Emerging Regions With The Clothing Industry Analysis

Published Date: 02 Nov 2017

CoachLogo

Student ID number：4697042

Module Leader: Suresh George

Date ：17th JAN 2013

Word count: 3626

Introduction

Over the recent decades, the global economic structure has experienced great changes that some countries have been developing much faster on their economies; these fast developing countries are called emerging economies or markets. As Henry (2002) said, during the recent years, emerging markets account for a significant proportion of the world economic growth, economic growth of some developing countries are even much faster than the developed economies. These markets provide great opportunities for the business globally, as these countries have abundant natural resources, cheaper labor and increasing domestic demands. Within the global trade liberalization, these emerging markets show great potential for business and become attractive places for foreign investment, especially during the financial and economic crisis, these economies are also less affected by this downturn, figures show that companies based in the emerging markets have gained strengths than others during this crisis, they have gained many benefits such as cost reduction, avoiding intensive competition and expanded demands for their products. Therefore, increasing number of companies are seeking opportunities in the emerging markets for their businesses.

This paper is produced to develop a business strategy document for the Coach Inc. to expand its business into one emerging market. Coach is luxury leather Goods Company in America, the aims of this paper is to seek a market among the emerging economies which has great business opportunity for the international expansion of Coach. It includes the analysis of the target market that what opportunities it can provide to Coach and where the threats lay, the situation of the company is also analyzed to examine its strengths and weaknesses to support or impede its entry into this market, and finally recommendations are provided for the company to successfully enter its business into the new market.

Background of Coach

Coach Inc. is an American leather brand headquartered in the New York City which was founded in 1941 starting as a family run workshop, and now it has become one of the leading luxury clothing brands in the US, it designs, produces and markets a variety of leather products including clothes for men and women, handbags, briefcases, luggage, accessories et al, Coach brand enjoys a globally famous reputation by its high standards for the materials and workmanship. During the recent years, the company has greatly expanded its business, currently it has more than 13,000 people in the company and the market value of the company achieved over $18 billion in 2006, in the fiscal year of 2010, the revenue of Coach was $ 3,607.6 million which increased by 11.7% than 2009 (Wikipedia, 2012). Coach also holds significant market shares overseas, it has distribution, product development and quality control operations in France, Italy, Japan, China and South Korea. Over the past years, Coach has been extremely successful and competes against other internationally famous clothing brands such as Louis Vuitton, Gucci and Prada.

Analysis of the luxury leather goods industry

The products of Coach are categorized as luxury goods, luxury goods refer to products or services which are not considered as essential and are associated with affluence (Dubois and Duquesne, 1993), and this industry has numbers of distinctive features against other industries. The luxury goods usually target social classes with high incomes as the main customers; the characteristics of luxury goods include superior quality, brand recognition, expensive prices and high income elasticity of demands. With the economic development and people being wealthier, demands for luxury goods have been fast increasing during the recent decades, the annual growth rate of the global luxury goods industry maintains 9% on average (ELS, 2012). Being affected by the economic downturn, the global luxury goods industry is under great changes, incomes of the middle class consumers have been greatly affected which significantly reduces their demands for luxury goods, while demands from high end class are less affected and thought to have a better future.

The market for luxury leather accessories and handbags is also changing with the changing generation, demands of young generation increase and younger consumers show more diverse purchasing behavior than the older generation (Young et al., 2010), they have different opinions and perspectives towards luxury goods that companies are adapting their products to the changing buying habits of them. The market of luxury handbags in the US have been fast growing that the market size had doubled between 2002 and 2006, this had favored Coach as 67% of its revenue came from the handbag products. There several key factors determining the success in the luxury leather goods market, according to Catry (2003), one factor is the ability of manufacturing high quality products while being able to outsourcing the production to lower cost market to increase the profit margin; the second factor is the reputation of brand name and capability of smart adverting; the third one is the distribution capability and finally the capability of product development and innovation. Coach has done well in these 4 aspects and these have been its strong competitive advantages against other competitors.

Business situation analysis of Coach

Coach as one of the largest luxury brands in the US is holding significant market shares with its product ranges especially for its handbag, according to The International Man (2012), Coach was the third largest luxury brand name in the US in 2011 and its handbag products were among the top 10 most expensive product brands, its strong product development and marketing capabilities make it one of the most competitive brand against other competitors globally.

SWOT analysis of Coach

Strength

Coach has built a strong brand image of ‘affordable luxury’ for its product portfolio, unlike other competitors; Coach develops products catering for both high-end and middle class consumers. It has a wide range of products including handbags, accessories, footwear and apparel et al, and it prices its products very flexibly, this enables its products affordable to more groups, and Coach has a strong capability on its product development, such as in 2009 it launched a new collection which aimed to cater for younger female consumers (Cotton et al, 2005). The comparatively affordable prices and fast innovating product ranges enable Coach to attract more customers than its competitors, in 2011; its handbag products had occupied 40% of the market ranking the first.

Coach has developed a large number of distribution channels, it is selling products through two main channels – direct to customer and indirect sales, and it has a considerable amount of owned retails and factory stores, such as there are 342 Coach retail stores and 121 factory stores in the US which directly serve the customers. Coach also developed a significant number of indirect channels internationally; it has more than 940 wholesale location in the US and Japan as well as a large number of department stores and freestanding retail locations in over 20 countries (Cotton et al, 2005). The variety of its retail channels not only allows Coach to access a wide range of markets, but also it makes its brand visible to more consumer base. In addition, Coach is also capable to cut down the cost by outsourcing and provide higher level of customer services than its competitors.

Weakness

Due to the affect of economic downturn, the wholesale business of Coach is declining, its sales of the indirect segment decreased by 10.3% and 27.4% compared in 2009 and 2008 respectively, and this significantly affects the overall financial performance of Coach (TTREFIS, 2012). Furthermore, Coach does not have its own manufacturing facility, it sources the materials and products from a wide range of sources globally, this makes it over depend on other manufacturers, this poses a disadvantages for Coach as it is not able to effectively control the production process. Most of the goods of Coach are sourced from developing countries such as China and South Korea, this makes Coach more vulnerable to the lower product quality. In addition, it is also exposed to threats of shipment delays, foreign political uncertainty and inconsistent operations.

Opportunity

The biggest opportunity for Coach seems to be the booming emerging economies and increasing demands for luxury goods, especially in China and India. Coach brand has already penetrated Chinese market and its operations have been greatly expanding in cities such as Hong Kong and Shanghai. However, sales of Coach in Chinese market just occupy less than 10% of its total sales, thus there is still huge growth potential for Coach in this market. Furthermore, being the second fast increasing economy, the luxury goods market of India is also increasing fast, currently the luxury market in India is estimated at $4.76 billion and is expected to increase to $14.72 billion by 2015 (F2F, 2012), this market also provides a great opportunity for Coach as it does not really have a presence in India.

Threat

One major threat to Coach is the expanding operations of counterfeit products. During the recent years, the counterfeit goods have been fast spreading though the market globally especially in developing countries such as China and India, these products are particularly prevalent in accessories such as handbags and shoes. Coach has been involved into several lawsuits both domestically and internationally due to the imitations of its products. Spread of the counterfeit goods not only affects Coach’s revenues, but also it deteriorates its brand reputation (NEWS, 2012).. In addition, the slow economic development in the US is also affecting its business in its home market, due to the financial crisis, the disposable incomes of American household decline that consumers tend to cut their expenditure, as Coach’s main market, this poses to be big obstacle for the top line growth and profitability of Coach.

Selection and analysis of the key markets

It is suggested India could be an ideal potential market for Coach’s international expansion, and Coach could introduce its leather accessories into the market which are its most competitive product lines of the company. India is the second booming emerging economy after China that there is dramatic increase in wealth among Indian population, and the luxury goods industry in India also shows a strong trend of growth. Thus it suggests India as one major strategic target for Coach, and it recommends the company to penetrate the market from the bigger cities such as Delhi, Mumbai and Bangalore, as these cities are more internationalized and gather more potential consumers for the luxury goods which can be favorable conditions for Coach’s business expansion.

PEST analysis of Indian luxury leather goods industry

Political factor

Indian government has devoted much of its effect to liberalize the process of regulation and approval, many domestic sectors have been transparent and open for foreign companies including the luxury goods industry (Majumdar, 2009). Indian government also promotes development of the leather sector, during the recent years, the government has been encouraging and facilitating the expansion of leather sector towards the modern lines with advanced art machineries and equipment. Indian government keeps increasing funds supporting the modernization of manufacturing facilities, foreign investment into this sector is highly encouraged and the profit is fully guaranteed to be repatriated. All types of partnerships in this sector are permitted through the automatic routes such as the joint venture. These policies can provide Coach favorable conditions to establish its presence in this market.

Economic factor

India is currently the 10th largest economy in the world, as Figure 1 shows, from the liberalization of Indian economy in 1980s, the GDP growth rate of India has been fast increasing especially over the last two decades, its average GDP growth rate achieves 6.6% annually (IIFL, 2012). The growth rate of luxury market in India is also raising at a supervising rate, in 2009, Indian luxury market size increased by 20%. As Figure 2 shows, Indian luxury industry is the second fast growing market just behind China. Increasing demands for luxury goods and purchasing power of consumers make India a huge potential luxury goods consumption market.

Figure 1.

Source: Wikipedia (2012).

Figure 2. Comparison of Luxury Market Growth Rate

Source: DOMINION (2012)

Social factor

In India, luxury goods consumers are most between 30 to 45 years, with increase in wealth among the society, consumers are increasing their spending on luxury goods and other high-end products. The exclusivity and uniqueness elements of the products play significant roles driving consumers to make their purchase decisions. While during the recent period, the values or stories associated with the luxury brands are emerging among consumers as important drivers for their purchases, this is mainly due to the increasing number of intellectuals, such as overseas students and business managers, as these groups of people are well travelled and know the brands better, they generally have their own tastes and preferences towards specific brands (Atwal1, 2009). Unlike other markets, Indian consumers are more conscious to the price of luxury products, they usually straddle with a middle class mindset. During Coach’s expansion into Indian market, these factors must be taken into consideration into its product development strategies.

Technological factor

The technology of Indian leather industry varies though different sizes of the manufacture factories. Although Indian leather market is gradually expanding, the product quality tends to be low in comparison with others overseas, as Basant. and Fikkert (2005) said, Indian leather market showed strong desire for improvement on both quality and quantity. Most of manufacturers in India do not provide their own fashion collections, production methods, design and component selection are generally prescribed and provided by the buyers, while Indian leather goods manufacture sector shows capability of absorbing new ideas and skills into the production. Currently, there is a technological transformation among Indian leather industry on producing environmentally friendly goods and maximizing the utilization of raw materials of production.

In-depth analysis of the Indian luxury leather market

5 forces analysis

Intensity of competition

The luxury market of India is during the early stage of development, the competition is less intensive than other European markets, and there is no brand that truly dominants the market yet, many regions in India are underexploited, this provides a great opportunity of entry for other foreign luxury brands. Increasing number of European brands have entered the market, and many other are waiting and preparing, each brand sees India as the key place for their strategic development and wants to gain superior competitive advantages by firstly penetrating and dominating the market (Chowdhary, 2010). At the moment, there are very few companies who are able to compete against Coach at its size, it is expected Coach will receive less pressure from other competitors on its entry, this can be one advantage for Coach’s strategic expansion.

Threat of new entrants

The entry cost of luxury market is very expensive and it takes longer term to develop the brand recognition, the existing companies have developed their products for a long period that they have built their own distinct advantages on their brands, these can be huge obstacles keeping other new entrants out of the market (Dubois and Laurent, 1995). For India, the main threat comes from the entry of other European luxury brands, such as Chanel, Prada and Fendi, these companies have their distinctive advantages which can be powerful competitors against Coach. However, the threat could be average, as Coach is capable to provide affordable luxury product ranges, this can be one competitive advantage of Coach, generally consumers are not willing to spend more money on things they are unfamiliar with, and lower price luxury goods could be one superior advantage of early entry.

Threat of substitute products

The threat of substitute products for Coach can come from two product categories, one is the similar products of other brands and the other is the counterfeit goods. The brand value is one major driver for consumer purchases, as Coach also offers lower class product ranges, the lower price and quality goods may reduce its brand equity and it could lead some customers switch to other alternative brands. The counterfeit goods are also a big threat to Coach, these products can seriously deteriorate the brand reputation and value of the brand, this problem could be more serious in Indian market due to lack of market regulations and policies, which must draw a great attention of the company.

Bargaining power of buyers

The bargaining power of buyers in India can be average. Unlike European markets where demands for luxury goods are not price sensitivity, during the early stage of Indian luxury market, price and quality factors play important roles for the purchase decisions of consumers, the ordinary leather goods still dominate the market (Husic, 2007). However, for those affordable consumers for luxury brands, due to the fewer present brands in the market, they have a comparatively narrow choice to the alternatives, and due to the capability of offering lower price goods, the bargaining power of buyers will not pose much disadvantage to Coach.

Bargaining power of suppliers

The bargaining power of suppliers can be small against Coach, as Coach has a wide variety of supply sources for raw materials or finished goods globally such as China, Italy and Hungary, it can easily switch among different suppliers. As the main material in manufacture of Coach’s goods is leather, in India, there is a big amount of independent leather manufacturers and suppliers, which allows Coach to select the suppliers under a wider scope of initiative, thus even in Indian market Coach will still have advantages to negotiate the prices against the suppliers.

Entry strategy plan

Market entry strategies mean the ways or modes which help a company to enter a foreign market (Agarwal, 2000), it has a significant impact to the success of entry. According to Erramilli (1999), there are 4 common modes for market entry which are exporting, licensing, joint venture and direct investment. For Coach’s case, exporting may not be appropriate for the company, as sales of luxury goods depend on the extent to which a company has developed its brand equity and recognition in consumer minds, without a real presence in the target, sales will not be guaranteed. It also not suggests direct investment, operating in an unfamiliar market independently has too many risks. As Peter (1998) indicates, Indian luxury market is very distinctive and unique, as a country with a wide diversity in its population, it is difficult for foreign brand to understand the market. The desires, tastes and ways of purchasing of Indian consumers for luxury goods are quite diverse and affected by many factors such as location, education, income level and ages et al, the complex purchasing behavior of Indian consumers is easily confusing foreign brands, fact shows that many foreign luxury brands have been driven away by their poor perceptions of the market.

Licensing could be a feasible way, but it reduces the control of Coach to develop its brand equity in the market, during the early stage of the market, if Coach is unable to effectively make its brand recognized in Indian market, it will be difficult for it to gain the first mover advantages. It suggests Coach penetrate the market through the joint venture, there are 5 benefits of joint venture which include market entry, risk sharing, techniques and skills sharing, development of joint product and conforming to local government regulations (Agarwal, 2000). Sometimes, joint venture can be an effective tool to gain the first mover advantages in an unfamiliar market, as Indian luxury market is highly complex and diverse, partnerships with local companies will not only allow the products to be easily accepted by local consumers, it also helps the company to develop the right strategies with the market knowledge and understanding of local firms, they can also provide the skills, resources and distribution network needed to develop the market, this can significantly reduce the difficulties and time for Coach to develop the presence in the target market, which helps it to gain the first mover advantages.

However, there are some issues which need to be considered by Coach, as Peter (1998) indicated, joint venture may have problems such as inconsistent operations, untreatable relationships, different goals and interests and ambiguity of operations. Due to cultural difference and different perspectives to business, it is not easy to establish a smooth partnership with foreign companies. Thus, it suggests Coach should carefully examine the capability of local firms before making the decision, negotiation must ensure the achievement of shared goals and interests between two parties, and the inconsistence and ambiguity also should be minimized. During the cooperation, coordination and adjustment must draw great attention of the management, only this can Coach ensure its strategies to adapt to local markets as well as consistent with its strategic objectives.

Conclusion and recommendation

In conclusion, Coach has been very successful during the recent years, while the economic downturn has limited its sales in the European markets. The booming emerging economies provide a great opportunity for Coach to further expand its operations. Some developing countries such as China and India have a dramatic increase on their luxury markets, these countries are drawing an increasing number of foreign luxury brands into their markets. Indian luxury market is during its early stage of development and Coach has not had a real presence in this market, it suggests Coach target India as one major potential market for its strategic expansion with its leather goods. There are many conditions favoring Coach for this project, first it enjoys a globally famous brand reputation, second it has excellent capability on production cost reduction and offering lower price product ranges than its competitors, and it has a superior ability of product innovation and renewing. These could become Coach’s advantages supporting its entry into Indian market, as Indian luxury consumers are more price sensitive and have diverse tastes and mindset to luxury goods, availability of lower price product range and fast product renewing can be its strong competitive advantages. To enter the market, it is suggested Coach adopting the joint venture model, as it will reduce the risk, gain local knowledge and skills and improve the efficiency to build a presence. However, numbers of issues should be focused by Coach, it recommends Coach to carefully consider the capability of local firms, seek common goals and interests and focus on coordination and adjustment, as these will ensure the business consistence and guarantee the success of this venture.