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Background in Brief:
Coach was first established in 1941, as a small family run leather goods
manufacturing business. Over time Coach became recognized as a premium brand
that provided superior quality leather goods in classic styles and in the 1980`s it
opened exclusive Coach retail stores. Coach was sold to Sara Lee in 1985 and
experienced rapid expansion. Coach`s product portfolio was expanded to include,
accessories, luggage and briefcases and many more exclusive Coach stores and
Boutiques were opened. By the late 1980`s there were 12 exclusive Coach retail stores
as well as approximately 50 boutiques selling Coach products within lager department
stores. While Coach initially grew it started to lag behind its competitors in terms of
trendiness and sales began to decline. In 1996 Krakoff joined Coach and he was
instrumental in positioning Coach as an 'accessible luxury brand`` for it was
understood that price was a source of competitive advantage for the brand in the
luxury market. In October 2000, Coach went public under the name of Coach Inc. By
2005 Coach`s revenues tripled and their share price increased more than 900 % since
their IPO in 2000.
Drive growth and market share by expanding their distribution channels to reach
local consumers in emerging markets and leveraging the global opportunities.
Ensure that the Coach brand remains a premier, distinctive and easily
recognizable brand by delivering a consistent message to the consumer through
Stakeholders:
Employees: Coach`s approximate 18,000 employees are extremely
important stakeholders for the company. They want to have a fair salary and
benefits for their hard work.
Investors: Shareholder`s would like to see a return on their investment. This
includes stock appreciation as well as an increase in the dividend.
Board of Directors and Management: are looking for Coach Inc. to
perform well so that their stock options are in the money and their jobs will
be safer.
Customers: are purchasing Coach products primarily for the brand
recognition and the perception of a status symbol. They also expect the
quality good of the product to be superb.
Competitors: are ultimately looking to increase their market share and
profits. They will be evaluating Coach`s strategy and looking for opportunities
to steal customers.
External Analysis
General Environment (Macro):
Economic: During the next several years the economy poses significant risk to the
luxury industry in the mature markets, however, emerging markets such as China,
India and Brazil are expected to experience strong growth in the luxury market as their
middle class develops. The U.S (Coach`s largest market) must address the Fiscal Cliff``
or another economic recession will occur. Furthermore there is currently no solution in
sight regarding the European debt crisis.
Socio-Cultural: Changing societal concerns, attitudes, and lifestyles represents both
opportunities and risks to the luxury accessory industry. The changing preferences by
middle class consumers towards luxury goods inevitably create new opportunities for
growth within mature markets. Companies that shift manufacturing jobs overseas for
lower wages have been criticized by consumers. Companies need to evaluate the
potential costs as well as benefits before manufacturing or dispersing their products
into a country or region.
Globalization: The primary reason for the increasing globalization is that firms within
the industry are attracted by the rising level of income and wealth and the advantage
of cheap labor within relatively new industrialized countries such as China, India, and
Brazil. While geographic diversity and globalization helps to reduce companies
exposure to risks in any one country, they`re subject to risks associated with all the
different international operations, including, changes in exchange rates, natural
disasters , and government controls.
Technological Development: Firms need to continuously invest in technology in
order to innovate products and minimize defects. Luxury products need not only to
deliver on quality to their customers, but also justify their premium prices over
counterfeit products. Luxury firms also need to invest in technologies, to prevent
counterfeiting such as holograms, smart cards, biometric markers and inks, which can
be used to protect and authenticate genuine products. Large global firms also require
sophisticated websites that need to consider language, cultural elements and product
lines.
Political/Legal: The political landscape within the U.S. for the next four years is
unclear leading to uncertainty for the luxury goods industry. If Governor Romney wins
the election he has stated that he will label China a currency manipulator which could
result in tariffs and a stressed relationship. The legal fight against trademark
infringement, trademark counterfeiting and patent infringement, and trade mark
dilution is significant for the luxury accessory industry. Companies spend millions of
dollars trying to enforce intellectual property rights around the world by working
cooperatively with other companies within the industry, and government agencies and
law enforcement agencies.
Demographic: The luxury market is defined as individuals with annual income above
USD $30,000. It is estimated to grow by more than 600 million individuals from 2010 to
2025 as global economic realignment continues to pick up speed. China is expected to
contribute 30% of the growth, with 200 million more consumers entering the luxury
market by 2025.
Competitor Analysis
1.) Polo Ralph Lauren Corp. (RL): Polo Ralph Lauren Corporation, together with its
subsidiaries has a market cap of $14.5 billion while Coach has a market cap of $16.2
billion. RL engages in the design, marketing, and distribution of lifestyle products. The
company offers mens, womens, and childrens clothing; and accessories comprising
footwear, eyewear, watches, jewelry, hats, and belts, as well as leather goods,
including handbags, luggage and products for homes. Price wise, it is at the lower end
of the luxury market whereas Louis Vuitton and Gucci are at the upper end.
2.) LVMH MOET HENNESSY-UNSP ADR (LVMUY:OTC US): LVMH Moet Hennessy
Louis Vuitton SA is a France-based luxury goods company with a market capitalization
of $83.1 billion, five times the size of Coach. The Company owns a portfolio of luxury
brands and its business activities are divided into five business groups: Wines and
Spirits, Perfumes and Cosmetics, Watches and Jewelry, Fashion and Leather Goods, and
Selective Retailing. The competition with Coach comes primarily in the fashion and
leather goods business but higher cost luxury firms like Gucci and Louis Vuitton do not
want to compete on price in the luxury goods industry for fear of damage to their
brand.
3.) GUCCI GROUP NV-NY REG SHRS (GUCG:OTC US) Through the Gucci, Yves
Saint Laurent and Sergio Rossi brands it designs, produces and distributes high-quality
personal luxury goods, including: handbags, luggage, small leather goods, shoes,
timepieces, jewelry, ties and scarves, eyewear and perfume. The company has a
market capitalization of $13.4 billion and directly operates stores in major markets
throughout the world and wholesales products through franchise stores, duty free
boutiques and leading department and specialty stores.
threat of substitutability is also low which keeps the luxury industry extremely
profitable as well.
Internal Analysis
Tangible Resources
Financial Resources: The firm`s borrowing capacity and ability to generate funds
internally is impressive. They recently replaced their previous line of credit on June 18,
2012 with a new $400 million one with JP Morgan Chase Bank which will allow them to
fund any further expansion. This access to funds as well as its positive cash flows from
operating activities of $1.2 billion is expected to be used to fund expansion into
emerging markets.
Physical resources: As of June 30, 2012, Coach occupied 354 retail and 169 factory
leased stores located in North America, 180 Coach-operated department store shop-inshops, retail stores and factory stores in Japan, 96 Coach-operated department store
shop-in-shops, retail stores and factory stores in Hong Kong, Macau and mainland
China, and 34 Coach-operated department store shop-in-shops, retail stores and
factory stores in Taiwan and Singapore. Coach really utilizes new technologies such as
their global web presence, with 17 informational websites in 18 countries.
Trademarks and Patents: Coach owns the entire material trademark rights used in
connection with the production, marketing and distribution of all of its products, both in
the U.S. and in other countries in which the products are principally sold. ``Major
trademarks include Coach, Coach and Lozenge Design, Coach and Tag Design,
Signature C Design, Coach Op Art Design and The Heritage Logo (Coach Leatherware
Est. 1941)``
Intangible Resources
Managerial Capabilities: The dramatic growth of Coach is a testament to the
strength of management talent at Coach. Coach`s management team has enormous
experience in the industry, massive talent and demonstrated ability to continue to
innovate and stay relevant.
Capacity to Innovate: Coach`s ability to innovate can be attributed to Reed Krakoff
(Executive Creative Director) who has been with the company since 1996. Coach has
revitalized its image to attract a younger demographic. Coach is consumer-centric, and
pays attention to its consumers needs and wants through consumer research.
Reputation Resource, Perceived Quality: Since inception Coach has focused on creating
quality products and it provides a lifetime warrantee for every Coach handbag.
Coach`s commitment to quality and customer service creates important brand loyalty.
Capabilities
Innovative Merchandising: Coach`s ability for innovative product designs
merchandising is one of Coach`s capabilities. Coach listens to its consumer through
comprehensive consumer research to anticipate the consumers changing needs,
keeping the product assortment fresh and relevant.
(Marketing) Effective Promotion of Brand: Coach has been highly successful in
promoting its brand of affordable luxury. Their after-sale service has engineered
significant customer loyalty to the brand.
(Distribution) Effective use logistics management techniques: Coach
maintains three primary distribution centers: a distribution center in Jacksonville,
Florida, owned and operated by Coach, an Asia distribution center in Shanghai,
owned and operated by a third-party, and a distribution center, through a thirdparty, in Japan. The warehousing of Coach Merchandise, store replenishment and
the processing of direct-to-customer orders is handled by these centers. The
foundation of Coachs information systems is its Enterprise Resource Planning (ERP)
system which supports all aspects of finance and accounting, procurement, inventory
control, sales and store replenishment.
Core Competencies
Brand Image: Coach`s distinctive brand image and easily recognizable luxury
products provide customers with a feeling of success. Coach`s customers have an
emotional connection with the brand because of its long history and unmatched
customer service, and quality. To keep their image relevant they spend a total of
$245.2 million on advertising, marketing, and design costs, and specifically $89.2
million related to marketing and consumer communications.
Distribution Channels: Coach`s implementation of a 'multi-channel international
distribution model' leverages its distribution channels which include retail stores,
factory stores, department stores, direct mail catalogs, on-line store, and e-commerce
websites. Through these different channels Coach is able to effectively appeal to
multiple segments that are often overlooked by their competitors who are afraid of
brand dilution.
Management: Coach`s CEO, Lee Frankfort has been recognized from 2005-2008 as
one of 30 "Most Respected CEO's" globally. Creative Director Reed Krakoff was
formally recognized when he was awarded Accessories Designer of the Year from the
Council of Fashion Designers of America in 2001 and 2004. It is clear Coach has a
superb management team that has created a vision and successfully implanted
strategies to achieve that vision.
Performance
Coach`s performance has been impressive given the economic uncertainty in the
world. Net cash provided by operating activities was $1.04 Billion for fiscal 2012
compared to $880.8 million for 2011 fiscal year end resulting in EPS increasing from
$2.92 in 2011 to $3.53 in 2012. An increase in number of stores globally open from 750
in 2011 to 833 in 2012 contributed to their higher operating income. Their gross
margin increased slightly to 72.8% from 72.7% year over year. Despite these positive
numbers their share price has fallen approximately 10% over the last three months.
Strategy
Business Level Strategy
Coach uses product differentiation as their business level strategy positioning itself as
an ``accessible luxury brand``, within the luxury market of specialty retailing. It can
defend against new entrants since they have to surpass proven products; they also
mitigate buyers power through the tiered pricing structure for its products. When
products are well differentiated customers are less prices sensitive. A well
differentiated product line reduces chance of customers trying other products and
switching to a different brand.
Table
1.0
Coach's Product Offerings by % of Net
Sales
JunFiscal Year Ended
12 Jul-11 Jul-10
Mens & Womens
Handbags
65%
66%
65%
Accessories
28%
27%
26%
All other products
7%
7%
9%
Total
100
100
100
International Strategy
Coach uses a transnational strategy to get above average returns for a sustained
period of time. Coach also benefits from economies of scale and scope and an
increased market for their product offerings. By employing a transnational strategy
Coach is able to achieve efficiencies while also being flexible enough to cater to local
requirements. Coach uses a host of global entry methods including, exporting,
licensing, strategic alliances, and acquisitions.
Licensing: Coach also licenses certain products with partners outlined in Table 2.0. In
these relationships, Coach takes an active role in the design process and controls the
marketing and distribution of products under the Coach brand. Royalties from licensed
products currently comprise less than 1% of Coachs total revenues, but they provide
Coach with additional controlled exposure for their brand.
Table 2.0
Coach's Licensing Relationships as of June 30, 2012
Category
Licensing
Introduction
Territory
License
Expiration
Partner
Date
Date
Footwear
Jimlar
Spring 1999
U.S.
Spring '99
Eyewear
Luxottica
Spring 2012
Worldwide
Spring '12
Watches
Movado
Spring 1998
Worldwide
Spring '98
Fragrance
Estee Lauder
Spring 2010
Worldwide
Spring '10
Acquisitions: During fiscal 2009, the Company acquired its domestic retail businesses
in Hong Kong, Macau and mainland China from its former distributor and in 2011,
Coach acquired 100% of its domestic retail business in Singapore from the former
distributor, and on January 1, 2012, acquired 100% of its domestic retail business in
Taiwan from the former distributor. These acquisitions provide the Company with a
greater degree of control over the brand in these markets and enable Coach to raise
brand awareness and grow market share with regional consumers. As part of its
international strategy Coach has also announced that they will be buying the remaining
50% of their Japanese joint venture for $225 million.
Cooperative Strategies
Over the years Coach has taken advantage of cooperative strategic alliances with
companies to help enter markets and overcome uncertainties. Coach currently enjoys
the benefits of a vertical complementary strategic alliance with its manufacturers
within many different countries. This business level cooperative strategy helps Coach
benefit by taking advantage of its manufacturers core competency of manufacturing
quality products at an inexpensive price. Joint venture`s have reduced Coach`s risk of
entering markets and instantly give it a large distribution channel.
Synthesis
Strengths
1.) Strong Brand Image of "Affordable Luxury" Product Portfolio: Coach offers
a wide range of merchandise through its stores, and reaches a larger demographic
compared to many of Coach's higher-priced competitors. Coach is the leading
American manufacturer and retailer of leather goods, accessories and apparel for men
and women in the U.S and the second highest-selling luxury handbag retailer in Japan.
2.) Coachs Performance Remained Strong despite Weak Economy: During a
difficult economic environment Coach, has managed to increase sales at a time when
its counterparts are struggling to keep consumers buying their products. Their success
has come in part from the tiered pricing strategy system and their distribution network
including the factory discount stores.
3.) Global Presence Through its Comprehensive Distribution Channels: Coach
operates through its two business segments: direct-to-customer and in-direct. The
company's direct-to-consumers segment provides with immediate, controlled access to
consumers through Coach owned retail and factory stores in North America and Japan
as well as their e-commerce site www.coach.com and Coach Catalogs. The direct to
consumer segment represented approximately 89% of Coachs total net sales in fiscal
2012.
4.) Customer Service: One of Coachs greatest strengths is excellent customer
service. 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 wasnt available during a visit to a Coach
store. This excellent distribution and consumer service cost $68.9 million (1.4 % of net
sales) in 2012.
5.) Strong Financial Position: With nominal long term debt, the long term debt to
equity ratio is 0.05 and given the quick ratio 1.6 it suggests that Coach should have no
liquidity issues. They recently replaced their previous line of credit on June 18, 2012
with a new $400 million one with JP Morgan Chase Bank which will allow them to fund
any further expansion.
Weaknesses
1.) Dependence on Independent Manufacturers for Procuring Merchandise:
Coach sources all its merchandise from independent manufacturers or vendors. This
makes Coach vulnerable to the risk of lower product quality. Coach is also exposed to
the risk of delays in shipments, foreign governmental regulations, and political unrest
in the manufacturer's country. Disruption in any of the mentioned factors could
interrupt timely product supply at Coach.
2.) Declining Operating Margins: Coach is experiencing slowly declining margins
on its products. This is primarily due to the economys impact on luxury brand
purchases which has caused sales at its factory stores to increase as more consumers
seek bargains. Coach has been relying on sales at its lower price points and though
net sales have remained steady the margins have shrunk from 36.1% in fiscal year
2008 to 31.7% in fiscal year 2012.
3.) Geographic Concentration: Coach currently relies on the U.S. and Japan for
85.6% of its sales. This reliance on the U.S. and Japan for the majority of its sales
makes it vulnerable to geographic risks associated with each country.
Opportunities
1.) Expanding presence in China, India Brazil: The Chinese luxury market has
been growing at annual rates ranging from 2530%. China will soon become the
world`s largest purchaser of consumer luxury products. Emerging economies like
China, India, and Brazil with their developing middle class provide opportunities for
long term growth to counterbalance a smaller growth rate in America and Europe.
2.) Joint Ventures: With international partners in Europe Coach has already
partnered or entered into joint ventures with European companies but more joint
ventures in different countries would not only diversify the company's business risk but
also add a wider customer base. Given its tiered pricing model Coach is well positioned
to win market share from its rivals in Europe. Joint Ventures could also be used to enter
the manufacturing industry, gaining greater control of the quality of goods produced
and lead times.
3.) Increase in Online Sales will Enable Higher Revenues: Coach sells its
products online through its brand-dedicated website www.coach.com and also on
macys.com, dillards.com and nordstrom.com which are the company's wholesale
customers. The company's website acts as a key communications vehicle for the brand
to promote traffic in Coach retail stores and department store locations building brand
awareness as it displays the Coach brand to a larger customer base across different
countries and thus drives sales.
Threats
1.) Subdued Consumer Spending in the US: The slow recovery from the 2008
economic downtown and the risk of another economic downturn has affected
consumer spending as household have increased their savings rates. A further
Strengths
Strong Brand Image(Affordable
Luxury)
Strong Despite Weak Economy
Global Presence, Distribution
Channels
Customer Service
Strong Financial Position
Opportunities
Expanding
Presence in
China, India
Brazil
Joint Ventures
Increase Online
Sales
Threats
Subdued
Consumer
Spending in
the US
Intense
Competition
Counterfeit
Goods
Brand Diffusion
Weaknesses
Geographic
Concentration
Slightly Declining
Operating Margins
Dependence on
Independent
Manufacturers
-Reduce geographic concentration
and take advantage of emerging
markets.
-Focus on reducing overhead by
using online and therefore
increasing online sales.
- Reduce dependence on
independent manufacturers by
using joint ventures.
Coach`s current strategy is consistent with the SWOT matrix with the exception of
becoming more vertically integrated by entering the manufacturing part of the
value chain.
Alternatives:
Proceed with expansion into Europe`s Luxury goods market using the
offensive strategy of its tiered price system to win market share from the
other companies and position Coach for the eventual European recovery.
Continue the assault on China`s Luxury goods market for it will soon be the
largest market for luxury goods in the world.
Increase presence in India and Brazil to take advantage of the growth of their
middle class.
Increase advertising and brand promotion for the Coach name and its
prestige is at the core to their success.
Sales
Cost
Brand
Image
5
Time
Manageme
nt
3
* Ranking is from 0-5, where zero is no effect and five is the greatest effect/
use of resource
Implementation
Action plan and Description
1. Increase brand awareness through advertising.
2. Communicate with independent manufacturers immediately with respect to
quality controls.
3. Use unique position of affordable luxury to continue the assault on
competitors within Europe, Asia, and South America.
4. Establish task force to tackle the problem of counterfeit goods.
5. Leverage the Coach Brand globally to reinforce the Coach message of affordable
luxury.
6. Look for joint ventures in order to expand into emerging markets.
7. Identify further men`s luxury product markets coach can enter.
8. Identify reasons for declining margins over the last few years.
9. Saturate mature markets of Japan and U.S. to grow current large position.
Marketing and Sales Department needs a separate strategic unit for the
internet. This specialized unit requires unique skills that will allow Coach to
leverage its brand over the Internet. This is an important yet underestimated
market.
New excusive stock options with short as well as long maturity dates should be
given to avoid potential agency problems to executives running new
departments.