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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 marketentry

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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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,
customercentric 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

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very high-end “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.

Two different types of stores of Coach

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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.

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.

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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:
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

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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 means that the
company is losing out to competitors on nearly 80% of their product lines
in this division.

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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 members have over

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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,

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also the changing has depended on both the favor of customers 1

and the 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 – 3

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

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• The impact of 12 percent sales growth across Central and 4

South America (notably Brazil and Mexico) will result in

overall growth of five to seven percent in the Americas

• 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
Europe, curtail spending—Bain expects flat-to-two percent growth
• Middle East is growing at a steady pace, with Dubai continuing as the
center of gravity and the only city attracting foreign luxury consumers
(e.g. Russians, Indians, Africans)
• There has been many changes such as changes in who buys the
product, changes in industry’s long-term growth rate, changes in cost
and efficiency

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

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• The era of the disengaged, formal shopping experience is 5

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.

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Question 4. What key factors determine the success of

makers of fine ladies handbags and leather accessories?

There are many key factors that determine the success of makers of
fine ladies handbags and leather accessories including these following
elements:

Coach, Inc. has consistently fashioned their product line to coexist

with the newest styles and seasons. This Spring Coach is introducing a new
“scribble line” that consists of a poly cotton material and bright colors.
These new products were tested at fifteen stores and were “enormously
well received”, says CEO Lew Frankfort. Coach Inc. is expecting to increase
sales in February thanks to the new “scribble line” and Valentine’s Day. In
an effort to keep up with the broadening competition Coach, Inc. has is
planning to add up to nine more stores in the United States along with two
more in Japan. Coach Inc. sales have been helped by the recent innovative
accessories such as the PDA leather holder. The diverse product line
consists 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.

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Coach’s diverse product line 7

Thanks to the changes to Coach’s strategy and operations

to build a sizeable lead in the “accessible luxury” segment of
the leather handbags and accessories industry a solid performer in Sarah
Lee’s business lineup, in October 2000, spinning off Coach through an IPO
is a part of a restructuring initiative designed to focus the corporation on
food and beverages. Therefore, Coach Inc. proved the ability to
manufacture high quality products while increasing margins by outsourcing
production to lower cost markets and Coach did in having around 80% of
its products outsourcing in 2000. 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.

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. Using a multi-channel distribution strategy Coach is presently able
to have 200 stores in the United States alone with locations in eighteen
countries outside the United States, as well as a full colored catalogue and
an online store at www.coach.com.

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Online store of Coach 8

A well-known and well-respected brand name is clear

advertising. The Luxury Institute rated Coach's advertisements
atop their ranking for print advertisements in regards to the overall Luxury
Ad Effectiveness Index in 2006. Wealthy consumers said that Coach's
message were “bold and to the point” and “extremely eye catching” with its
use of black and white photography and lack of other distractions. 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.

Besides strong brand image, Coach also possesses strong distribution

capabilities. For example, 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 has since it has distribution, product development, and quality
control in the United States, Italy, Hong Kong, China, and South Korea.

Coach currently uses a multi-channel distribution strategy. The

products are sold through direct mail catalogs, on-line store, e-commerce
websites, 200 retail stores and its 76 factory stores.

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The catalog has had increasingly popularity and has been an

important advertising and sales tool for Coach, both domestically and
abroad. In addition, Coach launched its online store at www.coach.com.
Coach has also spread to various retailers and departments stores to
increase sales. To improve and market the brand, boutiques have been set
up in the department stores. Through this distribution strategy and
advertising campaign Coach has become one of the most well recognized
brands in the United States and is rapidly gaining recognition
internationally, especially in Japan.

With an established global brand, 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. While some businesses think that web development is easy,
maintaining a sophisticated website on a global scale that not only considers
cultural elements, language, and product lines, can be a daunting task.
Besides web development, Coach also needs strong technology to maintain
quality control with its product lines. Because Coach’s products are luxury
goods, consumers essentially expect quality with minimal defects. By
maintaining and continuously investing in technology in order to innovate
products and minimize defects, Coach not only assures quality to their

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customers, but also justifies their premium prices over one of 0

the major problems facing all luxury goods – knockoffs.

Coach is, “America’s number one accessible luxury accessories brand,

and the fastest growing imported handbag and accessory brand in Japan.”
Without marketing and design it would not be possible for Coach to receive
such distinguished titles. In 2004 marketing and design costs reached 63.5
million. As a result Coach was able to penetrate new markets such as Japan
and strengthen their position in existing ones. Coach recently announced
the next phase of its growth strategy Japan. It involves capitalization on
the significant growth opportunity that exists with the domestic Japanese
consumers. The company expects sales to more than double during the
next four years to over 80 billion yen by 2009. Furthermore, Coach
announced that it is strengthening its leadership team at Coach Japan, or
CJI, later this spring. Coach will also add two executives who will be
responsible for all Coach retail and factory store strategy and operations.
In addition, CJI will shortly be announcing the appointment of its first
Executive Vice President and Chief Operating Officer, a new position for the
company. The Chief Operating Officer will spearhead logistics initiatives as
well as oversee administrative, finance and information technology
functions.

To sum up, to determine the success of makers of luxury handbags

and leather accessories, Coach need to have the significant key factors
which there are the ability to manufacture high quality products while
increasing margins by outsourcing production to lower cost markets, strong
brand image, strong global distribution capabilities, diverse product line and
strong innovative technology.

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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?

1. Coach’s 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. The
company has used the best-cost strategy. The company’s array of
products included ladies handbags, leather accessories such as key forbs,
electronic accessories, and cosmetic cases. Coach pursues this strategy by
many ways:

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 targeted the top 20 percent of Americans by
households’ income, as opposed to the top 3 to 5 percent targeted by most
European luxury brands. Coach has focused on sales in China, Japan and

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the United States because these three countries lead global 2

luxury goods spending.

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.
Management control quality throughout the process with product
development offices in Hong Kong, China, South Korea, India, and Vietnam.
This broad-based, global manufacturing strategy was designed to optimize
the mix of cost, lead times, and construction capabilities. The company’s
procurement process selected only the highest-quality leathers and its
outsourcing agreements with quality offshore manufacturers contributed to
the company’s reputation for high quality and value.

Coach launched new collection every month. The market research

design process developed by Executive Creative Director Reed Krakoff
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. Lew Frankfort said the increase was attributable to monthly
product launches that “increase the frequency of consumer visits” and
women’s changing style preferences of “using bags to complement their
wardrobes in the same way they used to use shoes”. A retail analyst agreed
that the frequent product introductions is “a huge driver of traffic and sales
and has enabled them to capture the…customer who wants the newest
items and fashions”.

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

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periods to ensure all customers were attended to satisfactorily. 3

Customers are allowed to order merchandise for home delivery

if the particular handbag or color wasn’t available during a visit
to a Coach store.

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. Under Coach’s tiered merchandising strategy, the company’s
flagship stores carried the most sophisticated and high-priced items, while
core stores carried widely demand lines. The company’s fashion locations
tend to stock a blend of Coach’s best-selling lines and chic specialty bags.

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.

Handbags sold in Coach full-price stores ranged from $200-$500,

which was well below the $700-$800 entry-level price charged by other
luxury brands. So the buyers could get a branded product in an affordable
value.

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4

Coach’s products price

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. During these economic times, it may
seem as though the factory store shoppers might reduce spending.
However, these same economic times have little effect on full-priced
shoppers due to their amount of wealth. This might be able to help Coach
in its struggle between being an exclusive brand or just another common
brand.

Coach has many product lines- items with appealing attributes,

assorted upscale features. Coach Inc. designed and marketed women’s
handbags; leather accessories such as key fobs, belts, electronic
accessories and cosmetic cases; and outwear such as gloves, hats and
scarves. Coach also designed and marketed leather business cases and
luggage.

Coach is production emphasis- build in upscale features and appealing

attributes at lower cost than rivals. The outsourcing agreements allowed
Coach to maintain a sizeable pricing advantage relative to other luxury
handbag brands in its full-price stores as well.

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Moreover, Coach is marketing emphasis. Coach’s 5

wholesale distribution international markets involved

department stores, freestanding retail locations, shop-in-shop
locations, and specialty retailers in 18 countries. The company mailed about
4.1 million catalogs to strategically selected households in the US during
2006 and place another 3.5 million catalogs in Coach retail stores for
customers to pick up during a store visit

3. That advantage has translated into superior financial and market

performance both in the United States and worldwide.

In 2011, Coach had 169 retail locations in Japan, which generated

$748 million in sales. In 2012, Coach had 66 stores in China, up from 41
stores in 2011. Coach anticipated recording fiscal 2012 revenues in China
approximately $300 million.

Coach’s products were sold in approximately 970 wholesale locations

in the U.S. and Canada. From 2002 to 2006, Coach has been growing faster
than the handbag market in the U.S. This has resulted in Coach
continuously gaining market share. Which, in 2002 was 19% and just four
years later Coach was holding 26% of the U.S. handbag market share in
the U.S. and also had total revenues of $2.6 billion in 2008, a 26.9%
increase from 2006. As of June 2008, it operated 289 retail stores and 102
factory stores in the United States, five retail stores in Canada. This is not
satisfying enough as Coach expects the number of factory stores to top out
at around 100 in the U.S. while the full-priced stores could reach up to 350.

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.

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6

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.

Besides strong brand image, 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. These retail channels truly boost Coach’s presence in global
markets and promote its brand. For example, “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

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allows for Coach to position their luxury goods as accessible 7

(without tarnishing their image).

Another strength 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.

Moreover, 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.

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 locations all over the United States, one of Coach’s biggest
weaknesses is also one of its previously mentioned strengths: accessibility.
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, as the case states, Coach’s
most loyal consumers visited the store once every two months and made a
purchase once every seven months with an average customer purchasing
around four handbags per year. While consumers are benefited in

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accessibility, the question remains when sales begin going sour, 8

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. Therefore in order to clear inventories, Coach may have to make
a painful decision to cut prices, which could have an apparent negative
effect on the firm’s profitability.

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.

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.

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.

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Along the same lines of globalization, Coach can increase 9

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

As nations become more and more sophisticated in the ways that they
are able to produce counterfeit products, one of the biggest threats that
faces Coach is the ability of these knockoffs to serve as substitute products.
To illustrate the extent of counterfeit goods, “in 2006, more than $500
billion worth of counterfeit merchandise were sold in the United States and
internationally;” moreover, these staggering numbers illustrates the global
problem confront many industries (Thompson C-106). 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, such as
LVMH Moët Hennessy • Louis Vuitton S.A., The House of Gucci, and Hermès
International S.A. 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

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have a lot of spending money, so is Coach’s bottom line. In 0

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. Consequently, the US Coach
would lose a large number of customers which leads to poor sales. 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; moreover, this is particularly dangerous because of the high
cost associated with maintaining high-cost inventory and facilities.

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?

Short-Term Recommendations

• Elevate Men’s Product Offering

Currently, Coach concentrates on designing and offering women’s

products, especially the handbags. The company only supplies the
customers with a small part of men’s accessories which merely represent
2% of the total net sales.1 But in fact, an increasing number of men today
have a great appetite for western luxury goods. They have the same desire
for fashion products and prepare to spend much money on packing
themselves. So Coach should do its utmost to meet men’s demands.

• Recruit Talented Fashion Designers

Brilliant fashion designers are in high demand in luxury goods

industry since a brand’s soul is the design of its products. So in order to set
a good brand image as well as instill new vitality into the enterprise, Coach,
Inc. needs to recruit more talented designers who are extremely sensitive

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to the pulse of fashion and have the ability to design a number 1

of marketable products.

• Ally With Strong Jewelry Brands

In many countries and areas throughout the world, Coach is

considered as a mid-range luxury brand rather than a world’s top brand like
LVMH, Gucci, Hermès, Prada and so forth. This phenomenon may be caused
by Coach’s cheaper price. To compete against these powerful opponents
and draw more attention from the upper-class customers, Coach can think
about allying with a group of world-class jewelry companies to try to
combine varieties of jewelries with its products. On the one hand, this
practice is a sign of seeking novelty. On the other hand, it can also enhance
Coach’s fame.

Long-Term Recommendations

• Upgrade Brand Image

In 2006, it took Coach’s 4.8% of net sales to design, advertise, and

market its merchandise.2 However, the result was disappointing. 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.

• Curb 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

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products to make it difficult to imitate and counterfeit. In 2

addition, since Coach, Inc. operates in many countries, the

company could strive to persuade the foreign governments to
enact and amend their intellectual property laws, which can legally protect
Coach’s interests.

• Expand in China

As an emerging market, China has attracted more and more foreign

investments from multinational enterprises in the past few decades. China
is an ideal place for international investors because it offers cheap labor
force, rich natural resources, huge potential market, as well as stable
political and economic environment. What’s more, as a result of Chinese
fast economic development, the number of Chinese customers who have a
strong desire for the world-famous luxuries has dramatically increased in
recent years. Thus it is advisable for Coach to set up factories and retail
stores in China so as to both reduce operating expenses and better satisfy
the growing needs of Chinese customers.

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