Case 4: Coach Expands into China’s Tier 2

and Tier 3 Citiesc-4

Until now, most foreign retailers have used heavily populated
Tier 1 Chinese cities such as Beijing, Shanghai, Guangzhou,
and Shenzen as their initial entry points into the Chinese consumer
marketplace. In contrast, over the next twenty years, retail
analysts predict that a large number of foreign retailers will
increasingly seek out retail sites in Tier 2 and Tier 3 Chinese
cities. Bain & Co., a global management consulting firm, lists
330 Tier 2 cities in China; they have populations of 500,000 to
2 million people. There are more than 1,200 smaller countylevel
communities that are considered to be Tier 3. Lang
LaSalle, a global real-estate services firm, has identified 15 of
China’s Tier 2 cities and 25 of its Tier 3 cities, most of which
are provincial capitals, as leading candidates for retailers.
What most researchers agree upon is that the relative importance
of the Tier 1 cities in China will diminish over time
in terms of population and spending power. China has more
than 200 cities that each have a population of at least 1 million
people. In contrast, there are only 35 cities this size in all of
Europe.
Let’s examine the expansion strategy of Coach (www.
coach.com), a U.S.-based luxury leather fashion accessories
designer and retailer, in China. Coach initially entered China
in 2003 through licensing agreements. When Coach discovered
that the locally managed retail outlets were very profitable,
it purchased back these rights in 2009. Direct control of
its image, expansion plans, and pricing was essential to Coach.
The firm also realized that it needed to better understand the
Chinese market and the important differences between Chinese
and American consumers. Its research showed that Chinese
consumers desire very conspicuous brand marking on all of
Coach’s apparel and accessory items.
Coach initially focused its attention on establishing its
brand in such affluent Tier 1 cities as Beijing and Shanghai.
The company then expanded into newer market locations such
as Chongqing after it was firmly established in Tier 1 markets.
This strategy is referred to as a “beachhead to a disperse location
strategy.” Of Coach’s initial 28 Chinese stores, 12 are
in Tier 1 cities and 16 are in Tier 2 cities or beyond. Coach
opened 13 new stores in 2010; this represented an increase in
square footage of 50 percent. It planned to open 30 new locations
in 2011, representing another increase of 60 percent in
square footage. Some of these stores will be Coach flagship
stores to focus attention on Coach’s presence in these new provincial
markets, despite their having lower profitability than
Coach’s traditional stores.
In a conference call with financial analysts, Coach cited
the Chinese market as its “largest geographic opportunity.”
Coach is seeking to more than double its sales in China, with a
goal of $250 million (U.S.) as of fiscal year 2012, as compared
with $100 million (U.S.) in fiscal year 2010.
Coach and other retailers are hoping that the lessons
learned from their Tier 1 market experiences will be applicable
to Tier 2 and Tier 3 cities. These retailers further believe that
as first movers into Tier 2 and Tier 3 cities, they will be able to
solidify their image as innovators, secure the best retail locations,
and be able to obtain sourcing agreements with the best
logistics and materials suppliers. On the other hand, they will
be assuming high risk to their image and profits, because they
may not be as successful in these smaller market areas.
Questions
1. Evaluate Tier 2 and Tier 3 cities in contrast to Tier 1 Chinese
cities from the perspectives of economic base characteristics,
as well as the nature of competition and the level
of saturation.
2. Discuss the pros and cons of Coach’s “beachhead to a disperse
location” strategy.
3. Describe the location-based advantages of being a first
mover into Tier 1 and Tier 2 cites.
4. Explain the location-based disadvantages of being a first
mover into Tier 1 and Tier 2 cites.