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Coach-LVMH Resolution a Long Way Off

It could take a year or more to resolve Coach's claim of harassing and anticompetitive behavior in Japanese department stores by LVMH.

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PARIS — The battle is on between Coach and LVMH Moët Hennessy Louis Vuitton, but it could be a long war.

It could take a year or more for Coach to resolve its dispute with LVMH over what Coach describes as harassing and anticompetitive behavior in Japanese department stores, according to the Japanese Fair Trade Commission.

A spokesman for the commission in Tokyo said Friday that investigations regarding the Anti-Monopoly Act in Japan often take “more than one year.” At the end of the process, the commission makes a recommendation to eliminate the illegal action, if any is found, and, “if it is not accepted [by the offending company], it takes another one or two years to finalize the decision,” the spokesman said.

Reached last week, executives at major Japanese department stores declined to comment on the case. However, speaking on condition of anonymity, one official noted that stores tend to acquiesce to demands from big brands since they generate such important sales.

To be sure, many big vendors are said to have thrown their weight around in the past to grow brands in Japan, where Vuitton commands a dominant position.

And there are already signs the battle between Coach and LVMH is going to be a drag-out fight. Bernard Arnault, LVMH’s chairman, is renowned for his combativeness, as evident in the barbed war of words he conducted with then-Gucci Group chairman Domenico De Sole when LVMH bid for Gucci in the Nineties and in the lawsuit LVMH filed against Morgan Stanley luxury goods analyst Claire Kent over allegedly biased research reports.

But Lew Frankfort, Coach’s chairman and chief executive, has been equally outspoken so far. Last week, in revealing the JFTC filing, he said: “We cannot accept being subjected to anticompetitive practices aimed at limiting our ability to freely offer Coach in the marketplace. It is not the way we do business and is contrary to our principles of fair play.”

In rebuttal, an LVMH spokesman said the French group would vigorously defend itself against any accusations and that, during its 40-year history in Japan, its business practices have been regularly praised. It immediately hit back at Coach’s business practices, saying it “can only question the motivation of the firm that filed this complaint, which is known to manufacture most of its products in regions with cheap labor.”

Only hours before Coach announced the filing of its complaint last Wednesday, Louis Vuitton chief executive Yves Carcelle was showing off slides of its just-renovated production facility in Asnieres, just outside of Paris, to attendees of the press conference to announce LVMH’s results. With its high-tech architecture and skylights, the factory resembles an upscale boutique or shopping mall.

A Coach spokeswoman on Friday, responding to LVMH’s remarks about producing in China, said, “It’s disappointing that LVMH has resorted to making comments intended to be disparaging about Coach. Coach is proud of the workmanship and quality of its products, which are made of the finest materials by skilled craftspeople around the world. By utilizing this global sourcing approach, Coach provides considerable savings to consumers in the form of affordable prices, providing the exceptional value that consumers in Japan have embraced.”

According to the company’s most recent annual report, by shifting to lower-cost production outside the U.S. Coach has been able to “support a broader mix of product types, materials and a seasonal influx of new, more fashion-oriented styles. During fiscal 2004, approximately 61 percent of Coach’s total net sales, excluding Coach Japan, were generated from products introduced within the fiscal year.”

The U.S. firm describes its sourcing operations as “a flexible model that meets shifts in marketplace demand and changes in consumer preferences.”

According to the report, Coach sources from countries including China, Turkey, India, Costa Rica, the Dominican Republic, Hungary, Indonesia, Italy, South Korea, Philippines, Singapore, Spain, Taiwan and Thailand. It has sourcing offices in Hong Kong, China and South Korea as well as a European sourcing and product development organization in Florence, Italy. 

Despite the exchanges between the two leading global brands, European luxury goods analysts downplayed the battle, saying it would be unlikely to have a major impact on LVMH’s share price. But U.S. analysts view the fight as crucial to the continued development of the brand in the booming Japanese market.

On Friday, shares of LVMH inched up 0.2 percent to close at 57.10 euros, or $76.51 at current exchange, on the Paris Bourse.

In research reports in the wake of LVMH reporting record net profits in 2004 in excess of 1 billion euros, or $1.34 billion, analysts trumpeted signs of recovery in the Japanese market and said Vuitton is well positioned, given a recent price hike of 5 percent last January.

As for Coach, the company “is pretty much in the next phase of its expansion in Japan,” said Neely Tamminga, analyst at Piper Jaffray. “It had been focused on operating freestanding stores, but now is looking at building out in-store shops in the department stores.”

She noted that LVMH and Tiffany currently operate in-store shops, some even with separate entrances to the retail space. “If you’re moving up to 1,200 square feet from an average of 300 square feet to 500 square feet, you definitely want to make sure there are no unfair [trade] practices to prevent you from expanding,” Tamminga said.

Based on Tamminga’s estimates, “Coach’s business in Japan has a compounded annual growth rate of around 40 percent.” She added that, even though LVMH has the greater market share owing to its longer presence in Japan, the growth trajectory for Coach — considered a younger, hipper American brand — is higher than for its French competitor.

Stacey Widlitz, analyst at Fulcrum Global Partners, said, “The increased competition is definitely an issue in the Japanese market. The retail laws in Japan were changed in 2000 to allow foreign luxury brands to come in and open freestanding stores. Because of that [change], competition within the department stores is heating up, too.”

Widlitz said she wasn’t totally surprised by the spat. “When the market becomes so much more competitive, you expect to see some of the brands react defensively,” she said.

— With contributions from Vicki M. Young and Marc Karimzadeh, New York

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