Coach Channel Management Analysis Coach Inc., Distribution

Coach Channel Management Analysis

Coach Inc., Distribution Channel Analysis

Company Description and Overview

Coach Inc., (NYSE:COH) is a globe leader in fine accessories and gifts market, and one of the most profitable competitors in the leather goods and luggage manufacturing globally. Coach generated $4.76B in Revenues in their latest full fiscal year and earned a Net Income of $1.04B. Coach is a highly profitable business, earning 21.77% Net Profit Margin, 30.44% Operating Margin and 33/12% Return on Assets (ROA) in addition to a Return on Average Equity (ROE) of 51.3%. An eleven year financial ratio analysis is include in Appendix A, Coach Inc., Ratio Analysis. These financial accomplishments are significant given how consolidated the fine accessories and gift markets have become in recent years with the company reporting that their own market research shows the overall industry consolidating at a negative growth rate of 9.6% from 2007 to 2012, with continued consolidation, dropping 2.4% from 2012 to 2017(Coach Investor Relations, 2012). Industry analysts are predicting that there are approximately 4,700 companies competing in this industry today and that in the U.S. alone the manufacturing and sales of leather handbags and accessories generates $1.8B in profits (IBIS Research, 2012). Coach has less than 1% market share of the global industry, yet has significant market share in the affluent (over $100K income) buyers located in North America, Asia and throughout the Middle East, which is growing rapidly as a source of revenue for the company (IBIS Research, 2012). Coach is unique in that it competes across a wide variety of product categories in the high-end of the market, taking on significant inventory risk by sourcing men's and women's handbags, accessories including business cases and backpacks, in addition to footwear, jewelry and sunwear for women and men. The company has also successfully move into fragrance and watches, two product lines generating well over 50% gross contribution margins per the company's latest financial statements (Coach Investor Relations, 2012).

Coach relies on a Direct-to-Consumer and Indirect channel strategy, which gives them greater visibility into customer demand while at the same time concentrating the company's focus on key markets (Coach Investor Relations, 2012) . The company has stores in Japan, Hong Kong, Macau, mainland China and North America and continues to enjoy success in the Middle East with this Coach catalog and Internet-based e-commerce strategies (IBIS Research, 2012). Coach operates 345 retail and 143 factory-based stories in 20 countries (Coach Investor Relations, 2012).

Market and Competitive Analysis

Coach continues to gain profitable sales and is able to attain significant sales due to the high level of customer loyalty and brand value that its products provide. The company satiates that 65% of sales are from returning, loyal customers, which is the highest repurchased rate of any retailer in their competitive arena (Coach Investor Relations, 2012). In evaluating the competitors in this market, industry analysts have commented how fragmented its structure is, and how differentiation through customer experience and breadth of products is critical for success (IBIS Research, 2012). Coach has been able to grow to a $4.9B corporation due to making their business excel on these dimensions. Competitors most prevalent include American Apparel and Tandy Brands, in addition to private-label suppliers for mass merchandisers including French conglomerate Carrefour, United Kingdom-based Tesco and Wal-Mart. These three mass merchandisers are increasingly sourcing low-end knock-offs of Coach-based designs, changing the labeling and packaging to alleviate potential copyright infringement (IBIS Research, 2012). The next effect of their competitors continually pursuing a low-end pricing strategy is a net reduction in the total revenue for the industry as was shown in the introduction of this analysis. Price wars are breaking out on low-end products that Coach sells, further accelerating the commoditized of this industry as well (Coach Investor Relations, 2012) (IBIS Research, 2012).

Based on an analysis of the industry from IBIS Research (2012) and from the financial statements from Coach, the graphic shown to the right has been created.

Figure 1: Analysis of the Leather Goods and Luggage Manufacturing Industry

Sources:

(Coach Investor Relations, 2012)

(IBIS Research, 2012)

Current Distribution Structure and Strategy

Coach currently selling through a classical multitier distribution channel structure, relying on 345 retail and 143 factory-leased stores in the U.S. alone and also maintained retail locations in 20 countries (Coach Investor Relations, 2012). Coach is the dominant high-end retailer of gifts and accessories in Jana where the typical customer earns in the top ten percent of income in that nation (which is equivalent to North American incomes over $150,000 a year)(IBIS Research, 2012). Due to this affluent and highly loyal customer base, Coach can afford to operation 169 department store shop-in-shops that are based on alliances with Japanese department stores (IBIS Research, 2012). Un addition the company has over two dozen factory stores in Japan and over a dozen factory stores in Hong Kong, Macau, and mainland China.

The following is an overview of their current distribution channel strategy:

Coach Inc., SWOT Analysis

Coach continues to be successful in a highly commoditized industry due to the following strengths, and the unique approach the company is taking to address weaknesses and threats. The opportunities are also very significant for the company, which could easily lead to Coach being over $5B in revenue by 2015 according to financial analysts' forecasts (IBIS Research, 2012). The following is a list of the strengths, weakness, opportunities and threats of Coach:

Strengths

Excellent brand recognition and a defensible position as an "affordable luxury" brand with the broadest product portfolio of the industry (IBIS Research, 2012).

Highly profitable and able to quickly design then source from suppliers unique and differentiated products, despite a weak global economy.

Excellent multichannel management and the ability to balance department stores in their channel mix without resorting to price wars.

65% of customers return to purchase additional products (Coach Investor Relations, 2012).

Weaknesses

Highly dependent on foreign suppliers and an unstable supply chain for many of their products (IBIS Research, 2012).

Competing in an industry that is known for price wars and rampant consolidation, Coach has no low-end product liens they can counter with that also deliver their high gross margins.

Opportunities

Strong brand recognition and aspirational sales in China; this represents the single largest potential to Coach and could lead to them being a $5B company by 2013.

Joint ventures with global partners throughout Asia, the Middle East and Europe also show significant potential (Coach Investor Relations, 2012).

Strong catalog and e-commerce sales globally with the Middle East being one of the leading regions of sales through these channels.

Threats

Pervasive threat in the industry are counterfeit goods, which are according to IBIS Research responsible for the company not being $5B in sales already

(IBIS Research, 2012).

Exceptionally strong price competition throughout North America, with competitors often partners with mass merchandisers including WalMart to gain distribution while lowering price.

Proposed Distribution Structure and Strategy

Coach will increasingly be competing with mass merchandisers who will increasingly attempt to drive down prices and force consolidation of the industry. The aspirational value of the Coach brand is very strong, and will continue to drive consumers in Asian nations especially to save nearly 30% of their monthly incomes to buy a stylish handbag or briefcase, a common practice in the emerging economies of China (IBIS Research, 2012). Second, Coach is not addressing the customization segment of their business as well. Creating a separate channel called My Coach, which would personalize items for the high-end consumer, could deliver 60% or greater gross margins. The proposed multichannel strategy is defined below with MyCoach designed to capture higher-end customization sales, thereby protecting gross margin and the Indirect channel organization given the role of managing products to the highest profit and sales possible across factory outlets, company-owned stores and department stores.