Coach’s Precarious Position In The Luxury Goods Market
Coach (NYSE:COH) is a brand associated with classic handbags and accessories, but the rapidly changing conditions in the luxury goods market mean that the company is having to strike a fine balance between keeping up with the present and planning for the future. Coach is having to fend off strong competition from competitors such as Michael Kors, Kate Spade and Tory Burch. At the same time, Coach is undertaking a transformation of its brand image from a handbags and accessories based company to a complete lifestyle brand. The company started diversifying its products to promote sales of categories other than handbags and small leather goods in 2013. It rolled out varied offerings of clothing, watches and jewelry, and also opened “shoe salons” at some of its flagship stores. The campaign was well received, but store traffic and sales haven’t followed. The success of this strategy is still moot. [1]
In this article, we will discuss in greater detail at how Coach is losing competitiveness in the handbag market, highlight the challenges the company faces as the luxury goods market evolves and outline the possible outcomes that these factors can have on the company’s future outlook.
Read our complete analysis for Coach, Inc
Coach Struggling Against Competition
According to a study by EuroMonitor International, Coach’s market share in the U.S. handbags market fell from 19% to 17.5% between 2011 and 2012. This share was mostly grabbed by competitor Michael Kors, whose market share has risen from 4.5% to 7% in the same period. This discouraging trend hasn’t been reversed in the past year as comparable store sales fell by ~15% in the holiday quarter. This drop in sales was due to lower traffic in Coach’s stores as shoppers were turned off by the lack of online flash sales over the quarter. Sales have now fallen for the third straight quarter in succession and management expects sales to fall further in the second half of the fiscal year. The bright spots for Coach in this quarter were sales in China, which were up by 25%, and the sales of handbags priced above $400, in North America. The disappointing thing for the company is that these high-priced handbags only comprise about a fifth of their handbag products and this means that the company is losing out to competitors on nearly 80% of their product lines in this division. [2]
Main competitor Michael Kors, having grown its revenues between 58% and 67% in the last three years, posted a revenue growth of 59% in the holiday quarter. This growth is an ominous sign for Coach as Michael Kors hasn’t reached its full store capacity yet. The store count for Michael Kors’ stood at 284 by the end of the previous quarter or approximately 70% of its stated long term target of 400 stores. Without having reached its full store capacity yet, it is possible that Michael Kors isn’t meeting the full demand for its products and there is still potential room for growth. This is a challenging scenario for Coach. [3]
Changing Luxury Goods Market
Rapidly rising incomes, greater availability of luxury products (and information about them), and changing attitudes toward the display of wealth have meant that the global personal luxury goods market is in a state of flux. These trends mean that more consumers than ever feel comfortable buying luxury goods. Moreover, the consumer base interested in these products is now more fragmented than in the past. A study by Bain & Company, classified customers in as many as seven different categories. The upshot of this fragmentation is that now there are as many opportunities as challenges for marketers accustomed to serving only the very rich. Tried and tested marketing strategies are not as effective anymore as the customer base to which these are targeted is now shifting. This means that even an established brand like Coach will have to evolve its products and marketing strategies to be able to appeal to as many segments of the luxury goods consumer base as possible. [4]
Brand Image Suffering From Ubiquity
Over the last few years, Coach has added new lines of merchandise and opened dozens of factory store outlets in an effort to boost its earnings. However, in trying to increase its sales on a quarterly basis, the company might have unwittingly eroded the appeal that made it so valuable in the first place. Coach’s products are much cheaper than those of European luxury brands such as Hermès, Bulgari or Louis Vuitton. Moreover, it derives two-thirds of its North American sales from lower-priced sales at factory outlets. This accounts for nearly half of its total sales, a percentage that is too high for a true luxury brand. As a result of these strategies, Coach’s products are now ubiquitous and no longer possess that aura of exclusivity that one identifies with a luxury brand. It is for the same reason that the products of competitors, Michael Kors and Kate Spade, appeal much more to younger consumers. If the company is to overcome these issues, it might have to bring itself to accept that a unique brand image and high sales are at odds with each other.
Outlook
Looking ahead to the future there are three outcomes possible
-Management at Coach shifts its focus on transforming the company from a handbags and accessories brand into a lifestyle brand. Considering the declining performance of Coach in the handbag market, this strategy makes sense but it can also have the negative impact of diluting the company’s brand image. This can further weaken its competitiveness in the handbags market. According to our valuation of Coach, the handbags division accounts for nearly 60% of its value and a weak outlook in this division will have a significant negative impact on the company valuation.
– Coach’s status as a classic brand might work in its favor once demographic changes. Fashion buyers are fickle and tend to swap loyalties over time. It is possible that the company’s products can come back in favor over time and help it keep a steady share of the market.
– Buyers of luxury products such as handbags and accessories don’t often have to make a binary choice between Coach and a competitor. They often purchase multiple bags for a greater variety. Moreover, by expanding its presence in many second tier American cities, Coach can now reach customers that it previously hasn’t been able to reach. Additionally, if Coach’s transformational strategy turns out to be successful, they can target more customers than it did previously. This can help Coach ride the wave of growth in the luxury market, thereby increasing its top line.
Our $59.50 price estimate for Coach’s stock which stands at a ~25% upside to the market price.