Case Study:
Coach: Riding the Wave of Premium Pricing
Victor Luis stood looking out the window of his office on 34th Street in Manhattan’s Hell’s Kitchen neighborhood. It had been just over a year since he had taken over as CEO of Coach, Inc., a position that had previously been held by Lewis Frankfort for 28 years. Under Frankfort’s leadership, it seemed Coach could do no wrong. Indeed, over the previous decade, the 73-year- old company had seen its revenues skyrocket from about $1 billion to more than $5 billion as its handbags became one of the most coveted luxury items for women in the United States and beyond. On top of that, the company’s $1 billion bottom line—a 20 percent net margin—was a common annual out- come. Coach’s revenues made it the leading handbags seller in the nation. The brand’s premium price and profit margins made the company a Wall Street darling.
Right around the time Luis took over, however, Coach’s fortunes had begun to stumble. Although the company had experienced promising results with expansion into men’s lines and international markets, it had just recorded the fourth straight quarter of declining revenues in the United States, a market that accounts for 70 percent of its business. North Amer- ican comparable sales were down by a whopping 21 percent over the previous year. Once the trendsetter, Coach lost market share to younger and more nimble competitors for two years in a row. Investors were jittery, causing Coach’s stock price to drop nearly 50 percent during that time. After years of success, it now seemed that Coach could do little right.
Artisanal Origins
In a Manhattan loft in 1941, six artisans formed a partnership called Gail Leather Products and ran it as a family-owned busi- ness. Employing skills handed down from generation to gen- eration, the group handcrafted a collection of leather goods, primarily wallets and billfolds. Five years later, the company hired Miles and Lillian Cahn—owners of a leather handbag manufacturing firm—and by 1950, Miles was running things.
As the business grew, Cahn took particular interest in the distinctive properties of the leather in baseball gloves. The gloves were stiff and tough when new, but with use they became soft and supple. Cahn developed a method that mim- icked the wear-and-tear process, making a leather that was stronger, softer, and more flexible. As an added benefit, the worn leather also absorbed dye to a greater degree, producing deep, rich tones. When Lillian Cahn suggested that the com- pany add women’s handbags to the company’s low-margin line of wallets, the Coach brand was born.
Over the next 20 years, Coach’s uniquely soft and femi- nine cowhide bags developed a reputation for durability. Coach bags also became known for innovative features and bright col- ors rather than the usual browns and tans. As the Coach brand expanded into shoes and accessories, it also became known for attractive integrated hardware pieces—particularly the silver toggle that remains an identifying feature of the Coach brand today. In 1985, the Cahns sold Coach to the Sara Lee Corpora- tion, which housed the brand within its Hanes Group. Frankfort became Coach’s director and took the brand into a new era of growth and development.
Under Frankfort’s leadership, Coach grew from a relatively small company to a widely recognized global brand. This growth included not only new designs for handbags and new product lines but a major expansion of outlets as well. When Frankfort assumed the top position, Coach had only six boutiques located within department stores and a flagship Coach store on Madison Avenue. By the time Frankfort stepped down, there were more than 900 Coach stores in North America, Asia, and Europe, with hundreds of Coach boutiques in department stores throughout those same markets as well as in Latin America, the Middle East, and Australia. In addition to the brick-and-mortar outlets, Coach had developed a healthy stream of online sales through its Web sites.
High Price Equals High Sales
With the expansion in Coach’s product lines and distribution outlets, women everywhere were drawn to the brand’s quality and style. But perhaps more than anything, they were attracted to the brand as a symbol of luxury, taste, and success. Over the years, Coach had taken great care to find an optimal price point, well above that of ordinary department store brands. Whereas stores that carried Coach products also sold mid-tier handbag brands for moderate prices, Coach bags were priced as much as five times higher.
It might seem that such a high price would scare buyers off. To the contrary. As Coach’s reputation grew, women aspired to own its products. And although the price of a Coach bag is an extravagance for most buyers, it is still within reach for even middle-class women who want to splurge once in a while. And with comparable bags from Gucci, Fendi, or Prada priced five to ten times higher, a Coach bag is a relative bargain.
With its image as an accessible status symbol, Coach was one of the few luxury brands that maintained steady growth and profits throughout the Great Recession. And it did so without discounting its prices. Fearing that price cuts would damage the brand’s image, Coach instead introduced its “Poppy” line at prices about 30 percent lower than regular Coach bags. Coach concentrated on its factory stores in outlet malls. And it main- tained an emphasis on quality to drive perceptions of value. As a result, Coach’s devoted customer base remained loyal throughout the tough times.
At about the same time, Coach also invested in new cus- tomers. It opened its first men’s-only store, stocked with small leather goods, travel accessories, footwear, jewelry, and swim- suits. Coach also expanded men’s collections in other stores. As a result, its revenue from men’s products doubled in one year. The company saw similar success with international customers, pressing hard into Europe, China, and other Asian markets.
But just as it seemed that Coach was untouchable, the brand showed signs of frailty. Coach’s U.S. handbag busi- ness started slowing down. During Luis’s first year on the job, Coach’s share of the U.S. handbag market fell from 19 percent to 17.5 percent—the second straight year for such a loss. Dur- ing that same period, Michael Kors, Coach’s biggest competi- tive threat, saw its market share increase from 4.5 percent to 7 percent. Up-and-comers Kate Spade and Tory Burch also saw increases. Because the U.S. market accounted for such a large portion of the company’s business, overall revenue took a dip despite the brand’s growth in new markets.
What’s the Problem?
Many factors could be blamed for Coach’s U.S. decline. Dur- ing the most recent holiday season, Coach had to contend with the same problem many other retailers faced—less traf- fic in shopping malls. But Kate Spade and Michael Kors, which operate their own stores and sell through department stores in malls just as Coach does, experienced double-digit gains during the same period. Coach’s performance also ran counter to the dynamics of the handbag and accessory market as a whole, which grew by nearly 10 percent over the previ- ous year.
The differences in sales trends between Coach and its com- petitors have led some analysts to speculate that the long-time leader has lost its eye for fashion. “These guys are definitely losing share,” said analyst Brian Yarbrough. “Fashion-wise, they’re missing the beat.” Yarbrough isn’t alone. Many oth- ers assert that, under the same creative direction for 17 years, Coach’s designs have grown stale.
Then there is the issue of Coach’s price structure—in short, Coach may have taken the premium price point too far. “Coach tried to eliminate coupon promotions tied directly to its discount outlets, which are the company’s biggest source of revenue, and which attract customers looking to stretch their dollars,” said one luxury retail expert. “The number of people willing and able to pay a premium for luxury brands, like Coach, is getting small as this weak economy continues.” However, price alone would not explain why Coach’s business slid at the same time that sales by comparably priced competitors rose. Additionally, while Coach’s North American revenues were down last year, sales of its high-end handbags (priced above $400) actually increased.
Some analysts have also questioned the effect of Coach’s popularity on its image of exclusivity. A luxury brand’s image and customer aspirations often rest on the fact that not every- one can afford it. But Coach has become so accessible, anyone that wants a Coach product can usually find a way to buy one. This availability has been fostered by Coach’s outlet stores— company-owned stores that carry prior season merchandise, seconds, and lower-quality lines at much lower prices. With the number of customers drawn in by low prices, Coach’s outlet stores now account for a sizable 60 percent of revenues and an even higher percentage of unit sales. Outlet sales, combined with a healthy secondary market through eBay and other Web sites, mean that Coach products are no longer as exclusive as they once were.
Although new as CEO, Luis has been with Coach for the past eight years and oversaw Coach’s international expansion. And although Frankfort has stepped down, he is still involved as chairman of the board. Led by these seasoned fashion execu- tives, Coach has a turnaround plan. For starters, the company hired a new creative director. Stuart Vevers brings to Coach the same magic that he worked for brands like Louis Vuitton, Givenchy, Bottega Veneta, and Mulberry. According to Luis, Vevers is “providing a fashion relevance for the brand like we have never had.”
In addition to the creative and design changes, Coach is rebalancing its product portfolio. To win back shoppers, Coach will be positioned as a lifestyle brand with greater expansion into footwear, clothing, and accessories. Additionally, the com- pany will increase the number of handbag offerings priced at $400 or more, a move that could raise the average price point of Coach’s handbags.
The initial fruit of Coach’s turnaround plan appears prom- ising. The first lines under Vevers’s direction show evidence of a complete transformation while still remaining true to the core elements of the brand. Bold new shapes and colors abound in the handbag lines. But the real changes are apparent in Coach’s other lines—black leather biker jackets festooned with pins and zippers, suede coats and parkas, and urban hiker boots, all accented liberally with shearling pieces. Vevers was going for “a Coach approach to luxury, even an American approach to luxury—not too precious . . . not too perfect.” Based on reviews from the fashion world and the public, Vevers seems to have dialed in the right combination. “Coach is cool again, and not in a way that’s appealing only to fashion insiders,” says Lauren Indvik, editor in chief of Fashionista.
Every company gets things wrong now and then. What dis- tinguishes good companies from bad ones is the fact that good companies are able to see their mistakes and correct them. It’s clear that those in charge at Coach have recognized their mis- takes. But it remains to be seen if the turnaround plan is the antidote. With all that Coach has at stake, Luis, Frankfort, and the others will not give up easily. The question is, will the new strategy restore Coach to its former glory days?
Answer the following questions:
- What challenges does Coach face in pricing its vast prod- uct line?
- Based on principles, explain how price affects customer perceptions of the Coach brand.
- How has increased competition at Coach’s price points affected the brand’s performance?
- Will the plan proposed by current Coach’s leadership be successful in reversing the brand’s slide in market share? Why or why not?
- What recommendations would you make to Coach?
Your answer must be typed, double-spaced, Times New Roman font (size 12), one-inch margins on all sides, APA format and also include references.