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Thursday, April 14, 2011

Potter's Five Forces Model of Coch

Potter’s Five Force Model:
Intensity of Rivalry
The premium handbag and accessories industry has many competitors (coach co., 2010), most of whom hold significant percentage of market share. The Coach Company basically competes with European luxury brands as well as private level retailers (Coach, 2009). Burberry, Louis Vuitton, Gucci Group, Kate Spade, Kenneth Cole, Jones Apparel Group, I Pellettieri d’Italia S.P.A (Prada) are some of the competitors in the luxury handbag and accessories industry. Coach is a leader in handbags, which accounts for 62% of total sales in the U.S. market (business week, 2009). The company is able to leave its competitors behind by implementing price cutting strategy without sacrificing quality (business week, 2009). Coach is the top premium handbag company in the U.S. market with the market capitalization of 12.63 billion (market watch, 2010). Similarly, Gucci Group has the market capitalization of 3.08 billion (market watch, 2010). Kate Spade has market Capitalizations of $0.692 billion and Kenneth Cole has the market capitalization of $2.15 billion respectively (market watch, 2010). The companies within this industry need to constantly watch for aggressive moves of their competition, and need to be observant to whether competition is planning on growing their business. What primarily intensifies rivalry in this industry is Brand name, price competition, valued and qualitative goods, rapid introduction of new products, and differentiation (James, 2009).
The luxury handbag and accessories industry is a slow growing market with few strong competitors which intensifies the rivalry. Even though customer loyalty is typical for the industry, all companies are concentrated on implementing new competitive strategies, diversification, distribution capabilities, and positions in foreign markets.

Power of suppliers
Suppliers’ power generally depends on volume purchase by companies. The more powerful suppliers are, the less profitable the industry is. Suppliers for the premium leather handbags and accessories industry come from both international and local dimensions, and each group holds different level of powers (All business, 2009). Basically, China, Italy, United States, Hong Kong, India, Thailand, Vietnam, Turkey, Philippines, Spain and Taiwan are major suppliers of finest quality of leather for this industry (coach, 2009). Gucci works more than 100 independent vendors from around the world to manufacture their products (Gucci, 2009). Coach has longstanding relationships with purveyors of fine leathers and hardware. Coach products are manufactured by independent manufacturers acquiring less than 10% of raw materials from individual vendor (coach, 2009).
            The fact that these companies have the power to collaborate and partners with numerous vendors all over the world wane the bargaining power of the suppliers. This situation increases the profit potentials of the industry by moderately weakening suppliers’ power.
Power of Buyers
The premium handbags and accessories industry faces strongly fragmented retail power (All business, 2009). The major companies on this industry sell their product by two segments: Direct-to-consumer segment via factory stores, internet and catalog and indirect segment via departmental store and wholesale distribution (Coach, 2009). Even though luxury goods companies have well established brand names and a unique customer demand with value-added price, due to the recessionary period, the buyers have higher ability to influence the setting of price. The bargaining power of the buyers is relatively high due to intense rivalry within the luxurious handbag and accessories industry and substitute products available in the market with the lower price. Coach handbags reduce the average handbags price from $325 each to $285 in 2009 (business week, 2009) to avoid the knocked out by the recession.
Threat of substitutes
The threat of substitute to premium handbags and accessories industry is moderately strong due to many factors. To begin with, “luxury goods do not have direct substitutes like other ordinary goods but the threat could come from imitation. Counterfeits often penetrate the market; this could take away a portion of the sales that should go to luxury goods companies” (Cuizon, 2009). In the market, there are products that are considered ordinary or the medium brands but can eventually expand their product lines to premium brands in the future such as Zara and Gap and create threat to the luxury products (Cuizon, 2009). 
A survey of shoppers with the average yearly income of $300,000 shows that Coach Designer handbags were the most familiar brand of designer handbags, recognized by 52 percent of respondents. According to the respondents, price did not come into the equation even though designer handbags from luxury fashion houses such as Prada and Gucci can cost in the thousands of dollars, while Coach Handbags generally cost hundreds of dollars, the important factor is brand nam
e. If customers could get better brand name with relatively low price than coach, they will definitely switchover the brands. Therefore, luxury handbags and other accessories industry has threat of substitute products.

Threat of new entrance
Threat of new entrants to the luxury handbags and accessories industry could possibly come from existing companies in the market or newcomers, both locally and internationally; thus, the overall threat is relatively low.
            The start-up costs for entering the industry create a serious barrier. Brand awareness and establishment cost would be higher due to the customer loyalty on existing brands. For example, Coach inc. spent over 140 million on advertising and over 50 million on customers communication in fiscal year 2009 (coach inc, 2009).  Additionally, in this industry, the barriers to entry are really high and the barriers to exit are low, therefore only the few companies can maintain their position in the market, while others companies could give up altogether or are merged with bigger firms (Gucci group, 2009).
Lastly, the entry barriers have risen for the premium handbags industry. Currently there are fewer but more powerful companies, therefore strengthening the barriers to new entrants, and weakening the potential for new entrant success.

Five Forces Model of Competitive Position (Poter’s Analysis)
Table: 1
Magnitude of Forces
Intense Rivalry
Strong rivalry decreases the profit potentials of the industry.
Suppliers power
Week bargaining power of the suppliers increases the profit potentials.
Buyers Power
Moderately Strong
Strong buying power of the buyers decreases the profit potentials.
Threat of Substitute Products
Moderately strong
Strong threat of substitute products decreases the profit potentials.
Threat of new entrance
Moderately week
Week threat of new entrance increases the profit potentials.
Industry is well established with numerous recognized brands. Buyers’ power is moderately strong which reduce the profit potentials. Industry has threat from other medium and low quality handbag industry. Industry may be slightly affected by new entrance of existing brand.

Strategic Group Map:
Competitive Market Positions of selected Luxury handbag Companies: A strategic Group Map Application.
Market Capitalization
Kenneth Cole
Kate spade

In this strategic group map, there are six domestic and international luxury handbag companies; coach, Kenneth Cole, Kate Spade (domestic), Gucci, Burberry and Louis Vuitton (international) that are chosen to be evaluated based on their sales revenue and market capitalizations.
This group map shows that Coach Handbag Company has strong competition from both domestic and International market. Based on market capitalizations and revenue, Coach is the leader of the handbag industry in the US. It has second highest position on global luxury handbag industry. The market capitalization of Coach Handbag Company is 12.03 billion (market watch, 2010). Coach sales revenue in 2009 was 3.02 billion, which is an increase of 1.6% in comparison to 2008 sales (market watch, 2010). The trend of the market share price is increasing in the last few months because of the slow economic recovery. As per march 26, 2010 at 3:45 pm, Coach Inc (COH) market price is $40.27. In the competitive handbag industry, Louis Vuitton is the top luxury Handbag Company based on the revenue. It has $57.04 billion of market capitalization and sales revenue of $3.76 billion in 2009 (market watch, 2010). The stock share price was $23.20 per share as of march 26, 2010. At the same time, Burberry Company is the top handbag company based on market capitalization. Burberry has $322.40 billion of market capitalization and $1.69 billion of sales revenue in 2009 (market watch, 2010). The share price was $742 per share as of march 26, 2010. Gucci Group is the third highest industry competitors in the US market as per its sales revenue and market capitalization. The market capitalization of Gucci group is 3.08 billion and sales revenue of 2.2 billion euro, in us dollars $3.03billion (market watch, 2010). The share price was $30 per share as per march 26, 2010. Kenneth Cole, top domestic competitors of coach handbag has 2.15 billion of market capitalization and $0.41 billion of sales revenue in 2009 (market watch, 2010). The stock price of Kenneth Cole was $73 as of march 26, 2010. Kate Spade has market capitalization of $0.619 billion. Kate Spade sales revenue was 0.31 billion in 2009 (market watch, 2010).
The direction of the U.S. Premium handbag industry is pre mature, while the direction of the International premium handbag industry is toward expansion and diversification.

James, J (2009, Jan 5). Handbags: Premium handbags and accessories: Industry Analysis. AC
            Associated content. Retrieved from

Coach Handbag Company (2009). Form 10-K.annual report filed august 2009 from
Gucci Group (2009). From 10-K. annual report field august 2009 from
Coach Corporation (2010).  Company Profile. Retrieved March 20, 2010 from               /Coach_US/CompanyInformation/InvestorRelations/CompanyProfile

Gene, M(2009). Coach’s Winning Bag of Trick. Business week: Personal Business. 4151, p66-     66, 1p. Retrieved from

Cuizon, G(2009, March 6). The marketing Strategy of Gucci: SWOT Analysis for House of
 Gucci. Retrieved from

Women's Handbags and Purses. Encyclopedia of American Industries. Gale, 2008.
Reproduced in Business and Company Resource Center. Farmington Hills, Mich.:Gale Group. 2010. Retrieved from

Different Demographic for Coach. Retrived March 20 2010 from

 U.S. Census Bureau (2002). "Women's Handbag and Purse Manufacturing: 2002." 2002
 Economic Census, January 2005. Available from

 Law Against Selling Fate Bags .  Retrieved March 24, 2010 from

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