case teaching note 8 Coach Inc.: Is Its Advantage in Luxury Handbags Sustainable? Overview
In the six years following its October 2000 initial public offering (IPO), Coach Inc.’s net sales had grown at a compounded annual rate of 26% and its stock price had increased by 1,400% as a result of a strategy keyed to “accessible” luxury. Coach created the “accessible” luxury category in ladies handbags and leather accessories by matching key luxury rivals on quality and styling, 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 regularly snapped up its products as well. By 2006, Coach had become the best-selling brand of ladies luxury handbags and leather accessories in the U.S. with a 25% market share and was the second best-selling brand of such products in Japan with an 8% market share. Beyond its winning combination of styling, quality, and pricing, the attractiveness of Coach retail stores and high levels of customer service provided by its employees contributed to its competitive advantage. Much of the company’s growth in net sales was attributable to its rapid growth in companyowned stores in the U.S. and Japan. Coach stores ranged from prominent flagship stores on Rodeo Drive and Madison Avenue to factory outlet stores. In fact, Coach’s factory stores had achieved higher comparable store growth during 2005 and 2006 than its full-price stores. At yearend 2006, comparable store sales in Coach factory stores had increased by 31.9% since year-end 2005, while comparable store sales for Coach full price stores experienced a 12.3% year-overyear increase. Coach’s dramatic growth that resulted from its strategy keyed to “accessible luxury” had not gone unnoticed by long-established luxury goods makers. In 2006, most leading designer brands had developed sub-brands that retained the styling and quality of the marquee brand, but sold at considerably more modest price points. For example, while Dolce & Gabbana dresses might sell at price points between $1,000 and $1,500, very similar appearing dresses under Dolce & Gabbana’s “affordable luxury” brand—D&G—were priced at $400 to $600. Going into 2007, Coach Inc. executives expected to sustain the company’s impressive growth through monthly introductions of fresh new handbag designs and the addition of retail locations in the U.S., Japan, and rapidly growing luxury goods markets in Asia. Other growth initiatives included strategic alliances to bring the Coach brand to such additional luxury categories as women’s knitwear and fragrances.
Suggestions for Using the Case
Students should be highly interested in the Coach Inc. case because of their likely aspirations to own luxury goods upon completion of their degrees. Industry statistics presented in the case indicate that young professionals are among the most frequent purchasers of “accessible luxury”
goods such as Coach handbags. You’ll probably find many of the young women in your class already own Coach products. The case provides students with an excellent example of a best-cost strategy. The coupling of Coach’s differentiating features such as product quality, prestigious image, outstanding customer service, lifetime guarantee, and attractive stores with a cost-based pricing advantage has yielded a strong competitive advantage for Coach. The case also contains ample information for conducting an industry analysis and company situation analysis. The financial statements in the case are sufficient to allow you to assign whatever “number-crunching” exercises you see fit. You should be able to generate quite a lively class discussion concerning the strategy’s capability to continue to deliver competitive advantage in the midst of new “accessible luxury” brands being brought to market by the luxury industry’s strongest brands, including Dolce & Gabbana, Giorgio...
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