Here’s How Coach Can Regain Its Market Share

April 2nd, 2014 by Trefis Team
COH: Coach logo
COH
Coach

Coach (NYSE:COH) used to be one of the leading brands in the North American “affordable” luxury market segment. Since 2011, it has seen its market share eroded by newer entrants like Michael Kors and Kate Spade. It’s share has fallen from 19% in 2011 to 17.6% in 2012. The earnings announcement for Q2F14 did not bring any different news: comparable store sales in North America were down by 13.6%, gross profits fell by more than 9% and gross margin contracted three percentage points. In comparison, Michael Kors’ most recent earnings report was excellent. The company recorded a 50% rise in North American revenues on the back of a 24% growth in comparable store sales.

However, there was one silver lining for Coach in its earnings numbers: international sales grew by 2%, due to a strong 25% rise in sales in China. We believe that Coach should take this number as its guidance to regain it’s eroding market share.

Read our complete analysis for Coach, Inc

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China Opportunity

Let’s consider the following facts about China:

  • Chinese consumers contribute 25% to the total luxury purchases around the globe, compared to 20% by U.S. shoppers.
  • Approximately 60% of these purchases are made outside of China. [1]
  • A further 23% of these purchases are made through a e-commerce retailers like Amazon, Ebay and direct-to-consumer channels of foreign luxury brands [2]

In Q2, sales in China experienced double-digit growth of 25%. Additionally, square footage in China is expected to grow 25% with the company planning on adding 30 new stores. We expect sales in China to rise in the foreseeable future. The reasons for our optimism are as follows:

  • A weakening dollar and eased visa restrictions for Chinese nationals have made U.S. the preferred shopping destination over Europe. [3]
  • The Chinese growth story has followed the same pattern as other growth stories: high GDP growth followed by rise of the middle income trap. The number of middle income earners in China has grown at a rapid rate over the last decade, but the growth rate in high income makers has been low. [4] A consequence of this is that Chinese consumers are quite price sensitive with regard to the luxury goods market. This trend might mean that high end luxury brands like Louis Vuitton, Loewe and Hermes might suffer, but high quality and affordable brands like Coach can capitalize on this opportunity. [5]
  • Asian men are more fashion conscious than their Western counterparts. Therefore, a stronghold in the handbags and accessories space in China will help the company’s men’s business too.

Protecting Share in North America

Coach’s high presence in outlet stores has seen the brand lose some of its appeal. Consequently, comparable store sales have suffered and Michael Kors has gained momentum in the handbag market. To help put a stop to declining revenue growth in North America, Coach will be looking to accelerate its square footage expansion. Global square footage is expected to grow by 9% in 2014, with fifteen new stores in North America. This has seen the company shift its focus from handbags and accessories to a lifestyle brand.

Additionally, Coach has rebalanced its assortments towards a sales mix with a 7% higher average unit price. By focusing on the above $400 price bucket, the company is looking to capture the leather bag segment that European high end luxury brands like Vuitton and Loewe cannot tap. Moreover, management indicated that the average unit price is likely to increase further as new creative director, Stuart Vevers, launches his product line in September. This price range currently only contributes about 20% to the overall business. Therefore, a shift towards this segment can help Coach regain some of its lost appeal. [6]

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Notes:
  1. Chinese shoppers world’s top luxury goods spenders, while China luxury market cools to seven percent growth in 2012, Bain & Company, December 2012 [↩]
  2. China Accounts for Nearly 50% of Global Luxury Goods Consumption, World Travel Online, November 2013 [↩]
  3. Made-in-USA luxury brands win fans in China, Businessweek, February 2014 [↩]
  4. Can China escape the middle income trap, TIME, March 2013 [↩]
  5. Coach outflanking Vuitton in China with $400 handbags, Bloomberg, February 2014 [↩]
  6. Coach Earnings Fall on North American Weakness, Wall Street Journal, January 2014 [↩]