Coach Inc. : Is Its Advantage in Luxury Handbags Sustainable? Executive Summary Coach Inc. : Is Its Advantage in Luxury Handbags Sustainable? Company History ? Founded in 1941 by Miles Cahn, a leather artisan, who began producing women’s handbags; simple in style and resilient to wear and tear. ? Even after 40 years of business, coach was able to grow at a steady rate by setting prices about 50% lower than most luxurious handbags, adding new models and establishing accounts with retailers such as Bloomingdale’s and Saks Fifth Avenue. After 44 years of family management, Coach was then sold to Sara Lee, a diversified food and consumer goods producer (acquisition strategy). ? Sara Lee left Coach’s strategy and operations intact but by 1990’s the company performance began to decline as consumer shifted preference to a more stylish French and Italian handbags such as Gucci, Prada, Louis Vuitton, etc. ? In 1996, there was a change in the management having Reed Krakoff as the new creative director, an ex Tommy Hilfiger designer. He believed that new products should be based on market research rather than on designer’s instincts about what would sell. Coach then conducted excessive research and held focus groups to ask customers about styling, comfort, and functionality preferences. They found that customers look for edgier styling, softer leathers, and leather-trimmed fabric handbags. These prototypes were tested in selected coach stores for 6 months before announcing the launch. This process allowed coach to launch a new collection every month instead of “2 per year” launch prior to Krakoff’s arrival, making it adopting an offensive strategy to improve its market standing or result in a competitive edge fairly quickly. The stores were redesigned to complement the contemporary new designs, the factory stores’ appearance were improved. ? The factory stores carry test models, discontinued models and special lines that sold at discounts ranging from 15-50%. These discounts were possible because of the company’s policy to outsource production to 40 suppliers in 15 countries. The outsourcing agreements allowed coach to maintain sizeable pricing advantage relative to other luxury brands (outsourcing production line). ? Its attractive ricing enabled Coach to appeal to consumers who would not normally consider luxury brands, while the quality and styling of its products were sufficient to satisfy traditional luxury consumers. (Blue Ocean Strategy) ? By the year 2000, coach was able to build 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. ? In October 2000, Sara Lee decided to launch an IPO for Coach as part of a restructuring initiative designed to focus the corporation on food and beverages. Offensive strategy) Coach’s Strategy and Industry Positioning ? Coach Inc. designed and marketed women’s handbags; leather accessories such as key fobs, belts, electronic accessories, and cosmetic case; and outwear such as gloves, hats and scarves. ? Licensing agreements (collaborative partnership to achieve product line extension): o Movado Group in 1998 to make coach-branded watches available in coach retail stores. o Jimlar Corporation in 1999, manufacture and market coach’s women footwear. o Marchon Eyewear in 2003, for coach branded eyewear ?
Approach to differentiation: o Based on the market research design process developed by Krakoff o Procurement process and its outsourcing agreements also contribute for differentiation and high quality o Voguish image due to monthly new product launch o It sought to make customer service experiences an additional differentiating aspect of the brand. It also has a Special Request service where customers can order merchandise for home delivery if the particular handbag or color wasn’t available during the visit to the coach store (defensive strategy). Strategy: o Increase frequency of customer visits by regular product launch and sending out catalogs to strategically selected households (defensive strategy). The company’s market research found that its best customers visited a coach store once every two months and made a purchase once every 7 months. o They adapted to the fact that women usually use bags to complement their wardrobes the same way the used to use shoes. o Coach is a brick and click company, having its products sold on its web site as well as in the full-price and factory stores (web site strategy).
Coach’s web site had 40 million unique visitors and generated $54 million in net sales. The company also sends promotional e-mail to 55 million selected customers in 2006. ? Functional area strategies: o R&D engineering: making prototypes and test them with the consumers by keeping them in the factory stores for 6 months before the actual launch. o Production: outsourcing the procurement and manufacturing processes to 40 different suppliers in 15 countries. o Marketing and sales: extensive market research to find out consumer preferences about new styles, comfort and functionality.
The retail distribution is both direct (full price and factory stores, internet sales, catalog sales and stores in Japan) and indirect (wholesale accounts with department stores in US and in international market outside Japan). ? Coach can be regarded as a fast-follower in the luxury bags industry. It can leapfrog its competitors such as Gucci, Prada, Louis Vuitton, etc. by quickly adapting new styles to its handbags which eventually became popular among its customers.
Hence, in essence, it became the first-mover in the “accessible” luxury handbags. Coach’s Strategic Options in 2007 ? Key growth involved store expansion in the US, Japan, Hong Kong and China; increasing sales to existing customers to drive comparable store growth; and creating alliances to exploit the coach brand in additional luxury categories. ? Second growth initiative: increase same-store sales through continued development of new styles, the development of new usage collection, and the exploitation of gift giving opportunities. Agreement with Lutz & Patmos to launch women’s knitwear collection and Estee Lauder Company for development of fragrance that would be sold in Coach. Analysis of Coach’s Outlook in 2007 Key Success Factors ? Increasing quality and styling ? Merchandising strategy; “trade up, trade down” ? Outsourcing to push down the price ? Selecting appropriate country for global expansion ? Counterfeiting block ? Store locations ? Good economic outlook to encourage shoppers to buy luxury goods ? Low shipping cost Environmental friendly products ———————– Strengths Weaknesses ? Customer loyalty — Image delusion ? Frequent update of demand ? Equal service and quality between — environmental unfriendly products ? full-price and factory stores ? Direct and indirect sales ? Differentiating its product placement OpportunitiesThreats ? The number of millionaires were — product counterfeits expected to increase by 23%– Italian and French handbags continue by 2009 to be favorites, hence pose as threats Chinese market for luxury goods– in unfortunate case of global financial were expected to increase by 24% crisis/recession, sales will drop not to by 2014 making it the world’s mention the plunging of company’s largest market for luxury goods stocks ? Another rapidly growing market for luxury goods was India due to increase in household earnings ? Expansion opportunities in Japan ? Extension of customer service (gift giving). ? Shift from core store to fashion store and fashion store to flagship ? Product line extension to knitwear and fragrance
