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.
