I was thinking about this when I was writing my previous blog about luxury brand houses offshoring their manufacturing plants to China. It was supposed to be one of my concerns until I came across a very interesting article in Business Week about Coach (Is Coach becoming too popular?) which proves that this is a legitimate concern worth discussing.
Coach’s sales has been rising continuously for 3 consecutive quarters, beating Wall Street analyst’s estimates in the fiscal second quarter. This fact is certainly something for investors to be ecstatic about, but many of the Wall Street investors are worrying that Coach might not be able to sustain its earning growth. Upbeat about these nice mounting figures, the CEO of Coach even boosted the number of stores that Coach will open this year from 30 to 40. (Watch interview with Coach CEO Lew Frankfort on CNBC).
What analysts and investors are worried about is that sales and profits might sore for a moment, but it will come a time when Coach becomes too ubiquitous that it loses its specialness, something which happened to GAP in the 1970s when similar healthy market conditions for expansion was observed. GAP enjoyed a 122% increase in sales between 1998 and 1999, but in just two years, it started to decline because the GAP look was too ubiquitous. Similar cases also happened to Calvin Klein and Tommy Hilfiger when they try to capture more sales by targeting the discount market.
Some people are puzzled about the gravity that pervasively capturing the market can cause, but as I mentioned before, luxury brand industry is different from a lot of consumer products; luxury goods signify the socioeconomic status of people who buy them. Contrary to network goods on the other side of the spectrum, where the value increases with increasing number of people, it follows a different strategy than network goods.
There are certain dangers in pervasively targeting all market segments for luxury brands. Like what Coach is doing, in order to attract the younger group and having increasing sales, Coach has released a line of leather products that are lesser than $100. When luxury companies have such actions, their luxury products are not luxury anymore, removing the positive income elasticity that luxury goods should have.
What is important for luxury goods is their brand image. Tiffany, for instance, marked up its price for some of its jewellery for fear of change in its brand image.
LV also provides a very good example where it is successfully penetrating the huge market in China and all over the world, but at the same time preserving its high-end image. What LV does differently is that it focuses on what they do best – behaving in the way luxury brands should behave. It focuses on serving the top of the pyramid with its main products such as handbags, wallets, leather luggage, marking up prices yearly so as to retain value for their products. (Although this is unappealing from a customer's perspective, it successfully creates the asipiration and desire in buying their products).
It is understandable that many luxury brand companies are flocking to newly arising markets to capture market shares, however, I believe they should strategize and do it with care. Luxury brand companies should not forget their core values and ideas. If not, having huge sales for a moment can come at the cost of their brand image. We’ll just have to observe if Coach will continue to have sustainable profits if it carries on with its present strategy.
"Ubiquity can be the death of a brand, you need to be very careful when you expand." says Robert Passikoff, the CEO of Brand Keys, a New York brand consultancy.
4 comments:
Well, personally, I don't really care much about where the bag is manufactured if I know it's a LV. The brand name itself already gives me some sense of quality guaranteed. Also, it's a big trend to have high-end brands manufacturing in China rather than in Italy or Milan or Paris.
What is really affecting my perspective towards a brand is it's rarity and uniqueness. If one day LV lowers its cost for most products by 50%, and produce a large amount of the same product, I will lose the vanity to buy it. As you have pointed out, it is about the socioeconomic status.
As for Coach's approach, I would think it's risky if it's goal is to retain as a high-end fashion brand. It's not wrong to have a less-expensive line to attract young adults to buy it, and eventually lock them in if they become loyal customers. However, will that affect the status of the brand? If many students are affordable to buy a Coach, then why would a CEO, CFO or a superstar who have higher income or social status want to buy a Coach? It might become the case for GAP afterall.
Anyhow, it is up to the brand companies to adopt the different strategies to match their mission statement and brand culture.
For example, they can have different labels to attract different target markets, such Burberry has black label and blue label, which have different price range and different market segment.
For example, they can have limited edition to VIP customers or online only. Just like how the people were lining up outside LV for that whatever-it-calls limited edition purse.
Luxury brand companies are definitely not the same as other consumer products because the high cost we paid is for the rarity and uniqueness and socioeconomics status. If more people own the same bag or purse, people's vanity will lose, and eventually, they will lose the willingness to pay the high cost for it.
You've pointed out a very interesting challenge that publicly traded businesses face: sustaining growth. It is important to note that growth is a byproduct of the functions a business carries out. Therefore, growth in itself should not be the motivating factor in expanding a company's product line or its operations (As you noted with the example of GAP). Like you, I believe that Coach should instead focus on its core competencies, and worry less about hitting the outrageous growth projections that analysts predict.
For this reason I think the move to release 'a line of leather products that are lesser than $100' is a bad move by Coach because it is inconsistent with its differentiation strategy. What brought about the strength of the Coach brand was a strong combination or quality products with effective advertising. This brings to mind the efficient consumption frontier whereby the customer’s satisfaction with price is inversely related to the satisfaction with quality. Therefore if Coach is selling their products at a lower price then something has to go (product features, work-quality, or perhaps the brand name through other labels as Peony suggested). Furthermore, as you pointed out, ubiquity dilutes the brand image and can be fatal as coach products aim for a differentiation strategy are highly substitutable and imitable (ex: LV and all the Chinese knock-offs, respectively).
The article that you linked to indicated that the strongest growth for Coach were in factory outlet type stores where the similar retail goods were sold at a discount due to irregularities, floor models, and styles from the previous season. Factors that affect the pricing in outlets include: lower quality, limited quantity, and remote locations where retail space is cheaper and do not provide the same experience or service as shopping, for example, in Times Square. Again, I feel if coach continues to expand this factory outlet approach along with the lower price point products, they eventually may have to reposition itself.
I don't really think that it is a good idea for high-end brands such as Coach and Gucci to popularize and expand its brand by offering lower quality products. As you have pointed out, the public associate these brands to the rich and those high in their socioeconomic status.
Expanding might mean that they are moving away from their core competencies of selling luxury goods. It is not worth the trouble of finding and allocating resources to move to uncharted territories while the results are unclear.
Besides, luxury good companies should care more about their current products. There are fierce competitions going on in this market. Not only are the companies battling each other, but they must also constantly combat the danger of piracy or fakes.
In regions such as South-east Asia,
fake luxury goods are a common feature in the society. They sell at a ridiculously low prices while having similar features with the real ones. Moreover, they are extremely popular with the public.
This is what luxury good companies should be worried about. If museums are being created to honor fakes, we know that this problem is not going away pretty soon.
what you said about ubiquotus luxury goods...
sounds like USC to me!
Ubiquotus might be a problem, but remember, if everyone is carrying it, and you don't have it...
there might be a chance that you will save up however much money to belong to the general trend of the consumption of luxury goods.
of course, that is if you don't buy a fake one
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