What’s Coach’s secret?Arguably one of the hottest public companies in fashion today, Coach Inc., which last year generated $719 million in sales, not only has a strong balance sheet but is a bona fide Wall Street darling. Investors on board since its IPO in 2000 have tripled their money. And in the past year, the stock price has risen 61 percent and split two for one in July. The Coach success story has been overseen by its chairman and chief executive Lew Frankfort, who has teamed up with president and creative director Reed Krakoff to transform the brand’s traditional collection of leather handbags into a highly desirable American brand. Developing a solid and growing customer franchise, they have expanded into international markets and broadened product lines, all with a consistent marketing message, from product to retail environment."The story about Coach is about a team with a shared vision and deep understanding of our brand," said Frankfort in a keynote speech.The changes, though, have not alienated existing customers while bringing in new ones. "Over 80 percent of sales come from existing users. Five years ago, it was 90 percent. In the year 2000, over 10 percent of our sales came from younger consumer types between 18 and 24," said Frankfort.Frankfort, who began his career at Coach in 1979 and oversaw its transition to a public company in October 2000, said women’s changing shopping patterns have altered the retail landscape, and the company has had to change with the times — with multiple channels of distribution, a stylish image, a constant flow of merchandise into the stores, effective communications, and above all, a distinctive product. "Our distribution in multiple shopping venues allows us to be wherever the consumer chooses to shop." Currently only 12 percent of Coach’s distribution is to department stores. The rest is divided among Coach’s full-price stores (31 percent); its factory stores (29 percent); international, (20 percent); other, (6 percent), and direct marketing, (2 percent).Overall, 62 percent of Coach’s business comes from direct-to-consumer channels, primarily its retail stores, with catalog and Internet sales contributing to the remainder. Thirty-eight percent of Coach’s business is done through its wholesale operation, which consists of department stores, international and business-to-business.Presently, Coach has 144 retail stores, where it maintains a full-price policy 365 days a year. In addition, it has 76 factory stores, which provide a controlled venue for handling disposition requirements. "As the Coach brand strengthens, store expansion is obviously our growth strategy," said Frankfort. Coach had 106 retail stores in fiscal year 2000, and estimates it will have 158 in fiscal year 2003 and 200 in fiscal year 2005."Creating a compelling retail experience is fundamental. The product needs to be heroic. We streamlined our format, creating a simpler, brighter and more open store," said Frankfort, pointing to a slide of the new Embarcadero, San Francisco unit. The store, he said, provides "a powerful backdrop to showcase our product."Frankfort explained that for years, a robust retail environment led to the growth of department stores and discounters. "However," he continued, "the 1990s were a decade where the department stores lost market share to the discounters and the specialty stores." In fact, department stores at the end of the 1990s had a 20 percent market share overall, down from 30 percent. In addition, from 1982 to 1999, the average time spent on a visit to the mall decreased almost 20 percent. And during the last five years, the average number of outlets shopped doubled.Dealing with these new realities, Frankfort said, "There was no margin for error. Everything from the broadest strategy to the most narrowly executed tact needs to be thought and rethought with the customer front and center."Number one, Frankfort said, the product has to be distinctive, and it has to ring true. "Coach grew organically from the product. We gave customers a distinctive and easily recognizable product made out of excellent materials by skilled craftspeople," said Frankfort. However, with changing consumer preferences, it was vital for Coach to evolve without sacrificing its core values. Pointing to the slim duffel of 1991, he said, "It had one look and the qualities we’re known for. Today, it’s become more refined, more stylish and interpretive of style. It still incorporates the underlying qualities of the brand. It’s scoring as high on fashion as Coach attributes."One of the most important strategies is listening to the consumer to keep the brand relevant, he said. The company has a seven-million-household database for communication and research, where it can obtain critical knowledge about how the consumer thinks about the brand, how she goes about making a purchase decision, and what roles fashion, price and style play. The company analyzes this information by consumer segments and category for its predictive power and for its insight into launching new products, he said. It also has one-million e-mail addresses, which it uses to communicate with its customers. "We develop a communications platform via e-mail and give them a preview and talk about fashion and style."It’s crucial to understand the marketplace and your position within the competitive landscape. In our case, Coach occupies a leadership position in the market where we dominate the ‘accessible luxury’ segment." He said Coach also appeals to consumers in the designer and moderate segment. "We’re selective in our distribution, which is to market to better department and specialty stores," Frankfort said in response to a question of how the brand competes with such stores as Kohl’s. "Our business is growing rapidly through department stores. Last year our market share in the U.S. for handbags and accessories was 12 percent. It’s now 20 percent, and we can grow to 30 percent of U.S. market share."According to Frankfort, its best customers visit Coach every two months and purchase every seven months. Therefore, the company has increased the rate of product flow into the stores. Every month, Coach introduces an assortment of new products to drive sales in all product categories, create a fresh shopping experience and, most importantly, to encourage consumers to revisit. Additionally, Coach has broadened its product offerings to include clothing, footwear, watches, jewelry, home office, scarves and now hats.For some retailers, he said, there may be opportunities to expand their concept internationally, but it’s important to understand whether the brand has "legs" geographically. He noted that in the late 1980s, Coach focused on the Japanese consumer who spends 45 percent of the world’s luxury goods dollar. Today, the Japanese consumer represents between 20 and 25 percent of Coach’s total sales worldwide, and Frankfort believes the brand still has significant potential to grow in that market.Furthermore, Frankfort said it’s vital to have advertising that’s appropriate and consistent and should reflect one voice and one look across all media and geography. Three times each year — spring, fall and holiday — Coach launches a major ad campaign in support of key selling seasons."This holiday season we’re focusing on the slim duffel," said Frankfort. He said the same message will be reinforced in the catalog, Internet, store windows and outdoor advertising.In evolving from a manufacturer to a marketer, Coach needed a nimble and flexible operating model that could adapt to changing trends and patterns. The company increased its production flexibility, enabling it to introduce a broad range of new products in a rapid, but controlled fashion. At the same time, it provided the company with gross margin improvements. Its operating model includes a globally diverse sourcing base, strict quality control, a centralized, scalable distribution center and an established SAP Technology platform."In this challenging retail environment, balance-sheet strength and the flexibility it provides has become even more important," said Frankfort. He noted that sales were up nearly 30 percent in the last quarter, and inventory was up 3 percent in its core business.In answer to another question, Frankfort indicated that — unlike such multibrand luxury groups as Gucci Group — Coach prefers to focus on a single brand. "First, we have substantial opportunities ahead of us. The way we look at our growth is, ‘who’s the target customer?’ and ‘what part of the market do we enjoy?’"In the U.S., Coach has between a 15 and 18 percent market share. "We’re the U.S.’s number-one accessory brand. Our closest competition are the European luxury brands. By adding 100 more stores over the next four to five years, we expect to double our market share," Frankfort said. "A monobrand makes sense. We want to remain single-minded and do what we do best, which is develop the Coach brand."

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