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Coach (COH)Stock (Retail Industry, Luxury Industry, Apparel - Footwear & Accessories Industry, Fashion Industry)
 This article should cite more sources.  Coach has experienced rapid growth, catapulting from $926 million in net sales in 2003 to $3.1 billion[1] in fiscal 2008. The company faces the challenges of expanding their brand while maintaining the cachet that luxury brands must have to be attractive. Although it has no presence in European markets, Coach is increasing its presence in international, primarily Asian, markets. As the handbag market matures, Coach will be challenged to find new opportunities in other product categories where it can exploit its brand appeal and manufacturing relationships to continue to grow its business. The company has already begun this process with licensed lines of Coach-branded sunglasses, watches, footwear and other accessories. Skeptics of the company's recent expansion argue that Coach's popularity and the increasing sales growth at its factory stores, which sell cheaper and marked-down versions of its merchandise, could result in the perception that its products are too "pedestrian," turning off customers attracted to its stylish luxury handbags. Critics also argue that Coach's revenues are subject to the whim of the economy and could be affected by a downturn in the financial health of the U.S. and the other countries in which it operates. However, some believe Coach's stance as a luxury retailer helps shield it from the effects of macroeconomic troubles as its products appeal to a wealthier demographic whose wealth and consumption does not change during macroeconomic slumps. In order to continue their track record of growth, Coach is nurturing their direct channel business and expanding their operations abroad. In FY2008, Coach's direct channel business (e-commerce and catalog sales) contributed $2.54 billion to net sales (up 21% from FY07)[1]. In FY08, Coach's sales in Japan increased 14% (on a constant currency basis)[1] as the company added 12 new stores[1] in the country on net during the year.
[edit] HistoryFounded in 1941, Coach began as a small-scale leather goods manufacturer and expanded into handbag production in the 1960s. In 1985, the company was acquired by Sara Lee Corporation. Over the next 12 years, Coach increased its revenues from $19 million to $500 million, a compounded annual growth rate (CAGR) of 32%. As business stagnated in fiscal 1998 and 1999, Coach brought onto board a new management team that revitalized Coach’s product offerings, moved to an outsourced supply chain, and overhauled the interior appearance of the company’s retail stores. Coach subsequently experienced a 25% CAGR between fiscal 2000 and 2006. Following Coach’s October 2000 initial public offering (IPO), Sara Lee divested the remainder of its ownership in April 2001. [edit] Trends and Forces[edit] Core Handbag SalesCoach’s main revenue driver—accounting for 64% of total revenue in fiscal 2007—is the handbag. Coach’s success in the handbag market is evidenced by its estimated 26% market share in 2006, which makes it the leading player in the U.S. premium handbag market (premium is defined as having a price point greater than $100). Other brands in this market include Louis Vuitton, Dooney & Bourke, Gucci, and Prada. Coach’s closest competitor, Louis Vuitton, holds an estimated 11% market share. [edit] Rising with the Growing MarketPart of Coach’s success is attributed to growth in the size of the premium handbag market in the U.S., which has averaged approximately 20% annually and was roughly $5.6 billion in fiscal 2006. Analysts believe that part of this market growth is the result of consumers trading “up” from lower-priced brands (e.g., DKNY, Banana Republic, Fossil, etc.). Another contributor to this growth has been an overall expansion in the number of wealthy households in the U.S. The percentage of American households earning greater than $100,000 was 17% in 2005, having grown from 15% in 1995 and having recovered from a slump during the post-9/11 recession. The following table shows the recent changes in the U.S. Premium Handbags and Accessories market as well as Coach's steadily increasing market share.
[edit] Tiered Pricing StructureCoach’s product is classified as a “luxury” item but is accessible to a larger market due to the variety of price points that the company offers. Analysts have noted that this tiered pricing strategy is not common in the luxury handbag industry, which on average has higher entry-level price points than that of Coach. This pricing strategy is, however, reminiscent of Mercedes Benz and BMW, both of which offer a tiered pricing structure that allows consumers to enter the brand at a wide variety of price points. At all three of these companies, the tiered nature of the pricing gets consumers in on the lower end of the brand and gets them interested in owning the more expensive products that the brand offers. Coach believes that its incremental business is split about equally from three different sources: those trading “down” from higher-priced brands, those trading “up” from lower-priced brands, and those that shop similarly priced brands. To gain market share among the first category, customers trading "down," Coach plans to open two new “Legacy” stores with a higher price range. Coach's factory stores targets those in the second category, customers trading "up" from lower-priced brands. Coach has 101 US factory outlets as of the end of the third quarter of FY08. Products sold in the factory outlets are usually priced 10-50% lower compared to the retail stores. There has been some concern that the low prices in the factory stores will cannibalize the success of the full-priced stores. Significantly, the increase in same store sales at factory stores (high 20s to mid-30s) is larger than that of full-priced retail locations (mid-teens to low-20s). While this has worried some analysts, Coach maintains that only 20% of their customers shop at both retail and factory stores, and most factory stores are located a significant distance (>50 miles) from full-priced retail stores. [edit] Fashion RiskCoach introduces a new product 12 times per year in order to retain “newness” and to keep store traffic high. In 2007 73% of net sales were generated by products that had been introduced within that fiscal year. A major risk that accompanies the introduction of new product for Coach and other retailers is fashion risk. Thus far, most analysts note that Coach has done a solid job in consistently introducing products that fit with its brand and sit well with its customers. Though the company has a history of executing well in this area, fashion risk is still significant, especially considering Coach’s strong sales and increased consumer presence. If Coach loses its cachet with customers as a fashionable luxury item by becoming too popular, its sales may be susceptible. In order to address this risk, Coach focuses resources on thorough market research studies that anticipate the fashion desires and functional needs of its customers. Coach reportedly spends $4-5 million per year surveying over 15,000 consumers to find out more about their preferences. Moreover, new line introductions are subject to pilot programs in addition to internal review. [edit] Branching into Other Product CategoriesWhile still placing their main attention on the handbag as the driver of their sales, Coach is also looking at other areas of growth. Women's accessories, composed mostly of small leather goods, represented 13% of sales in fiscal 2002 but grew to compose 23% of sales in fiscal 2006. This category includes products like wristlets, cosmetic cases, and wallets. Coach also has partnered with a subsidiary of Estee Lauder to expand into fragrances and recently launched a line of jewelry in a limited number of its stores. Coach also offers a limited selection of men's accessories, outerwear, business accessories, travel accessories, watches, footwear, and eyewear. In 2007, accessories accounted for 28% of net sales. These items help increase the variety of offering in stores and keep customers coming back to keep up to date. Moreover, they also increase average transaction value as "impulse" buys when a customer is purchasing a bigger ticket item such as a handbag. Some analysts have noted that a potential constraint to growth in this area is limited store size.
[edit] International OpportunitiesApproximately 24% of Coach's revenues comes from countries outside the U.S. in 2007. Coach has an established presence in Japan and is expanding into other Asian markets. Coach has virtually no European presence and has no plans to compete against established brands there.
[edit] JapanAt the end of fiscal 2008 Coach operated 154 stores in Japan[1]. Coach's Japan operations constituted 19% of net sales in fiscal 2007. Coach is now the number two handbag brand in Japan with an approximate 9% market share (2006 estimate), though it is a distant second to Louis Vuitton's 28% share (2006 estimate). Since the Japanese handbag market (stagnated at 520 billion yen) has matured, further expansion in Japan will only be possible by increasing market share. [edit] Other marketsOutside of Japan and the U.S., Coach products are distributed through a combination of department stores, independent retail locations, and specialty retailers. Coach's strategy abroad has been to partner with local distributors who will make the majority of the capital commitment and will take the majority of the risk. Approximately 5% of net sales in 2007 came from these locations. Coach has an aggressive plan in place for expansion within Asia, including China. Macroeconomic downturns in certain parts of Asia thus may have a negative impact on Coach's operations now and going forward. China is expected to be a growth market for this industry with the emergence of a decent-sized middle class there and expected continued economic growth. [edit] No European presenceCoach does not currently operate any stores in Europe and is not seriously considering expansion into the area due to the general difficulty that it would have in replicating its high-margin business model in the area. Doing so would involve costly infrastructure investments. Moreover, Coach is at a disadvantage with its status as an American brand in a European-centric brand culture in that area. As such, Coach does not see opportunities to gain significant market share in the region. [edit] Comparison to CompetitorsCoach's business model is chiefly distinguished by its stress on "accessible luxury." This model thus reaches a larger demographic compared to many of Coach's higher-priced competitors, including Louis Vuitton, Gucci, and Prada. These competitors tend to focus on a higher income, high-fashion demographic. Companies like Dooney and Burke and Cole Haan also stress "accessible luxury" and are Coach's most successful competitors; however, Coach's market share has continued to increase in their presence. Coach's broad appeal and high volume, well-scaled operations allow it to maintain operating margins at an industry leading 38% in 2007. This margin is outstanding compared to other luxury companies whose margins are around 20% and small/fast-growing fashion companies whose margins range from the high teens to the low 20s. Many of Coach's closest competitors are either privately owned or owned by larger European conglomerates of various luxury brands. Consequently, comparative data is unavailable. This includes Louis Vitton and Fendi, owned by LVMH, and Gucci, owned by and the PPR Group. Privately held companies include Prada and Dooney & Burke.
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