Since October 2000’s IPO, net sales had grown at a compounded annual rate of 26% and stock price had increased by 1,400% as a result of a strategy keyed to “accessible luxury”. Coach created accessible luxury in ladies handbags and leather accessories by matching key rivals on quality and style, while beating them on price by 50% or more. Not only did Coach’s $200-$500 handbags appeal to middle income consumers wanting a taste of luxury, but affluent consumers with the means to spend $2,000 or more on a handbag also bought Coach. By 2006, Coach had become the best-selling brand of ladies luxury handbags and leather accessories in the US with a 25% market share. Coach retail stores and high levels of customer service provided by its employees contributed to its competitive advantage.
What are the defining characteristics of the luxury goods industry? * Market size and growth rate: The global luxury goods industry was expected to grow by 7% during 2006 to reach $112 billion. * Scope of rivalry: Global, with Italian luxury goods companies accounting for 27% of industry sales in 2005, French luxury goods companies – 22%, Swiss – 19%, and US companies – 14%. * Forward/backward integration: Most manufacturers were vertically integrated forward into the operation of retail stores. Unlike other signature lines such as Armani and Versace which manufactured under the supervision of the designer, Coach lines were produced by low-cost contract manufacturers. * Consumer characteristics: Although traditional luxury consumers in the US ranked in the top 1% of wage earners with household incomes of $300,000 or more higher, a growing percentage of luxury goods consumers earned substantially less, but still aspired to own products with higher levels of quality and styling. Manufacturers of the finest luxury goods sought to exploit middle-income consumers’ desire for such products by launching “diffusion lines” which offered affordable or “accessible” luxury. * Degree of product differentiation: All luxury good companies utilize strategies that attempt to create a high degree of differentiation. Key features include quality, image and reputation, customer service, styling, and store ambiance.
Five Force Model for the luxury goods industry:
* Rivalry: Strong
Interfirm rivalry is the strongest force in the luxury goods industry. Luxury goods sellers were required to develop and manufacture products that were made from the finest materials, set standards for style, had reputations of quality and prestige that dated back more than 100 years in most cases, were sold in beautiful flagship stores and the finest department stores, and provide levels of customer service which discriminating consumers were accustomed to. * Buyers: Weak
Both retailers and consumers had little power to negotiate with manufacturers of luxury goods. Most manufacturers maintained year-round full price policies. Department store buyers also had no ability to negotiate pricing with makers, since department stores were identified by the luxury brands they carried. The seller-buyer relationship also favored the world’s top luxury goods makers since limited distribution promoted a feeling of scarcity among consumers.
* Substitutes: Moderate to Strong
Many substitutes existed for luxury goods in every product category. By definition, luxury goods are not necessities. Luxury goods are possessions that satisfy an internal desire for certain consumers. Customers who did not aspire to own luxury goods were quite willing to purchase substitute products selling at much lower price points. However, the percentage of consumers in developed countries in the US and Canada, Europe, and Asia wishing to own luxury goods was increasing in 2006. These consumers had adopted a “trade up” shopping strategy whereby they spent little of commodity-type products in order to have more income for luxury items. * Suppliers: Weak
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