace, Louis Vuitton, Dior or Prade, just to name a few of them, are fighting for this market to increase or at least keep their market share and to maintain sustainability. Secondly, the number of new and “economy”, meaning affordable luxury brands will grow and address this market as well which, mainly with the later ones, tackle new and additional customers but also the existing clientele and hence boost the competition in this market even further.

In any case, new sales and production strategies are going to be introduced such as retail and factory stores or manufacturing in low cost countries to address this prospering markets and to cut down the costs of goods sold and to be more attractive in terms of sales prices. New marketing strategies, e.g. using extensively the internet among other methods, to introduce the latest products and catalogues and offering online shopping will further increase the brand recognition and raise the number of potential customers. Furthermore, introducing economy level luxury products in addition and offering the goods in accessible and convenient locations like for instance at Wal-Mart will increase a companies competitiveness even further.

2.3. Luxury Handbags and Leather Accessories Market and Key Success Factors

Based on the fact that buying behaviors have changed over the last decades the market for luxury handbags and leather accessories has changed as well. Nowadays consumers are spending more money on luxury goods than in the past as the basic average income per household has increasing and consequently their buying power. In parallel, new buying habits, such as aiming for status symbols expressing ones wealth, have been established and further developed in the last couple of years and are now part of the lifestyle and a significant driving force for this market. Especially the new lifestyle triggered some preferences for French and Italian brands such as Gucci, Prada, Louis Vuitton or Dolce & Gabbana in the mid 1990s (Thompson, 2008, p. C-101) supported by the women’s soft spot to complete their wardrobe with handbags the same way they use shoes (Thompson, 2008, p. C-107).

[...]

^[1]1 million USD or more

^[2]http://www.capgemini.com/insights-and-resources/by-publication/world-wealth-report-2010/

^[3]http://business-fundas.com/wp-content/uploads/2011/03/Porter-5-forces-model.jpg