By convincing American women they need to buy several $300 handbags a year, Coach Inc. has helped shape the "accessible luxury" retail category, producing $2.6 billion in fiscal 2007 sales.
![[Coach]](http://s.wsj.net/public/resources/images/MK-AP816_COACHB_20080528155704.jpg) |
| Bill Nelson |
Now, after increasing its profit in each of the 31 quarters since it went public in 2000, the company is at a turning point. U.S. consumers are trimming spending, and some analysts predict that the company's net income growth will slow to 11% in the fiscal year that begins in July, down from an average of 51% in the five years ended June 30, 2007.
But rather than hunker down, Chief Executive Lew Frankfort is going on the offensive, overhauling the look of Coach products for fall and adding a new "C" logo pattern that is more subtle than the signature logo that shouts Coach. He also plans to add 200 stores in the U.S. over the next several years, bringing the total to 500.
In addition, Mr. Frankfort is pushing aggressively into China. Coach just announced that it is buying out Imaginex Group, its third-party distributor there, and taking control of the business. It also just opened a new flagship store in Hong Kong, its biggest outside the U.S., and it could add 50 stores in the next five years to the nearly 30 it already has in China.
At the same time, Coach plans to introduce more higher-priced styles -- a limited-edition Peyton bag, for instance, will soon sell for as much as $900 -- and on average bag prices will rise slightly. To balance its assortment, Coach is also expanding its selection of lower-end purses priced at $200 to $250.
Mr. Frankfort discussed his strategy in an interview. Excerpts:
WSJ: How are you dealing with the economic slowdown?
Mr. Frankfort: A year ago, we decided to accelerate the level of innovation, compressing several years of innovation into one year.
Our new product for the fall is drapier, more feminine. We have a broader range of new material, and the product is much more sophisticated.
We want to be transformative in the way we look. You can't be iterative when the economy is tough.
WSJ: At some point, doesn't the U.S. become oversaturated with Coach stores?
Mr. Frankfort: Our surveys tell us that 80% of visits of mall shoppers are in one mall, and 90% of spending is in one mall. We have identified 200-plus additional locations, primarily in malls. We are pacing ourselves. We are opening about 40 a year.
About four years ago, I convinced my team that we should open a store in Queens and Staten Island. A lot of my team said, "Queens? How can you do that?" But our target consumer shops in those stores. We aren't going to advertise it on our marquee: Staten Island, Queens, Tokyo and Hong Kong. But for those consumers -- and I go to many of these openings -- they are thankful. And what do we find? In the first six months, 30% to 50% of our consumers are first-time users. So we are able to attract, in those instances, candidly, a more aspirational consumer.
WSJ: How do you retain the very elite, New York, Madison Avenue customer?
Mr. Frankfort: She doesn't go to Queens Center. She doesn't know about it.
Even though it may appear high and low, most of the consumers in Queens and Staten Island are college graduates. Many of them are teachers and social workers. The demographics aren't very different than the demographics in New Jersey, for example.
Manhattan, Los Angeles and San Francisco are countries unto themselves, so to speak.
Americans are very egalitarian. We don't really have a history of luxury brands in America. There's Tiffany and Polo. But we all shop high-low. We shop at Target, Costco, as well as at Tiffany, Coach and Saks.
WSJ: So after opening another 200 U.S. stores, where does your growth come from?
Mr. Frankfort: We have a growing business in Japan and emerging businesses in China, where we are beginning to invest very significantly.
One day, China will be a bigger market than Japan for Coach. We are doing extremely well in Hong Kong. We want to catapult brand awareness through a series of actions -- the new flagship store, taking over the business so we can directly manage [it], and building infrastructure. As brand owners, we are confident we can run the business more effectively than a third party.
WSJ: How is the Chinese consumer different from the U.S. consumer?
Mr. Frankfort: In China, there's a luxury consumer that represents perhaps 0.05% of the population -- very small but with enormous purchasing power. That's not our primary target. Our target is the emerging middle class who have gone to university and are now getting 30% to 40% [pay] increases a year as engineers, doctors, bankers and lawyers. These women are trading up and investing in plasma TVs and travel and laptop computers and Coach bags. They are looking for ways to broaden their life, and Coach is one way.
Several years ago, an inflection point was reached for cosmetics and spirits. Coach products, which are more expensive, are reaching that inflection point now. Millions and millions of consumers for the first time will be able to enjoy a Coach experience. There are some consumers who are extremely wealthy, and hopefully our limited-edition product will attract some of them, but they are not our primary thrust.
WSJ: How do you compete with your European rivals, who have been in China for some time?
Mr. Frankfort: We will provide an alternative to the European luxury brands, as we did in Japan. In 2000, we had 2% market share, Louis Vuitton had 33% and Gucci and Prada had more than 10% each. Today we have 12% market share. Louis Vuitton has 27%. Gucci and Prada have less than 10% [each].
Many Japanese women told us they would rather spend 60,000 yen ($578) for a Coach bag and spend the other 60,000 yen that they would save from [not buying a] European luxury brand and use it to go to Thailand.
In Japan, we are particularly appealing to women under 35, even though their moms are carrying the European luxury brands as a status symbol.
We don't know what China will be, but we can tell you we only have 3% market share and 4% brand awareness. Louis Vuitton has over 30% market share. The [handbag and women's accessories] market in China, Hong Kong and Macau is about $1.2 billion today, excluding Taiwan.
If we are able to replicate what we did in Japan, the business will double in the next four or five years.
WSJ: How do you keep the Coach brand more accessible than other luxury handbags?
Mr. Frankfort: We make our product in lower-cost countries. Even though the raw materials come from the finest mills and tanneries in the world, we save incredible amounts of money on labor. The average cost in France and Italy is $50 an hour, and a bag could take five hours to make. Our labor costs are 10% of that.
WSJ: Why are you pulling back from your signature "C" logo pattern?
Mr. Frankfort: We aren't pulling back. We are reducing our dependence on it by producing another logo that is more sophisticated. What consumers are telling us is that our new fabric is much more abstract than our traditional logo -- and more appealing.
Stores in Staten Island and Queens, for instance, will have a greater proportion of bags with the old logo, and the stores in Manhattan will have a greater proportion with the new pattern.
Source: Wall Street Journal
Read more...
Coach plans to open its first men's-only store in May. The 550-sq.-ft. store will be located in New York City's West Village, taking over space that was occupied by a Ruehl boutique that was closed as Abercrombie & Fitch shuttered the concept last year, according to a Dow Jones report.
