Coach Inc Business Case Analysis

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.

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Luxury goods industry is highly competitive due to a low market-entry barrier. It has experienced ups and downs during the 2000s. And in recent years, the industry has recovered and developed rapidly. More and more luxury goods corporations have expanded their operations in emerging markets through Internet and e-commerce. The future outlook of this industry is optimistic. The competitions in the luxury goods industry are pretty intense.

Many competitors of Coach are from France and Italy such as Louis Vuitton, Hermès, Gucci, and Prada. Having superior brand recognitions and strong impacts on global luxury goods market make them become dangerous rivals of Coach, Inc.

Even though Coach Inc. has come up with good strategy, it still suffered from harsh competition. The profit margin was still below the level achieved prior to the onset of a slowing economy in 2007 and its share price had experienced a sharp decline during the first six months of 2012. Due to the changing environment and harsher competition, it was not clear whether the company’s recent growth could be sustained and its competitive advantage could hold in the face of new accessible luxury lines launched by such aggressive and successful luxury brands as Michael Kors, Salvatore… Therefore, I recommend that Coach thinks about spending money working on TV commercials, or cooperating with some world-famous jewelry brands to raise the brand awareness. It also needs to
consider expanding in China so as to cut down operating expenses and better meet the Ch­inese customers’ growing needs. Question 1. What are the defining characteristics of the luxury goods industry? What is the industry like? Economics define a luxury good as one for which demand increase as income increase.

Luxury goods are said to have high income elasticity of demand: as people become wealthier, they will buy more and more of the luxury good. This also means, however, that should there be a decline in income its demand will drop. Unlike inferior goods, they are related to price and high-income individuals. A luxury corporation may establish its image via pricing, exclusivity, limited availability, quality and location. High pricing gives the product its prestigious nature, and implies high quality. Luxuries may be services. The hiring of full-time or live-in domestic servants is a luxury reflecting disparities of income. Some financial services, especially in some brokerage houses, can be considered luxury services by default because persons in lower-income brackets generally do not use them. Luxury brands in general, relied on creative designs, high quality, and brand reputation to attract customers and build brand loyalty. Price sensitivity for luxury goods was driven by brand exclusivity, customer-centric marketing, and to large extent some emotional sense of status and value. The luxury goods market has been on an upward climb for many years. The market for luxury goods was divided into three main categories: haute-couture, traditional luxury, and the growing submarket “accessible luxury”. At the apex of the market was haute couture with it very high-end “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
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.

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 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. 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 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.

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.

Question 3. How is the market for luxury handbags and leather accessories changing? What are the underlying drivers of change and how might those driving forces change the industry? The market for the luxury handbags and leather accessories is highly competitive. Recently, Coach Inc. is the market leader in the US market. But the market for luxury handbags and leather accessories is now changing rapidly because of many reasons. Firstly, the middle class is expanding and become younger and they are gaining disposable income to spend on luxury goods with different agendas than previous generations. Secondly, they also have different perspective on change, financial smarts, and have a very strong opinion and style on dressing up. Industry members need to account for the differences between the two, specifically how these differences affect their luxury goods buying habits. Finally, there has been the change in generations. The change from Generation X to Generation Y consumers has arrived and they are gaining disposable income to spend on luxury goods with different agendas than previous generations.

Coach was founded in 1941 and began producing ladies handbags with simple and extremely resilient to wear and tear, but over the next 40 years, Coach was able to grow at a steady rate by setting prices about 50 percent lower than those of more luxurious brands, adding new models and establishing accounts with retailers such as Bloomingdale’s and Saks Fifth Avenue. In 1996, Reed Krakoff – a top Tommy Hilfiger designer as a Coach’s new creative director believed new products should be based upon market research rather than designers’ instincts about what would sell, so the design process launched new collections every month to be satisfy with customers. By 2000, the changes to Coach’s strategy and operations built the brand into a sizeable lead in the “accessible luxury” segment of the leather handbags and accessories industry and made it a solid performer in Sara Lee’s business lineup. Therefore, the market for luxury handbags and leather accessories has changed through time from the beginning to now, also the changing has depended on both the favor of customers and the 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.

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 firms keep in tune with changes in the external environment – particularly with one’s consumers. Last, but not least, there is an increasing demand on services on customers in the luxury goods industry so that customers are willing to pay more money to receive good services with high prices, whether it is for quality or status.

There are many other drivers of the luxury goods market as mentioned below: Tourists are changing their consumption habits, seeking out new destinations (e.g., Dubai, South East Asia, Australia) and showing more savvy in the items they purchase Each year, more "HENRYs" (High Earnings, Not Rich Yet) become potential customers, with ten times as many HENRYs as ultra-affluent individuals The rise of the middle class in emerging countries is polarizing the competitive arena, becoming a "new baby boom sized generation" for luxury brands to target. Absolute luxury items (consisting of high-end products with no logo, highest quality materials, and exquisite craftsmanship) lead the way Despite some recovery of spending on apparel, leather goods and other accessories will continue growing faster than other categories Watch consumption has sharply decelerated as retailers de-stock and as Chinese luxury consumers slow their purchasing Cosmetics are slowing down in mature markets, while still delivering growth in emerging markets High consumer confidence among the affluent, increased store openings in American cities, and intensive investment in linking physical and digital shopping are all fueling United States sales growth.

The impact of 12 percent sales growth across Central and South America (notably Brazil and Mexico) will result in overall growth of five to seven percent in the Americas 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 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 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.

Coach’s diverse product line
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.

Online store of Coach
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.

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

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 the United States because these three countries lead global 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 periods to ensure all customers were attended to satisfactorily. 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.

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. Moreover, Coach is marketing emphasis. Coach’s 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.

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 allows for Coach to position their luxury goods as accessible (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 accessibility, 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. 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.

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

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 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. 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 to the pulse of fashion and have the ability to design a number 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 products to make it difficult to imitate and counterfeit. In 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.