Porter’s Five Forces Analysis

Threat of new entrants [10]

New entrants of this industry should be aware that large capital resources are required to build a new brand. Brand recognition and loyalty are one of the main factors attracting high income earners towards luxury companies. It will be difficult for a new player to achieve this brand recognition without significant investments. Most of new companies will need to establish strong distribution channels, because without them their products would never be seriously considered by consumers. There is also a possibility of having certain government restrictions that might weaken the competitive position of new entrants.

Threat of substitutes [11]

There is a low possibility of appearing of problematic issues caused by possible substitutes. This is mostly because product-for-product substitution could not possibly happen within luxury goods industry. Other products cannot simply replace the ingenuity of the established luxury products in the market. It is hardly possible that consumers of luxury products would find it comfortable using other products rather than luxury ones.

Competitive rivalry within the industry [12]

Nowadays the global luxury market continues to grow on account of recovery in the global economy and increasing demand from Chinese market. Some of competitors have large financial and marketing resources, which has allowed compete more effectively in difficult times. During the economic recession some of them fell back on promotions, which has influenced all the players in the industry negatively. Apart from established companies, there is also a possibility of rising competition from Internet-based companies selling apparel, accessories and other products. Such competitors could affect the market significantly taking into the consideration e-business’s growing popularity among consumers all over the world.

Bargaining power of buyers [13]

The bargaining power of buyers in the luxury goods industry is relatively high because there are only few, large players in the industry. Coach itself sells through the direct-to-consumer channel and the wholesale channel. The direct channel, which includes Coach operated stores and e-commerce sales accounted for around 89% of its total sales in fiscal 2012. While wholesale customers account for only around 10% of the total sales its bargaining power should be estimated as limited. At the same time the bargaining power of end-customers is moderate. Coach has positioned itself as an affordable luxury brand and reckons strong brand recognition due to its high quality products.

Bargaining power of suppliers [14]

Coach does not manufacture its own products relying on manufacturers located in various countries such as China, Vietnam, India, etc. In fiscal 2013, there was only one vendor that contributed around 12% to Coach’s total units, therefore it can be named the only player holding some bargaining leverage as there are high switching costs involved in replacing such a big supplier. However, no other individual supplier provided more than 10% of Coach’s total units in fiscal 2013, so their bargaining power could be evaluated as limited.

Financial Analysis [15]

Coach’s income statement for fiscal 2009, which included 2008-2009 period, reflected the overall trends taking place in the consumer discretionary sector. The slight sales increase of 1.6% was largely due to store expansion as 33 North American stores had been added (an 11% increase), 9 new factory outlet stores (a 9% increase), 6 new Japanese stores (a 4% increase) and 4 new China stores (a 17% increase). This sales increase coincided with a severe 20% decrease in net income. Such a contradiction represented a significant decrease in net margins. In the notes to Coach’s financial statements the company attributed this to an increasing reliance on its factory outlet stores for sales.

The company had $1.1 billion in cash, which represented more than a third of its total assets and almost doubled the company’s current liability total. This strong working capital position was further aided by the fact that the company’s current assets were three-fold greater than its current liabilities. Even more impressive was the company’s capital structure. Coach had only $25 million in debt, making it 98% reliant on equity versus 2% on debt for its financing. This strong cash position with almost no debt gave Coach a financial flexibility in the times of economic recession.

Coach had also a very strong cash flow statement. Cash inflows from operations were $800,000 which indicates that the company was doing a great job of generating cash from its operations.

SWOT Analysis [16]

Strengths	Weaknesses
· Strong focus on the handbags category     · Multi-channel distribution strategy	· Dependence on independent manufacturers for procuring merchandise   · Geographical concentration
Opportunities	Threats
· Strengthening presence in Europe   · Increasing online sales	· Slowing Chinese luxury goods market   · Intense competition

Strengths

Strong focus on the handbags category:

Coach is one of the leading companies in the US premium handbag market. In order to meet the fashion and functional requirements of its diverse customer base, the company launches 3-4 handbag collections per quarter and 4-7 styles per collection. Continuous introduction of new collections will help the company addressing the changing consumer preferences and attracting customer traffic. This will contribute towards the sales growth. In FY2013, approximately 69% of Coach's total net sales were generated from new collections of products with no sales in the same quarter the previous year.

The company's focus on handbags, one of the core product categories, helped it register an increase in the total revenues. Sales from handbags accounted for 58% of total revenues in FY2013. The company's strong focus on the handbags category contributes to the sales growth while its ability to introduce new handbag collections frequently provides it with a competitive advantage.

Multi-channel distribution strategy:

Coach has adopted a multi-channel distribution strategy to serve its products to a wide customer base. The company, through its own retail stores caters for consumers in North America, Japan, Hong Kong, China, and several other Asian countries. Coach also serves value-oriented customers in North America through its factory stores. Coach also operates online stores in the US, Canada, Japan, and China. The company also sells to wholesale customers both in the US and international markets. The company, through its international distributors and authorized retailers, serves domestic and travel retail markets in more than 25 countries.

Coach also distributes its products through licensees who sell Coach brand products through several other channels: shoes in department store shoe salons, watches in jewelry stores, eyewear and sunwear in optical retailers. Presence in multiple retail channels allows Coach to expand its access and reach wide spread markets. Moreover, it helps Coach maintaining its brand visibility over a large customer base.

Weaknesses

Dependence on independent manufacturers for procuring merchandise:

Coach sources all its goods from independent manufacturers or vendors not having its own manufacturing operations. The manufacturers that produce merchandise for Coach are located in many countries, including China, Vietnam, India, Philippines, Thailand, Italy and the US. Consequently, the company does not have a direct control over the manufacturing process or the quality of the raw material being used. This makes Coach vulnerable to the risk of lower product quality. Additionally, dependence on third party might cause other problems such as delays in shipments, inability to adapt to changes in foreign government regulations, etc.

Geographical concentration:

Coach currently relies on just the U.S. and Japan for 97% of its sales and it might be difficult to expand this limited geographic area. Europe is entirely dominated by the elite European luxury brands while there is not yet a market for luxury items in many emerging markets. This leaves Coach with expansion potential in its existing markets: the U.S. and Japan. However, these markets are beginning to be saturated and it might be risky to further expand in these markets in such an economic environment. Yet, China remains the major market that Coach could expand in. The problem is that such an expansion is likely to be very competitive as far as elite European brands are eager to enter the Chinese market as well.

Opportunities

Strengthening presence in Europe:

After 2008-2009 stagnation, the European apparel, accessories and luxury goods market recovered in 2010. It also showed a moderate growth in the next two years. According to MarketLine, in 2017 the European apparel, accessories and luxury goods market is expected to increase by 14.7% since 2012. In FY2011, Coach acquired a non-controlling interest in a joint venture with Hackett Limited to expand the Coach business in Europe. Through this joint venture, the company opened retail locations in Spain, Portugal, the UK, France, Ireland, and Germany. To further strengthen its presence in the European market, the company acquired Hackett Limited’s 50% interest in the European joint venture in July 2013. Expansion in the European market will enable the company to diversify its business risk and add a wider customer base to its portfolio.

Increasing online sales:

With more consumers comfortable shopping online and retailers investing more in their online operations, the online retail spending has been steadily growing. According to the industry estimates, the worldwide e-commerce sales will increase by nearly 20% in 2014 to reach nearly $1.5 trillion. Asia-Pacific is expected to become the largest e-commerce market in the world, accounting for more than 45% of digital buyers worldwide in 2014.

Couch maintains e-commerce sites in the US, Canada, Japan and China and has plans for additional e-commerce sites in other parts of the world. The company also has informational websites in 28 countries. Coach provides store pick services for customers, through which a consumer can purchase the product online and pick it up the in the nearby store.

The company's website remains a key communication vehicle for the brand to promote traffic in Coach retail stores and department store locations and build brand awareness. The company's strong brand equity and presence in the online retail channel provide an opportunity to promote its brand to a larger customer base across different countries, which, in turn, would support the revenue growth of the company.

Threats

Slowing Chinese luxury goods market:

Chinese contributed to nearly 28% of luxury purchases in the global market in 2013, which means China has the largest number of luxury buyers globally. However, the luxury goods market in China has slowed down in the recent past. According to the industry estimates, the sales growth in this market declined from approximately 6.9% in 2012 to nearly 2% in 2013. The market is forecast to register a passive growth rate in 2014 as well. The decline in sales of luxury goods was caused by the Chinese government’s measures and growing preference to buy the luxury goods abroad by Chinese. The Chinese government enforced a ban on advertisements for luxury products on its official television and radio channels as some of these advertisements encourage giving luxury items as gifts. This move of the government was directed at reducing the wealth gap between the rich and poor in the country and also to handle the issue of growing corruption. Giving gifts to higher officials with the intent of earning their favor is a common practice in China.

A slowdown in luxury spending along with slowing economic growth in China could affect the sales growth of companies such as Coach in this region.

Intense competition:

Coach faces intense competition in the product lines and markets it operates. The company competes with European and American luxury brands and private label retailers, including some of Coach's wholesale customers. The company's competitors obviously develop new products that attract the customers and in the majority of cases there is no possibility for Coach to predict the timing and scale of such product introductions. Therefore, the company’s ability to compete depends on the strength of its brand and its ability to protect its trademarks and design patents. Failure to compete effectively could majorly affect the growth and profitability of Coach in a negative way.

References

1. CNBC. Luxury’s hottest growth market: the US - http://www.cnbc.com/id/101148509

2. Coach Inc. Annual Report 2009

3. Economy Watch. Luxury tax in the USA - http://www.economywatch.com/tax/united-states/luxury.html

4. Euromonitor International. Luxury goods in Japan - http://www.euromonitor.com/luxury-goods-in-japan/report

5. Euromonitor International. Luxury goods in the USA - http://www.euromonitor.com/luxury-goods-in-the-us/report

6. Japan Guide. Taxes - http://www.japan-guide.com/e/e2206.html

7. Los Angeles Times. The Bush budget - http://articles.latimes.com/1992-01-31/business/fi-1159_1_luxury-tax

8. Luxury Society. Renewed optimism in the US luxury market - http://luxurysociety.com/articles/2013/07/renewed-optimism-in-the-us-luxury-market

9. MarketLine. Coach Inc. Report.

10. McKinsey&Company. Japan’s luxury shoppers move on - http://www.mckinsey.com/insights/consumer_and_retail/japans_luxury_shoppers_move_on

11. Reuters. PESTLE Analysis of Japan 2013 -http://www.reuters.com/article/2014/02/21/research-and-markets-idUSnBw215671a+100+BSW20140221

12. Thinking Made Easy. Luxury industry analysis - http://ivythesis.typepad.com/term_paper_topics/2009/05/strategic-analysis---luxury-goods-industry-analysis.html

13. TREFIS. What’s driving the stock [2]. Coach’s Porter 5 forces analysis - http://www.trefis.com/stock/coh/articles/205735/coach-through-the-lens-of-porter-fiveforces/2013-09-13

14. TREFIS. What’s driving the stock. Ralph Lauren’s Porter 5 forces analysis - http://www.trefis.com/stock/rl/articles/193242/ralph-lauren-through-the-lens-of-porters-five-forces/2013-06-28

15. UKEssays. PESTLE analysis of Japan economics - http://www.ukessays.com/essays/economics/pestle-analysis-of-japan-economics-essay.php

[1] MarketLine. Coach Inc. Report

[2] MarketLine. Coach Inc. Report

[3] Economy Watch. Luxury tax in the USA;

Los Angeles Times. The Bush budget

[4] Japan Guide. Taxes

[5] Luxury Society. Renewed optimism in the US luxury market

[6] McKinsey&Company. Japan’s luxury shoppers move on

[7] Euromonitor International. Luxury goods in the USA

[8] McKinsey&Company. Japan’s luxury shoppers move on

[9] CNBC. Luxury’s hottest growth market: the US

^10-12TREFIS. What’s driving the stock. Ralph Lauren’s Porter 5 forces analysis

^10-14TREFIS. What’s driving the stock [2]. Coach’s Porter 5 forces analysis

[15] Coach Inc. Annual Report 2009

[16] MarketLine. Coach Inc. Report

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