Direct Marketing Channels - Report Example

6. Types of distribution channels used to access buyers for the industry Affordable luxury goods industry adopts two main types of marketing channels, namely (1) Direct-to-Consumer (these are the company operated stores) and (2) Indirect (includes wholesale department stores and specialty stores). Coach Inc. uses “A Multi-Channel International Distribution Model” which incorporates both these types of marketing channels supported by online retailing at local and international levels. Consumers of various demographic segments can access Coach products via these channels. Company also can benefit from specific advantageous attributed these different marketing channels. Example: Direct-to-consumer marketing enable immediate and controlled access to consumers but the cost of maintaining stores is high. Alternatively indirect methods involve a lower marketing coast but the company cannot communicate with the end users directly. The dependency on a single marketing channel is lessened in a multi channel distribution model. Thus the business risk level associated with failing a given marketing channel is minimized (3). Direct Marketing Channels Coach products are accessible through approximately 500 company operated stores and 1000 department stores located in the United States and Canada. Coach retail stores are located in regional shopping centers and metropolitan shopping malls in these countries. Products offered in these stores vary based on the size, location and visibility of the store. Example: stores located in New York, Chicago, San Francisco and Toronto contain a broader assortment of products compared to the other locations. Such high-visibility locations are recognized as “flagship stores” by the company. Direct-to-customer stores are carefully designed to reflect the image the company and brand reputation. Showcases and environment of these stores are designed by professionals to attract the consumers. Example: “Coach stores are sophisticated, sleek, modern and inviting. They showcase the world of Coach and enhance the shopping experience” (5). High standards of visual presentation, merchandising and customer service are crucial in Direct-to-customer marketing (Figures I and II). Thus incorporates a higher cost to the company. Figure (I) & (II): Company operated Coach retails stores Direct marketing channels contribute to approximately 90% company’s total net sales in all geographic locations (2012). However the same is significantly lower in foreign markets. Example: contribution of direct marketing to net sales in North America amounts 63percentage while the same amounts 18percentage proportion and 6percentage proportion in Coach Japan and Coach China respectively. Coach Inc. has obtained a significant international market share by operating in direct marketing channels. There are over 300 company operated Coach-stores in Japan, China, Singapore and Taiwan. And also additional retail locations are located at Malaysia and South Korea. Websites are used to promote and create brand awareness by the companies in this industry. Initially luxury goods manufacturers were reluctant to adopt online retailing due to the fear of losing “exclusivity.” During the past few years most of the companies shifted to web based marketing in the industry while securing the brand reputation (Seeking Alpha, 2013). Coach online web store was launched in 1999. It is currently operating in three countries namely, United States, Canada and Japan. Approximately 76 million unique visits had been recorded into the coach.com website during the year 2012. Consumers browse through various Coach products without physically visiting a retail shop, thus saving the travel cost and time. Nevertheless only a selected assortment of goods and designs are offered in online stores. Figure III and IV depicts the online retail shop of Coach Inc. Figures (III) and (IV): Coach Online retail shop Indirect Marketing Channels Luxury goods industry consists of three categories of indirect marketing channels namely, wholesale (department stores), international distributors and Licensing. Coach Inc. adopts all three types of approaches. Departments stores (stores that offers a wide variety of products) falls under this category. Some consumers prefer to buy from department stores because of the convenience, less travel cost and low time consumption i.e. broader variety of goods can be purchased under one roof instead of visiting a number of shops. Initial marketing channel of Coach Inc. incorporated this approach. Company acted as a wholesaler to department stores in America during the early years. Now company’s wholesaler partnerships extend beyond the borders of America, reaching large Asian markets. Indirect segment represented approximately 11% of total net sales of Coach Inc. (7). Royalties earned on licensed product is a special category offered in this channel. Company’s largest and American wholesale customers are Macy’s (including Bloomingdale’s), Dillard’s, Nordstrom, Lord &Taylor, Carson’s, the Bay and Saks Fifth Avenue (Coach). International distributors of Coach product operates in the following domestic and/or travel retail markets: South Korea, US &Territories, Taiwan, Malaysia, Hong Kong, Mexico, Saudi Arabia, Thailand, Japan, Australia, Singapore, UAE, France, China, Macau, Indonesia, Kuwait, Bahamas, Aruba, Vietnam, New Zealand, Bahrain, India and Brazil. Freestanding stores, shop-in-shops and specially designed environments have been built in these locations to retain the brand image and stimulate growth. Coach’s strategy to increase the effectiveness of indirect channel includes increasing investment on image-enhancing, expanding existing stores and closing the less profitable stores. Coach’s most significant international wholesale customers include the DFS Group, Shinsegae International, Tasa Meng Corp, Lotte Group and Shilla Group. Web based indirect channels of Coach products can be listed as; macys.com, dillards.com, bloomingdales.com, lordandtaylor.com, belk.com, vonmaur.com and nordstrom.com (7). Products made under license contribute to less than 1perccentage proportion of the total sales of Coach Inc. The company states that designing process of such licensed partners are being closely monitored by them. Currently, Coach brand products and produced by Luxottica (Eyewear), Movado (Watches) and Estee Lauder (Fragrance) under licensing agreements. These companies have the authority to operate worldwide. And they pay annual “royalties” to Coach on their net sales of Coach branded products. The sole authority to terminate the said agreements with licensed partners remains with Coach Inc. Termination is usually subjected to failing to achieve the sales targets (8). 7) Standardized or differentiated product offerings? Handbags and accessories industry is characterized by the following unique features. 1. Strong correlation between the “trend and prices” as opposed to the “cost and prices” which is observed in other industries. 2. These products are largely purchased by high and middle income category consumers. 3. Luxury goods market demand is typically associated with high income elasticity 4. Handbags and accessories are not considered as essential goods in classic economics however consists of an important part of contemporary living styles of the society Some manufacturers target high income class category while the others target middle income category. Thus pricing strategy can be viewed as a significant product differentiation factor in this industry. Example: Coach handbags vary from 268USD to 6,000USD. There by company remains its iconic brand image i.e. “affordable luxury” to a wide range of consumers. Fashion accessory lovers in the middle class income category are strongly attracted to Coach goods due to their affordable prices. Company attracts a large number of consumers by strategically lowering the prices while earning net profits. Furthermore, Coach Inc. retained its customers during the economic recession in late 2007 by strategically lowering the prices and introducing a new product line named Poppy i.e. a lower-priced (38USD and 600USD) line of handbags, shoes and other accessories (Figure V) (BRAND, 2011). Figure V: Low priced Poppy product line Customers seek quality, authenticity and a brand history in luxury goods market. Thus price does not have an explicit correlation to the demand. Some luxury goods possess the rare characteristic of positive price elasticity: the higher the price, the higher the demand. Companies such as Louis Vuitton, Gucci, and Prada focus on higher price approach alternatively. These companies have failed to exert a significant business threat to Coach Inc. 8) Resource requirements and entry barriers. Prominent external factors affecting the performance of luxury goods market are described in the following chapter. Macro economic conditions adversely affect the processing operations and consumer demand. Most of the accessory manufacturers in the world lost sales during the latest global economic recession. It affected demand and supply of businesses. During this period level of consumer confidence and spending levels on luxury goods drastically dropped in America. Unemployment rate was sky rocketing and consumers became pessimistic about the future. Consequently, level of customer traffic in malls and frequency of purchasing significantly dropped. Manufactures have to be more value oriented during such time periods. Large manufacturers such as Coach Inc. invested on low cost processing methods and alternative raw materials. They also introduced cheaper product lines and managed to retain net profits despite the globally felt economic adversities (BRAND, 2011). The supply chain was also affected due to fluctuating raw materials, fuel & energy costs and adverse conditions in commercial real estate market & credit markets. Thus the general economic health in the world can significantly affect the consumer purchases and production processes (12). Level of competition in the industry Premium handbag and accessories industry is associated with intense competition at local and international markets. Example: Coach Inc. faces significant competition from European and American luxury brands as well as private label retailers, and company’s wholesale customers. Survival in competitive business environments largely depends on the company’s ability to anticipate the strategies adopted by other companies. And the brand strength, attracting and retaining key talents and protecting trademarks and design patents support company’s survival in the long-run (12). Risks associated with operating in international markets Companies operating on a global basis are less affected by production and/or market failures occurring in one specific geographic location. Example: approximately 32percentage proportion of Coach net sales is associated with foreign operations. However there are unique challenges faced by such businesses. Volatile exchange rates for foreign currencies, can increase the product prices in foreign markets and decrease the international consumer demand. It can also increase company’s supply costs and adversely affect the profit margins. Political instability and changes in policy environment can act as barriers to businesses. Natural disasters which can affect the manufacturing processes, distribution channels and company’s capital can adversely affect businesses. Changes of international trade policies and regulatory mechanisms may create trade barriers, restrictions, tariffs, embargoes, exchange or other government controls (13). Online Security threats E-commerce has largely contributed to the expansion of luxury goods industry. Sophisticated Email based communication can be used to reach the potential customers in distant geographic locations. Continuous market research, customer surveys and likelihood assessments of product success in the market are possible via new Information Technologies. Example: Coach Inc. has developed an extensive customer database which compiles consumer feedback relating to specific products (Coach). The security of such information is crucial to the company. Furthermore, employee information, processing of credit card transactions, other e-commerce activities and interaction with the public through social media space are threatened by the possibility of security breach. Although companies are in a greater control of protecting physical data files the same level of security cannot be guaranteed to online data systems. Companies engaged in online retailing are vulnerable to targeted or random security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors (14). Growth and survival of the business largely depends on successful execution of growth strategies Manufacturers in handbags and fashion accessories industry have to timely design and launch new products to the market. New products must comply with the consumer preferences, fashion trends, and life styles of the specific market segments. Identifying these factors at both national and international markets requires advanced technical and marketing research skills. Failure to do so can hinder the growth of business and delays in these can harm company reputation competitive edge. Direct-to-customer marketing at international level has unique challenges. Especially culture related differences can affect the growth and expansion of businesses. Luxury goods industry is characterized by intangible values such as emotions and perceptions of the consumers. Example: revealing dresses and high fashion designs may not be accepted by the South Asian consumers. If a certain manufacturer lacks knowledge, understanding, experiences and exposure to these cultures and their differences company may fail to achieve the sales targets and profit margins. Furthermore manufacturer may lack knowledge on established competitors, employment terms, wage rates, transportation regulations, hidden business costs, logistics, real estate, and local reporting or legal requirements of foreign countries. Thus careful studying of country’s back ground information is important (12). Seasonality Coach products are popularly recognized as gifts to men and women by a large proportion of the consumers. Thus company’s net sales are subjected to seasonal and quarterly fluctuations. Higher net sales are realized during the holiday season (November and December). Company has to plan inventories and supply accordingly. This involves correctly anticipating the magnitude of market demand forces at each geographic location. Failure in doing so can result in over stocks in company stores, fluctuations in operating income and incorrect timing of shipments (15). 9) Industry Profitability Approximately 70,208 individuals and 26,380 businesses are currently employed in handbag; luggage & accessory stores based industry in America (IBIS, 2012). During 2009 and 2010 most of the businesses in the world showed negative growth rates. However, luxury market indicated a 19percentage proportion positive growth rate during year 2012 (Seeking Alpha, 2012). Expansion of BRIC economies (Brazil, Russia, India and China) is largely responsible for this growth. Especially the demand for luxury goods in China considerably grew during year 2012. Extensive use of Information Technologies also contributed to this recent expansion which is expected to continue for the foreseeable future. Net income and gross profit of Coach Inc. amounted 353 million and 1.09 billion dollars respectively as at the end quarter of 2012 (Wikiinvest). Nevertheless the growth and expansion of a business with in the industry vastly depend on company’s long term strategic management decisions. Part B. 1) Rivalry among competitors and in what factors. As mentioned above, customers seek quality, authenticity and a brand history in luxury goods market. These expectations are highly associated with emotional and intangible values. Thus the nature of industry itself is highly challenging. Pricing strategy has a strong impact on market however it is not the only factor important to luxury goods market. Coach Inc. is the leading manufacturer of “affordable luxury” goods in America. Middle income class consumers including club girls, suburban housewives, and college students perceive Coach branded bag as a “must-have” (Bogenrief, 2013). Reputation of Coach-made leather goods steadily grew since its founding in 1941 due to the excellence in product design, quality, function and durability. These attributes comprise the competitive edge of Coach Inc. to date. Mission of the company is stated as; “to be the leading brand of quality lifestyle accessories offering classic, modern American styling.” The prominence of American attitude in Coach Brand is well pronounced in the above mission statement. Iconic American attitude is viewed as the source of uniqueness in Coach made designs to date. The brand as a touchstone, customer satisfaction as a paramount, integrity as a way of life, innovation driven performance, success depended on collaboration are embedded firmly in the organizational culture of Coach Inc. Sophisticated organizational culture has vastly contributed to achieving the above stated mission by Coach Inc. (Coach). Handbags, accessories, wearables, footwear, jewelry, sunwear, travel bags, watches and fragrance made out of fine leather and custom fabrics are currently included in its products mix (Coach). In addition to the old products Coach has moved into women’s apparel market recently. This product diversification strategy demarcated a drastic shift in Coach made products mix. This has been viewed as disadvantageous by some market analysts. Established reputation of the company as a producer of “exclusive” luxury items apparently has not supported the market growth of other products. Rather the same reputation may have obstacle the company in penetrating to the new market which has a relatively lower profit margin (Timberlake, 2013). Consumers view this change as Coach “being lost” (Bogenrief, 2013). References Bogenrief, M. Avoid these luxury retail brands, Market Watch. 24 February 2013. Web. 9 March 2013. http://articles.marketwatch.com/2013-02-24/commentary/37168024 BRAND. Coach – A Recessionary Time Success Story. Ahead of the Curve, 29 August 2011. Web. 9 March 2013. http://curvedotwordpressdotcom.wordpress.com/2011/08/29/coach-a-recessionary-time-success-story/ Coach. Annual Report. Coach Inc., n.d. Web. 9 March 2013. http://www.coach.com/online/handbags/genWCM-10551-10051-en-/Coach_US/CompanyInformation/. IBIS World. Handbag, Luggage & Accessory Stores in the US: Market Research Report. IBIS World, October 2012. Web. 9 March 2013. http://www.ibisworld.com/industry/default.aspx?indid=1965 Seeking Alpha. Coach And Ralph Lauren Taking The Right Steps.2 July 2012. Web. 9 March 2013. http://seekingalpha.com/article/697671-coach-and-ralph-lauren-taking-the-right-steps Timberlake, C. Coach Lacking Brand Personality Seen as Hindering Growth. 25 January 2013. Web. 9 March 2013. http://www.bloomberg.com/news/2013-01-24/ Wikinvest. Coach (COH). Wikinvest, 8 March 2013. Web. 9 March 2013. http://www.wikinvest.com/stock/Coach/. Read More