COACH - One Company and One Brand with Two RVPs

For the past year and a half, Coach Inc. has been attracting attention from investors across North America as it has outperformed expectations for four successive quarters. Coach Inc. has two main retail formats, the first being their retail stores; and the other being their outlet stores. At first glance this combination appears to be no different from many other retailers/brands such as Tommy Hilfiger and Calvin Klein. Unlike Tommy Hilfiger and Calvin Klein, Coach has preserved their upscale image while simultaneously pursuing different retail formats. Coach’s success can be attributed to how they service their two customer segments by recognizing their distinct RVPs and tailoring their retail strategies to each segment.

For Coach’s high-end retail consumer, the RVP focuses on offering the newest and trendiest selections located within classy shopping environments. Their target consumers are the “fashionistas”; women of about 35 who are college-educated, single or newly married, and are typically employed. Her annual purchases average $1,100. In comparison, the upscale outlet RVP focuses on offering older or specifically made designs. Outlets receive new inventory less frequently and are located in large outlet malls. Their target consumers are women who are about 45 years of age, married, college-educated and employed, and spend an average of $770 on Coach products every year. The commonalities between these two segments are gender, brand loyalty, and the desire for a high quality product. I think it is these commonalities that enable Coach to use the same products in different channels, the key difference is the timing of their release into each channel.

Additionally, Coach’s ability to manage the differences between these two segments enables them to be financially successful. One main difference between their retail and outlet segments is the degree of consumer price sensitivity. Retail store consumers are ahead on the fashion curve and are seen as influential among their peers, therefore they are willing to pay more for the newest fashions, which requires high product turnover. Coach then uses outlet stores as a way to extend the shelf life of products that aren’t as successful or were over-produced. The potential dilution of brand equity is always a concern, as was demonstrated by the Tommy and CK examples previously mentioned. Coach has successfully avoided this trap by taking several measures. First, they make sure that all outlet stores are no closer than 60 miles to all retail locations so as not to cannibalize sales. Second, they ensure that there is no overlap between product assortments in both channels. Outlet stores only contain merchandise that is no longer offered in retail stores or is specifically designed for the outlet stores themselves. Third, each channel has a different target market, with differing RVPs, but both have enough similarities to offer some of the same products. Finally, Coach does not allow third party distributors such as department stores to discount their products, and any discounts in their outlet stores are usually no less than 25% of the original sale price. The strict adherence to this pricing strategy is one of the most important factors that enable Coach to preserve the exclusivity of its brand, and it keeps customers going back to the outlets. This creates additional exclusivity for the outlets as well, as it is the only source for discounts.

Overall, Coach’s unique strategy has proven very financially rewarding for investors, all while creating and growing their loyal customer bases. Their next plan is to upgrade their high-end customers to the ultra-premium segment through two new legacy boutiques in New York and Los Angeles that will carry exclusive products at higher price point. It should be very interesting to see them cover the entire spectrum and perhaps even manage another set of consumers, requiring a different RVP!

Sources:
BW 50: Coach's Split Personality
http://www.businessweek.com/magazine/content/05_45/b3958072.htm?chan=search

The Best Performers (2007)
http://www.businessweek.com/magazine/content/07_13/b4027401.htm?chan=search

Stock Information
http://phx.corporate-ir.net/phoenix.zhtml?c=122587&p=irol-stockquote


Press Releases - Coach Announces Plans for First Two Coach Legacy Boutiques
http://phx.corporate-ir.net/phoenix.zhtml?c=122587&p=irol-newsArticle&ID=958176&highlight=

Press Releases - Coach Reports Second Quarter Earnings Growth of 36% on a Sales Gain of 29%; Ahead of Analysts' Expectations
http://phx.corporate-ir.net/phoenix.zhtml?c=122587&p=irol-newsArticle&ID=952758&highlight=