Coach Through The Lens Of Porter Five Forces

Coach Inc (NYSE:COH) is a leading American marketer of luxury handbags and other fashion accessories. It posted weak North American results in Q4 2013 as its comparable stores sales fell by around 1.7%. In this article, we look at how Coach stacks up along Porter’s Five Forces, to assess where it could gain or lose going forward.

According to our analysis, the competitive rivalry within the industry is the most potent threat for Coach. The growing popularity of upcoming fashion companies such as Michael Kors is impacting the demand for Coach’s products. The retailer’s ability to maintain and enhance its North American market share will be the key factor influencing its stock-price movement in the future. Moreover, the bargaining power of customers is increasing with the rising competition in the industry and low barriers to entry in the Internet business makes the threat of new entrants moderate. 

See our complete analysis for Coach

Porter Five Force Analysis

Competitive Rivalry Within The Industry

• Coach occupies around 28% market share in the U.S. handbags market, and competes with industry players including Louis Vuitton, Gucci, Longchamp, Vera Bradley, Fossil, Chanel, Guess, Marc Jacobs, Juicy Couture, etc. ((Duking It Out in Women’s Handbags, Barron’s, February 23, 2013))
• In North America, Coach is increasingly facing intense competition from upcoming fashion companies such as Michael Kors, Tory Burch and Kate Spade. The North American sales growth of these new players was recorded at 64.5%, 55.1% and 47.6% in 2012 respectively, and this significantly outpaced Coach’s 6.6% growth. ^[1]
• We believe the rising competition in the North American handbags and accessories market is an overriding concern for Coach’s stock in the near term. Its comparable stores sales declined in the last quarter and we believe this could continue in the near term.
• Coach is undertaking a transformation strategy to evolve into a global lifestyle brand anchored in accessories. However, we believe this transformation will take at least a few more quarters to reap the desired results.
• Increased private label offerings by wholesale customers also increases the competition for Coach.

Bargaining Power Of Customers

• Coach sells through both, the direct-to-consumer channel and the wholesale channel. The direct channel, which includes Coach operated stores and e-commerce sales accounted for around 89% of its total sales in fiscal 2012.
• Since wholesale customers account for only around 10% of the total sales, we believe their bargaining power is limited.
• We think the bargaining power of end-customers is moderate. Coach has positioned itself as an affordable luxury brand and enjoys strong brand recognition due to its high quality products. However, its North American consumers are increasingly gravitating towards newer fashion brands such as Michael Kors. Hence, Coach is losing some of its exclusive appeal to these upcoming brands.
• We believe that the customers’ bargaining power will remain moderate in the future as Coach’s efforts to reinvigorate its brand appeal will be offset by rising competition in the market.

Threat of New Entrants

• To start up a new brand, significant capital expenditure is required for marketing and floor space.
• Brand recognition and loyalty are among the main factors that drive middle-to-high income earners towards luxury companies such as Coach. A new player would find it difficult to achieve this position without making significant investments.
• However, the internet business has low barriers to entry and new players selling apparel, accessories and footwear online can emerge in the online sector.

Bargaining Power Of Suppliers

• Coach does not manufacture its own products. Instead, it relies on manufacturers located in various countries such as China, Vietnam, India, Philippines, Thailand, Italy and the United States.
• In fiscal 2013, there was one vendor that contributed around 12% to Coach’s total units. We believe this player holds some bargaining leverage as there are high switching costs involved in changing suppliers.
• However, no other individual supplier provided more than 10% of Coach’s total units in fiscal 2013. Hence, their bargaining power is limited.
• We believe the increased costs of raw material and labor are usually shared by suppliers with their end customers. Hence, Coach sources its products from various geographies to limit the impact of inflationary pressure.

Threat Of Substitute Products

• Coach’s products are purchased by people in the middle-to-high income group. As consumers in this income group like to wear high-end luxury brands to display affluence, the demand for brands like Coach will continue.
• However, counterfeit products represents a grave threat for the company, especially in emerging markets such as China. As the quality of counterfeit products has been improving over the past few years, we believe this problem has the potential to dilute the company’s brand value. Hence, this is an area of concern for the company.

Our $59.5 price estimate for Coach’s stock, represents near 10% upside to the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Tory Burch Stake Sale Suggests Michael Kors (KORS) is Overvalued, StreetInsider.com, January 3, 2013 [↩]