Coach, Inc. – Strategy In Accessible Luxury Goods Essay Example

Introduction

Coach, Inc. is a leading accessible luxury brand, which is engaged in the design, production, and distribution of classic leather bags and accessories. Formed in 1941, the company operates in 20 overseas markets with 15,000 staff and 1,100 retail stores. The unique selling positioning of Coach is the notion of providing luxury items at low prices. In the era where companies focused more on haute couture and traditional brands, Coach uniquely targeted the upper middle-class segment of the market. At present, its production and quality control operations rest in the China, Hong Kong, France, Italy, Japan, South Korea, and in its headquarter in the United States. Coach’s mission is to be a leading quality lifestyle brand of accessories offering the classic modern American styling.
Grand Strategy at Coach has been successfully implemented through product and market development. Now Coach Inc is not only known for its mid priced luxury bags but also for its wallets, briefcases, and other leather accessories. Currently, the major emphasis of Coach Inc is on the cost leadership, which is an integral part of generic strategy. While there are other premium brands that have initiated targeting the middle chunk of the market but Coach Inc was one of the first to initiate it. While the strategy of cost leadership and continuous innovation assisted Coach to increase its revenue but the sales figures never match the progress that was happening before the global economic meltdown of 2007. Presently, Coach Inc is aiming to focus on two major grant strategies including market development and penetration. The market expansion will be in the European Market and the penetration will be in the existing markets like United States, Japan, Hong Kong, and mainland China.

Strategic Issue

The luxury goods market is a special market since it has low barrier to entry (Gamble & Eastburn, 2012). In general, luxury brands rely on creative designs, high quality, and reputation to attract customers and build on its brand loyalty (Gamble & Eastbru, 2012). Its price sensitivity depends with the customer focused marketing, brand exclusivity, and an emotional sense of status and value. With the economic slowdown in the primary luxury markets of the United States, Japan and Europe, Coach found an emerging market in the Asian region. Because of the increased wealth in the said region, it provides a much needed boost for the luxury goods such as Coach bags and other leather products. Luxury goods and their sales outlets began to fill the shops of India and China and Coach has to make a productive retail operations in these countries.
The most pressing concern for Coach at this point is its competition with other luxury products, specifically in the emerging markets such as China and India and other Asian countries. Many other luxury brands have been accessing these markets and Coach has to empower its brand to assert its market status. Another major concern is the company’s product development and design system.

In these respect, the following queries have to be answered:

1. What countries should Coach prioritize in its marketing and sales initiatives and campaigns?
2. What products should it offer to the new markets?
3. How should it cut above the rest in terms of product design and other delicate details?
4. What sales channels should it utilize and take advantage of?

External Analysis

This external analysis shows that the competitive rivalry within the luxury goods market is the most intense threat for Coach. The emerging markets, which is a supposed potential for its accesible luxury products, are also swamped by emerging brands like Michael Kors. This directly affects the company’s overall sales and further growth. The smart channeling of its retail outlets and its ability to maintain and enhance its North American market share will be a crucial factor in its overall success. Also, the bargaining power of customers is developing with increased competition in the industry. The threat of new entrants is also moderate.

Competitive Rivalry Within The Industry

Coach occupies around 28% market share in the U.S. handbags market, and competes with industry players including Louis Vuitton, Gucci, Fossil, Chanel, Guess, among others (Trefis Website, 2013). In North America, Coach is intensely being threatened by new luxury goods from Michael Kors, Tory Burch and Kate Spade. Their sales growths have been recorded at 64.5%, 55.1% and 47.6% in 2012 respectively. These records have a great impact on the sales growth of Coach which was locked at 6.6% (Trefis Website, 2013). The growing private labels by wholesale customers also make competition for Coach tougher. By keeping significantly lower prices than its competitors, Coach is keeping the competition at bay. It has a greater range in the “accessible luxury” segment due to its low prices.

Bargaining Power of Customers

Coach has a multi-channel sales strategy as it sells to both wholesale and retail channels. The direct channel, which includes its operated stores and e-commerce sales, made up for almost 90% of its total sales (Trefis Website, 2013). Its 970 wholesale locations in the U.S. alone amounted to about $300 million sales in 2011 (Gamble & Eastburn, 2012). Since wholesale customers, both in the U.S. and in the foreign markets, constitute a bulk of the company sales, this means that their bargaining power is moderate yet significant. In the retail segment, the bargaining power of end-customers is moderate. Coach has already established its brand and reputation for high quality and yet mid-priced luxury products. The customers’ bargaining power will remain moderate in the future as Coach’s efforts to strengthen its brand will be offset by the dramatic growth of competition in its home markets and in the new markets as well.

Threat of New Entrants

The luxury goods market is hard to penetrate since it requires big capital expenditure; therefore new players are limited. Brand recognition and customer loyalty are among the key factors that drive middle-to-high income earners towards patronizing Coach. A new entrant would be challenged to attain this unless it has massive capitalization and human investments. New entrants have been rivaling the well established brands like Coach in the digital fronts. As such, new fashion brands effectively use the Internet to sell luxury goods. This is a moderate threat for Coach. Coach is addressing this with its renewed thrust in the online media. In 2011, it has a contact list of about 19 million active households in the US and about 4.2 million active households in Japan (Gamble & Eastburn, 2012). By maintaining their market research design and craftsmanship as a main strategy to produce a constant array of quality handbags, leather products and other luxury goods, Coach will stay as a strong brand and will also continue to dominate the new markets it intends to capture.

Bargaining Power of Suppliers

Coach heavily relies on its third party sources such as its manufacturers in the U.S., China, Vietnam, India, etc. (Coach Website, 2015). Its Chinese vendors constitute about 85% of its products, while its Indian and Vietnamese vendors constitute about 15% of its production. Thus, there is a strong bargaining power of suppliers. The use of broad based, global manufacturing strategy enables Coach to optimize its costs, lead times, quality control, and overall production capacity.

Threat of Substitute Products

Coach’s luxury goods are bought by the middle-to-high income market group. Since it is a bridge to the high end products, it will enjoy a sustainable demand for two level markets to enjoy. Many consumers now depend on high quality, branded yet affordable products like those offered by Coach. However, counterfeit luxury items from the likes of China are a moderate threat to the company. This is a threat to them especially in the emerging markets which they are targeting. As the quality of counterfeit products has been improving over the past few years, this degrades the brand proposition and customer loyalty of the avid Coach fans. This is a moderate threat for Coach. Coach is addressing the counterfeiting of its products by prosecuting manufacturers that counterfeit their products and they also have an online form so that Coach customers can report fake items if ever they spot or bought one (Trefis Website, 2013). Coach is very opposed to this practice because it reduces their global sales and brand equity, which is very damaging to their brand and reputation. The Coach counterfeits are easily spotted since they are of poor quality and are manufactured in a way that is incongruent with the values of the company (such as the use of child labor).

Key Success Factors

Brand Image – the company can depend on its brand as it is a reputable manufacturer of high quality and mid-priced luxury goods such as handbags, leather products, accessories, etc. It also produces high quality luggage, wallets, travel accessories, etc. for both men and women. It is a well-established company in the luxury goods segment as its products attest to its craftsmanship, excellent value, and differentiated designs.
Multi-channel distribution strategy - Coach is presently involved in both the direct to consumers and indirect sales channels. Its direct to consumer channels includes full price stores and factory stores in the U.S., online sales, catalogue sales, and Japan and Chinese stores. Its indirect sales include both wholesale and department stores sales both in the U.S. and in the foreign markets. In 2011, it has a total of 723 stores in both local and international markets.
Differentiated product lines – Coach invests so much in its market research design process and its well-crafted consumer market research enables the company to produce top of the line and quality luxury products. Their leather goods are attuned to the interests, preferences and needs of its intended buyers. The luxury image is impressed in their new designs as Coach employs the best designers for its new collections. This differentiation is also complemented by its excellent customer service and extensive customer communications.
Coach has also established itself in the accessories segment, aside from the handbags and the leather goods segments. It is a very competitive area and the company is thriving with its up-to-date designs and products. The Coach goods are custom fitted to the tastes of its targeted consumers. Other fashion brands fail in this segment because they cannot constantly come up with interesting design each year. Meanwhile, Coach is able to manage its leadership in this section with its highly market attuned market research data on its customers. It has the ability to keep being in style and it can assail the trends and changes in the fashion accessories section.
Flexible sourcing – the company employs a strategic mix of standards when outsourcing to manufacturers in China, India, Vietnam, among others. The management has a full hold of the quality control in all its production partners. They have product development offices in Hong Kong, China, South Korea, India, and Vietnam. The company also employ a broad based, global manufacturing standards and it is strategically linked to their costs, lead time, productions, and overall quality production and delivery.
Market positioning – the reign of Coach in the affordable or “accessible luxury” segment is very advantageous. This is because the high end markets are divided into three important categories. Hence, it has a leadership in the markets not being covered by haute couture and the traditional markets for luxury goods. The particular market segment that Coach Serves has a higher chance of expanding than the traditional segments of exclusive brands. It is also an ever growing category and it is sustainable primarily because many middle to high end customers still consider quality at a mid-price points. They want exclusivity but not highly expensive products and the Coach Brand appeals to them with taste, distinction yet reasonably prices.

Company Situation

Coach has a sound financial standing as shown in the following analysis:
Profitability
Coach has increased profitability dramatically from the previous financial years. Its 2011 income amounted to $ 2.6 billion. It has been improving in its gross profit and net profit margins while achieving a declining operating expense ratio and this is very sound for a luxury goods company. Coach’s gross profit margin has steady climbed above and beyond the competitor’s and industry’s average. This means the company is turning almost 80% of its sales into gross profit. This also means that its stakeholders are getting a higher return on their investment in the company compared with the others.

Liquidity

The liquidity of Coach has also improved over the past several years. It is very liquid. It has been able to grow its current assets while reducing its liabilities. This decreased percentage shows that Coach has a low credit risk. It means that it can finance other activities while being able to pay off its debts.

Leverage

Coach’s ratios are very favourable as it enjoys greater liquidity and high profitability. Coach’s current ratio has previously been lower than the industry standards. Its quick asset ratio has also exceeded the industry average. Over the past five years Coach’s accounts receivable turnover ratio has been above the industry average considerably. This implies that they are getting their accounts receivable quicker than their rivals, which enables them to reinvest their money more efficiently.

Activity

Coach invests so much capital on selling, design costs and marketing which account for about 35% of its net sales. It controls its inventory very efficiently by re-assessing their old products every quarter. They see to it that they come up with fresh inventories all the time.

SWOT Analysis

Strengths.
The geographical coverage of Coach through the presence in 20 overseas markets is its foremost significant strength. The global presence of over 1,100 retail outlets allows Coach to further enhance its revenues through market penetration. The notion of a multi-tiered pricing strategy is a new phenomenon introduced by Coach Inc as its products are available through high-end retail outlets and cheaper departmental stores, as well. Due to the presence of Coach Inc in the market for over six decades, it has developed high brand equity and large loyal customer base, which is its sheer significant strength. The practice of product launches every month has made Coach a leader in product innovation.

Weaknesses.

While Coach Inc promote itself as a global brand but almost 52% of its revenue comes from United States and Japan, which is its major weakness. The inventory turnover of Coach is also sheer high, which is its second weakness. Emerging economies like China and India have got huge potential for the enhancement in revenues but Coach is yet unable to tap developing markets efficiently.

Opportunities.

The rising middle-class and upper middle-class population in developing countries present an excellent opportunity for Coach Inc to multiply its revenue figures. These rising economies should be tapped strategically. The online business industry is now around $600 billion, which shows how Coach can increase its market reach through strong online presence. Although, Coach Inc is already present in the markets of USA, Japan, and China, but there is still a huge potential. Through the market development strategy, it can further enhance its business.

Threats.

Cheap counterfeits primarily made in China are the major threat to Coach Inc that can heavily affect the business. When the economy of any country is affected, the first victims of this scenario are the luxury goods. While Coach Inc presents itself as a luxury brand but due to its wide accessibility, there remains a threat that it can lose its brand value – hence brand dilution can occur.

Recommendations

Coach must continue to utilize its generic strategy called cost leadership and it must also focus on the major grant strategies that are product and market development. Coach intends to strengthen its strategies to market itself successfully in the U.S. and in the new markets such as China, Japan, etc. As its major strategy, Coach must constantly pursue product innovation. It has consistently designed and produced new products to keep up with the fashion trends worldwide. In terms of price, Coach also maintains its “accessible luxury” approach to pricing. As producers of quality leather, it also utilizes the best sourcing options.
Coach’s strategy is to provide luxury goods with reasonable prices. It fills in the gap of serving both two markets who are switching between quality and prices. The company also employs various distribution channels in its global expansion. It sells its quality products not just in wholesale channels but also in factory stores and retail channels, including through catalogues and digital platforms. Coach has also ventured into boutique selling aside from its department store channels. In this multi-channel retail network, Coach has been successful.
As it expands globally, Coach is encroached by various challenges. For one, there is an intense competition. In the main front of luxury segments, the brands of LVMH, Gucci, Hermes, among others, still dominate. But then, Coach enjoys a reputation on its own. Another major challenge is the prevalence of counterfeit luxury goods. As a world-class luxury brand, Coach suffers from the sales of these counterfeit items. As an outcome, both the income and brand image of the company are damaged due to the rapid production of these fake products, which are also easily traded especially in the emerging markets like China and India. Hence, Coach, Inc. must reorganize and strengthen its strategies to outcompete the other brands in the U.S. and in the emerging markets.

Short-Term Recommendations

The first major strategy is of product development, which is a significant notion of the Grand Strategy. Coach can use this strategy by further developing its men’s luxury goods. As it is, Coach focuses on designing and making women’s products, such as handbags. The company only supplies the customers with a little share of men’s accessories and this just account for about 2% of its total net sales (Coach Website, 2015). As we know, there is the metro sexual concept now and more men are actually consuming fashion products. They also have an increasing appetite for western luxury goods. They have the same fashion preferences and they can shell out a considerable amount of disposable income for luxury items. Coach must cater to this demand.
The second part of the recommendation also utilizes a category of Grant Strategy which is Product Development. It must further elevate its design aesthetics and production to a level which is competitive with other high end brands. Thus, in order to further enhance its brand image and instil new vitality into the company, Coach should recruit more talented designers who are very innovative and trend setting. These designers must be attuned to the market preferences.
Coach should also link with powerful jewellery and accessory bands. As it is common in other countries, Coach is taken at the mid-point of luxury brand and it quite distinct from the top, global fashion brands like LVMH, Gucci, Hermes, etc. This is because its prices cut across the high end luxury to the more affordable ones. To manoeuvre itself against these high luxury brands, Coach can co brand itself by linking with world famous jewellery and accessory brands and companies. This is to further strengthen its hold of the upper-class market. It can test on integrating its accessories with high class jewellery stores. This strategy might be a novelty but it might also be a grand entry into the more steady position to conquer the upper class markets.

Long-Term Recommendations

While coach continue to utilize its generic strategy called cost leadership, it must also focus on the major grant strategies, product and market development. Coach must constantly upgrade its brand image. There is always a grey area which the company serves; this is midway between upper and middle class customers. The company’s brand image is not yet very distinct compared to other competitors like LV. It is good in its product design and marketing, but the company must push forward to more sophisticated advertising strategies and better Internet presence. It should enhance its print and broadcast advertisements since these media are more effective than direct mails, catalogues and product displays through the website.
Coach should also take a strong stand against the counterfeit trading of luxury goods. As Coach explores the foreign markets, it should be keen on making itself clear that it detests counterfeit items. It has to secure and take measures to protect all its intellectual property rights to maintain its core advantages. Likewise, it can make its counterfeiting statement as a sort of a corporate social responsibility and marketing strategy. For one, counterfeit products use child labour and it can angle its advocacy from there. In another aspect, Coach should also ensure that its designs are not easily copied. It must further improve the technological content of its luxury goods to prevent counterfeiting.

Appendix 1:- Financial Ratios

Appendix 2 :- Porter Five Force Analysis
Appendix 3:- SWOT Analysis
References
Coach Website. (2015). “Our Story” Retrieved on February 23. 2015 from, http://www.coach.com/careers-about-coach.html
Gamble, John. E. & Eastburn, Ronald W. (2012). Coach Inc. in 2012: Its Strategy in the “Accesible” Luxury Goods Market. Retrieved on February 23, 2015 from, http://www.homeworkmarket.com/sites/default/files/q4/03/12/coach_case_study.pdf.
Trefis Website. (2013). “Coach Through the Lense of the 5 Forces Porter Analysis.” Retrieved on February 24, 2015 from, http://www.trefis.com/stock/coh/articles/205735/coach-through-the-lens-of-porter-five-forces/2013-09-13