What happened to Coach?

A luxury brand goes from first class to economy.

Oh, Coach. Remember the good old days, when we lusted after your tasteful equestrianesque handbags and wallets?  You were every bit as desirable as Gucci or Hermès and yet, every now and then we could actually afford you. Remember the first time we found you at a factory outlet? It felt like a fashion coup d'état - the ultimate shopping score.

And then…our mother found you on sale at a department store. And our girlfriends were buying you up online. Suddenly, everyone and her sister had a Coach bag on their shoulder. And Coach ballet flats on their feet. And a Coach belt around their waist and a Coach watch on their wrist. And then, one day, our father showed up wearing a pair of Coach glasses. Yep, that killed it. The love affair was over. Admittedly, Dad looked pretty cool, but get your own brand, right?

But here's the thing, Coach Inc. (NYSE:COH) is a publicly traded company. According to analysts, Coach is already the largest business in the U.S. luxury handbag market with close to 40 per cent market share.

Yet according to retail experts, when a luxury, elite brand rapidly becomes more widely available and popular among the mass consumer audience, the brand can lose its cachet or prestige among its original core group of consumers. This is called ''brand deterioration."

Posh handbags, leather goods and expensive sunglasses are the kind of luxury items that are tied to the performance of the overall economy. When the economy is rocking and middle class people have secure jobs with disposable income, they are willing to splurge on luxury goods, especially the kind of items they see worn or used by celebrities and people with more wealth than they have. When the economy collapses, as it did in the global financial crisis of 2008, only the super wealthy continue to spend on luxuries.

Coach responded to the economic downturn by introducing a less pricey line, Coach Poppy, which lowered its overall average handbag price by about 10 per cent. The goal was to offset any potential drop in demand for its products. The company also took the opportunity to shift its focus from established markets, to push into emerging economies, marketing itself all the while as an "affordable luxury" brand.

The strategy worked to expand Coach's popularity and brand awareness, but some argue that the cost was to lose customer loyalty at the top end of its buying chain. If fashionistas lose interest in Coach because they think the brand has become too commonplace, Coach could end up losing sales and, ultimately, profits. On the other hand, they can make up for it by continuing to increase sales in the middle market.

In Coach's 2011 second quarter report, the company stated its belief that North American shoppers can sustain about 500 Coach retail stores, including up to 30 in Canada. Currently they have 347 retail stores, with 23 in Canada. (This doesn't include 129 factory outlet stores, five of which are in Canada. It also doesn't count the 940 locations such as department stores across the US and Canada that sell Coach products.) In other words, watch out, there's more Coach on the way.

Outside of North America, Coach's biggest market is Japan and the company sees China as their next big thing. With the devastating earthquakes in Japan this year, the economy of Japan is expected to be suffering for a while and many North American companies with operations there are feeling the pinch.

Meanwhile, the rapidly expanding economy of China presents Coach with both good news and bad news. The good news is a fast-growing, increasingly wealthy class of Chinese consumers who will be eager to snap up all kinds of luxury goods, including "affordable luxuries." The bad news is that manufacturing plants in China are becoming increasingly expensive to operate, due to higher labour costs as well as rising global commodity prices for the materials to make their products.

According to Coach, menswear is one of their biggest areas for growth. Coach opened six menswear stores over the past year, including a hip boutique in Greenwich Village. They plan to open more men's retail shops throughout North America and across Asia.

So it looks like dear old Dad just might be the guy to give this brand a boost after all.

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