COACH Inc.

Case Summary

Coach is one of the well-known luxury brand for women’s and men’s bags, leather accessories,
leather apparel items, business cases, footwear, jewerly, travel bags, watches, and fragrances.
Company was found in New York in 1941 for a leather products, and now already become a world-
wide company. Over 40 years, Coach was able to grow at a steady rate by setting prices about 50
percent lower than those of more luxurious brands.

By the mid-1990s, the company’s performance began to decline because consumer preference more
intense to stylish French and Italian designer brands such as Gucci, Prada, Louis Vuitton, Dolce &
Gabbana, and Ferragamo. In 1996, Reed Krakoff, a top designer from Tommy Hilfiger is been hired as
a Coach’s new creative director. Krakoff focus to research about what consumers looking for a
product they prefer. Also, under his directions Coach change the period of launch new product from
two collections only per year into every month.

2007-2009, the global luxury goods retail market was significantly affected by economic slowdown
and financial crisis. Most income categories cut back discreationary purchases. However, while sales
decline in the United States, Japan, and Europe, emerging markets and especially China became a
key growth driver for the industry from 2006-2009. Asia became a very attractive market for the
luxury goods nowadays, because economic growth especially China and Japan are quite high.

Emerging markets, especially in India and China were expected to provide a major boost to the
luxury goods market because rapidly increasing wealth levels and standard of living gains. Luxury
goods spending in China was expected to overtake that of Japan and the United States, making
China the world’s largest market for luxury goods by 2015. One of the threat from this market is
counterfreiting, and about two-thirds of all counterfreit goods were produced by manufacturers in
China and Asian countries.

Coach offered distinctive, easily recognizable luxury products that were extremely well made and
provided excellent value. Focus to positioned its brand in the lower part of the accessible or
affordable luxury pyramid. This particular market provides a larger opportunity relative to that of
more exclusive brands. Coach had focused on sales in China, Japan, and the United States because
these three countries led global luxury goods spending.

Coach tries for sustainable growth with many strategy for attacking this market. Strategy from
flexible sourcing with vendors in China, Vietnam, and India. Approach to differentiation product line
based on research to defined product trends, selections, and consumer desires. Retail distribution
channels involved direct to consumer channels and indirect sales.

All of the worlds major luxury brands were racing to establish a retail presence and brand loyalty in
China, India, and any other developing countries that would soon account for a large percentage of
industry sales. In addition to market related threats, Coach management also needed to consider
how best to boost its profit margins to levels achieved in previous years and stabilize its stock price,
which fell by nearly $20 during the first six months of 2012.
Question 1
.What are the defining characteristics of the luxury goods industry? What is the industry like?

Luxury goods are different in opposite way if we compare with the normal goods. Basicly, luxury
goods defined by high price tag, high quality, and aesthetic. Luxury goods consumed by high level of
customer which mean when people become wealthier then they may afford to buy more luxury
goods. It means, this industry related to financial economic situation. Level of income from
individual related to demand, or it can be described as income elasticity of demand. Measures the
responsiveness of the demand for a good to a change in the income of the people demanding the
good.

Demand for the three goods, shown here, all respond very differently to the same change in income,
Y to Y1. Demand for the normal good increases from Q to Q1, demand for the luxury good rises
much more, to Q2, and demand for the inferior good falls from Q to Q3. (Economicsonline.co.uk)

There are three dominant trend for global luxury goods market :

 Globalization, result of the increased availibility of these goods, additional luxury brands,
and an increase in tourism.
 Consolidation, involves the growth of big companies and ownership of brands across many
segments of luxury products.
 Diversifications, due to the difficulty of making a profit in the mass consumer goods market.

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 a large extent some emotional sense of status and value. Market
of luxury goods are divided into three main categories: haute cuture which is market with a very
high-end “custom” product offering that cattered to extremely wealthy, traditional luxury, accessible
luxury.

Competition level among luxury goods brand are very competitive. Every company try to create and
set up a new trend for every seasons. This segment are low market entry barrier, possible for a new
brand can to come up. And its quite dangerous if they have a good differentiation than any other
brand. Every brand have an identity from their brand image to create a value for customer
perspective. Brand identity will give a prestige perspective for a customer which is one of the
important for selling strategic.

For simplification, market for luxury goods can be identified by high income consumer, followed by
economic growth in relation of demand, local culture, specific place for store location, tren in
international fashion, high product quality, and also there is possible of counterfeiting product.

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 luxury goods industry is highly affected by the financial crisis that occured from
year 2007 until 2009, resulting in the decline of sale in big countries, such as, the United States,
Japan and European countries. Thus, increasing the competition in old and emerging market.
As an illustration, the increase of industry sale has occured in the emerging market of China, India
and Southeast Asia, where the industry sales of 2% in 2001 has increased to 20% of industry sale in
2011. Participating in the competition at that time, were big companies originating from France, the
United States, Swiss and Italy, such as Louis Vuitton, Gucci, Hermes and Cartier.
A low barrier to the market-entry was a reason for the intense competition in the luxury goods
industry, as not all companies are able to attain prestigious achievements. This is caused due to the
lack of effective follow-up financial support. The luxury goods industry, nowadays,is perceptive on
how they provide their services and differentiate the types of clients.For those client that are
rational consumers, several companies offer affordable luxury goods with classic and long-lasting
styles; and for fashion-conscious customers, they are offered with higher-priced products that are
very dependant to thenewest fashion trends.
Luxury goods industry is indeed a promising business. During the 2000s, the luxury goods industry
has experienced ups and downs in generating benefit and in its performance, and further,the
industry was strongly and adversely impacted by wars, diseases, and global economic recession.
However, loyal customers, who are keen to demonstrate their wealth and status, further
contributed in the recovery of the industry. In the following years, the development of internet
services contributed in the successful marketing of their products in emerging markets. In the future,
goods and services of the luxury goods industry are expected to be optimized so as to meet the
international customers’ higher demands.
One of the biggest companies engaging in the business of luxury goods in the United States is Coach
Inc. However, Coach Inc. had experienced market fall for the sale of its handbags, where it fell from
19% to 17.5% between 2011 and 2012. This drop was due to, among others, 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. Although Coach had
gained sales up by 25% in Chinaand the sales of handbags priced above $400 in North
America,however, it was not significant for the company and Coach continues losing out to
competitors on nearly 80% of their product lines in this division.
During the falldowns of Coach, the share was mostly grabbed by its competitor in the United States,
Michael Kors, whose market share rose from 4.5% to 7% in the same period. While Michael Korshas
not reached its full store capacity, it revenues has grown between 58% and 67% in the last three
years, posted a revenue growth of 59% in the holiday quarter. Michael Kors has still the potentials to
grow as it has not yet reached its full store capacity, and it has not met the full demand for its
products.
Among the competitive forces that have a great effect on industry attractiveness is as follows:
1. The Threat of New Entrants and The Difiiculty in Building Up a Brand Name that can Compete
with the Big Names.
To compete with big names, such as Coach, Louis Vuitton, Dolce &Gabbana, and Versace,it is a costly
effort for new entrants, especially to gain exposure and market share. In addition, new entrants
should be able to create competitive superior quality and to some people, convincethe status that
they carry, which would be difficult for new entrants if they have insufficient resources. Although
new competitors enter with high quality products, they may have difficulties to compete with
established fashion brands.

2. The Bargaining Power with Suppliers

Suppliers are more likely to be keen to deal with globally known luxury brand which is known to
produce quality goods.Therefore, the power industry members have over suppliers is in favor of the
globally known luxury brand.

3. Mode of Pricing and Offering Economy Levels of Products

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.
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 recent rapid change in market for the luxury handbags and leather accessories could be
described by behaviour of segmented market itself, they are :
 Expansion of middle class, where the younger people are gaining disposable income to
spend on luxury goods.
 A different perspective on change, fashion and also style in dressing.
 Information awareness area

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. 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.

At this era, information are so easy to access from everywhere with such ease. One of the main
cause are the internet. With an internet, we can find so many information about the latest fashion
trends and also expanding our option of product. This gives consumers some bargaining leverage
and also tighten the cempetition between competitor. Not only the product, information about
product review can sometimes available, therefore producers must ensure the quality of their
product quality are always on top notch.

Luxury goods pays a lot of money to obtained it, so it is logical for customers of luxury goods
demand superior customer service, not the average one. This also affect the industry player to give a
high level cutomer service for their customers. From the customer point of view, they are willing to
pay more money good services with high prices, whether it is for quality or status.

The driving forces can change the industry by

1. Superior customer experience
 Luxury will depend more than ever on word-of- mouth promoters who share their delight
with products and experiences
 Consumers expect every interaction in stores, online, and on mobile devices to be
premium, differentiated, and targeted to their tastes and preferences
  Marketing must maintain a persistent drumbeat of innovation in media and messaging to
keep consumers connected to what's new.
2. Flawless retail management
 Physical and digital storefronts are accelerating their arms race for offering more
compelling engagement to wow the luxury shopper
 The era of the disengaged, formal shopping experience is ending. Shoppers now expect
inviting and personalized service to welcome them into the store
 As store networks grow into new markets and tap new segments, the bar is raised for
ensuring the right products are in the right stores in the right quantities.
3. People excellence
 Brands are investing more in top management talent from strategy to finance to supply
chain to back office operations
 The store employee serves as brands' direct face to shoppers, with brands expending
significant resources on training and development of people on the front lines
 Luxury players are more and more putting the customer first in their strategies.

Question 4
. What key factors determine the success of makers of fine ladies handbags and leather
accessories?

There are several key factors that determine the success of makers of fine ladies handbags and
leather accessories

 One of the key factors are always up to date with the newest styles and seasons.
Researching ad always had a good information regarding up to date fashion styles were
always play a major role in this kind of industry to their strategic planning. Coach was always
been able to do this consistently. The evidence for that is the quadrupled growth in annual
sales was from $555 million in 1999 to more than $4.2 billion in 2012, reflecting their
success in identifying and capitalizing quickly on opportunities for growth.
 Strong brand image of product. Coach proves this in their add where the message were
“bold and to the point” and “extremely eye catching” with its use of black and white
photography and lack of other distractions. With this strong brand image, as indicated by the
case, Coach held a 25 percent share of the U.S. luxury handbag market and was the second
best-selling brand in Japan, with an 8% market share. To earn strong market share, Coach
 offers a “winning combination of styling, quality, and pricing” that essentially operates off
the premise that they would target the new accessible luxury goods segment
 Maintaining and improving quality throughout many lines of product. The Coach brand is
one of the most recognized handbag and accessory brands in the World. Coach is committed
to leading the fine accessories market by designing and producing the finest quality of
accessories including handbags, luggage, travel accessories, wallets, outerwear, eyewear,
gloves, scarves, and fine jewelry for both men and women.
 A huge distribution networks, may represent as the availability of vast line of product to
delivered on the reasonable moment. In the United States, Coach products could be found
in approximately 900 department stores, 218 Coach full-price stores, and 86 Coach factory
outlet stores in addition to sales generate from their website. Essentially a strong
distribution network allows for Coach to position their luxury goods as accessible (without
tarnishing their image). Coach currently uses a multi-channel distribution strategy.
 Strong demand for innovation in technology remains high, Coach has introducing a new
collection on a monthly basis. For example, Coach utilizes its website to generate sales
worldwide.

Question 5
. What is Coach’s strategy to compete in the ladies handbag and leather accessories industry? Has
the company’s competitive strategy yielded a sustainable competitive advantage? If so, has that
advantage translated into superior financial and market performance?

The company has used the best-cost strategy to compete in the ladies handbag and leather
accessories. Coach’s strategy is to offer distinctive, easy recognizable luxury products that were
extremely well made and provided excellent value.

Coach pursues this strategy by many ways:

1) Coach positioned its brand in the lower part of the accessible and affordable luxury pyramid.
This particular market provides a larger opportunity relatives to that of more exclusive brands.
Coach has focused on sales in China, Japan and the United States because these three countries
lead global luxury goods spending.
2) Coach has flexible sourcing. All of Coach’s production was outsourced to contract
manufacturers, with vendors in China accounting for 85 percent of its products requirements.
Vendors located in Vietnam and India produced the remaining 15 percent of Coach products
requirements. This broad-based, global manufacturing strategy was designed to optimize the
mix of cost, lead times, and construction capabilities.

3) Coach launched new collection every month. The market research design process provided the
basis of Coach’s differentiated product line: each quarter, major consumers research is
undertaken to define product trends, selections and consumers designs. Monthly product
launches enhanced the company voguish image and gave consumers reason to make purchases
on a regular basis.

4) Coach sought to make customer services experiences an additional differentiating aspect of the
brand. It had agreed since its founding to refurbish or replace damaged handbags, regardless of
the age of the bag. The company provided store employees with regular customer services
training programs and scheduled additional personnel during peak shopping periods to ensure
all customers were attended to satisfactorily.

2. The company’s competitive strategy yielded a sustainable competitive advantage thanks to its
strategy to have both full-price stores and factory store.

In 2011, Coach had 345 full-price retail stores in the United States, which comprised 70 percent of its
total US outlets. Full-price stores were divided into three categories-core locations, fashion
locations, and flagship stores. Coach had 143 factory stores by 2011. About 75 percent of factory
store inventory was produced specifically for Coach factory stores, the remaining 25 percent was
made up of overstock items and discontinued models. Coach’s 10 to 50 percent discount offered a
year round full-price policy in full-price stores.

Therefore, Coach’s factory stores target customers who might not otherwise buy Coach products.
Both full-price stores and factory stores customers were equally brand loyal, but there was a distinct
demographic difference between the shopper segments. It means that each type of consumer does
not affect the other.
3. That advantage has translated into superior financial and market performance both in the
United States and worldwide.
When it comes to the financial performance, Coach, Inc. has handed in a satisfactory answer to the
public over the years. In 2011, the revenues of the company were $4,159 million, an increase of
15.3% compared with 2010. Besides, its operating profit and net income reached $1,305 million and
$881 million in the same year, an increase of 13.5% and 19.8% over 2010 respectively.

Coach’s wholesale distribution in international markets involved department stores, freestanding

retail locations, shop-in-shop locations, and specialty retailers in 18 countries. In 2006, international
wholesale accounts amounted to $147 million and have grown some 7.8 percent per year to reach
approximately $230 million in 2011.

Question 6
. What are the resource strengths and weaknesses of Coach Inc.? What competencies and
capabilities does it have that its chief rivals don't have? What new market opportunities does
Coach have? What external threats do you see that could adversely impact the company's future
wellbeing?
 
Strengths
Coach is very strong when it comes to brand image. As indicated by the case, Coach held a 25
percent share of the U.S. luxury handbag market and was the second best-selling brand in Japan,
with an 8% market share” .To earn strong market share, Coach offers a “winning combination of
styling, quality, and pricing” that essentially operates off the premise that they would target the new
accessible luxury goods segment.

Coach also possesses strong distribution capabilities. The company works closely with its distributors
to sell its products through domestic as well as overseas department stores. It also markets its
products by making effective use of Internet, like sending emails to its selected customers and
updating the information on its website in time. Essentially a strong distribution network allows for
Coach to position their luxury goods as accessible (without tarnishing their image).

Coach has is the diverse product line consisting of women’s handbags, key fobs, belts, electronics
accessories, cosmetic cases, gloves, hats, scarves, watches, shoes, and sunglasses. By having a large
product line, it allows for the company to diversify and differentiate. Similarly, Coach frequently
introduces new products which are indicative of a commitment to diversifying its product lines.

Finally, one of Coach’s greatest strengths is excellent customer service when it comes to taking care
of their customers. In an effort to show value-added benefits, Coach refurbishes damaged handbags
and provides special request service to allow consumers to custom order a product if a particular
handbag or color wasn’t available during a visit to a Coach store.
 
Weaknesses
With so many retail stores attempting to sell high-cost inventory, Coach inevitably puts itself in a
situation with a high risk/high reward situation. Currently, the strategy has paid off because middle
class consumers have started to purchase luxury goods; however, the question remains when sales
begin going sour, can Coach endure the high costs of so many retail stores and any left-over
inventory?

Coach has had a high level of inventory. As of 2011, the value of the company’s merchandise
inventories was $422 million, an increase of over 16% over 2010. It is obvious that large inventories
damage a corporation’s liquidity.

Though Coach, Inc. is a luxury brand aiming at the international market, its operations heavily rely on
American market. The evidence was that the US represented 74.6% of Coach’s total revenues in
2006. Such a market concentration may put the company at risk of having to suffer a
slump in demand for Coach’s products caused by American economic slowdown or recession.

Opportunities
While Coach currently has a strong base in international markets, as standards of living around the
world continue to increase, Coach can really exploit the opportunity to invest overseas particularly in
developing nations such as China. The Chinese market for luxury goods was predicted to increase to
24% of global revenue by 2014, which would make it world’s largest market for luxury goods.

In Japan, there are many young single ladies whose age is between 25 to 30 are pretty fashion
conscious and willing to pay much more than their American peers for similar western luxury goods
in order to demonstrate their good personal taste. So it is advisable for Coach to take the business
opportunity of excavating such a vast latent market.
Along the same lines of globalization, Coach can increase its market share through development of
sales via their website. While Coach currently operates an e-commerce site, it still remains to be
seen on how sophisticated it really is. Coach could look into some potential new avenues of possibly
adding some customization features or, at the very minimum, enhance the functionality and
friendliness of their site so that they can generate sales from individuals not within range of their
other stores.

Threats
One of the biggest threats that faces Coach is the ability of these counterfeit products to serve as
substitute products. This is a particularly dangerous threat to Coach because any time one of these
fake products has defects, consumers, unknowingly, may associate it with a defective product. In
addition, consumers who want their reference group members to think that they can afford high-
end products may not want to pay premium prices for those products so they rely on the
affordability of an identical product for half the price.

As an American-based company offering fine leather goods, Coach has proved to be extremely
successful in the domestic market. However, when the company launches its global expansion, it has
to be confronted with lots of strong foreign rivals. So Coach should pay more attention to maintain
its competitive advantages, or its dangerous competitors will encroach on its market shares.

Like most products, particularly luxury goods, Coach is impacted based on the economy. When the
economy is down and consumers do not have a lot of spending money, so is Coach’s bottom line. In
recent years, the consumers in the US have reduced their spending as a result of high interest rates
and rising fuel prices. Under this kind of pressure, Americans tend to cut down their unnecessary
expenses, especially the costs of luxuries. With luxury goods, consumers often find such products to
be extremely elastic so dramatic drops in income will result in dramatic drops in sales of Coach’s
product lines.
Question 7
. What recommendations would you make to Lew Frankfort to improve the Coach's competitive
position in the industry and its financial and market performance?
 
Upgrade Brand Image
The corporation’s reputation is still not as good as its international rivals. Actually, according to
Coach’s performance in the past few years, it is clear that there is no big problem in product design
and marketing, so Coach should take more advertising strategies into consideration besides Internet.
For example, TV commercials, as a kind of cyclic visual stimulation, are much more eye-catching and
effective than emails, catalogs and information listed on the websites.

Confine Counterfeit Trade

In international business, it is extremely significant for Coach to protect all its intellectual property
rights so as to maintain the competitive advantages. Nevertheless, no matter how many efforts the
company made, counterfeiting still happens frequently and shows an upward trend. At this time,
Coach, Inc. should further improve the technological content of products to make it difficult to
imitate and counterfeit.