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Coach limited edition handbags 2011

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CASE 7-1 COACH—SELLING HANDBAGS OVERSEAS

Coach, Inc. is an American luxury leather goods company primarily known for ladies’ handbags. The company started in 1941 as a family-run workshop based in a Manhattan loft. Now greatly expanded, the company aspires to maintain high standards for materials and craftsmanship. In 2008, faced with a severe economic slowdown in its core U.S. market, Coach decided to expand its drive into Asia. A key market in this expansion drive is China. According to Ernst & Young, China bought more than $2 billion worth of upscale products in 2008. This figure could rise to $11.5 billion by 2015. By the end of 2006, the country boasted 345,000 U.S. dollar million- aires, one-third of whom were women. Coach expected China would make up over 4 percent of its sales by 2013 as the retailer expand into a hundred cities. It also announced plans to acquire its own retail businesses in Greater China from cur- rent distributor ImagineX to boost its market presence. Coach planned to increase the number of stores there from 25 in 2008 to 80 by 2013. It intended to open its first flagship store in Shanghai within the coming 12 to 14 months.

Coach hoped to replicate in China what it did in Japan (see Table) by increasing its market share from just 3 percent in 2008 (compared to 30% for Louis Vuitton) to 10 percent by 2013. Coach’s former CEO Lew Frankfort explained how Coach was able to grab shares from its European competi- tors in Japan: “Many Japanese women told us they would rather spend 60,000 yen ($578) for a Coach bag and spend the other 60,000 yen that they would save by not buying a European luxury brand and use it to go to Thailand.” Coach especially appealed to women under age 35. Older Japanese women preferred carrying European luxury brands as a sta- tus symbol.

HANDBAG MARKET SHARES IN JAPAN

Company 2000 2008 Louis Vuitton 33% 27% Coach 2% 12% Prada >10% <10% Gucci >10% <10%

Source: “Coach bets Chinese open the purse strings,”Wall Street Journal, May 30–June 1, 2008, p. 28

Lew Frankfort noted that Coach’s competitive advantage over other luxury leather goods companies such as Louis Vuit- ton is that “We offer a well-made and stylish product… at less than half the price point of our European competitors.”1

Coach bags typically cost between $200 and $400, putting the brand at the top of the premium segment or the bottom of the luxury segment. Occasionally, Coach sells higher priced limited-edition bags, but it mainly focuses on aspirational buy- ers. By keeping prices within that range, Coach hopes to build up a loyal customer base. To keep the brand more accessible than its European luxury rival brands, Coachmakes its product in lower cost countries while sourcing its raw materials from high-end mills and tanneries. As a result, Coach’s labor costs are a fraction of its European competitors’ costs.

COACH FLAGSHIP STORE IN HONG KONG

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1“Handbag Brand Coach Plans Major Expansion in China,” http://www. iht.com/bin/printfriendly.php?id=13302728.

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2 • Case 7 • Global Segmentation and Positioning

Coach’s primary focus is on the female consumer because “she tends to be brand-loyal, will go shopping whether the stock market declines or not, and if she has a bad day at the office she may buy herself a Coach bag, where a man would have a double-scotch.”

Coach opened its first outlet in China in 2003. In May 2008, the retailer launched a 9,400 square foot flagship store on Hong Kong’s Canton Road, one of the city’s main shop- ping areas. Ian Bickley, president of Coach International, predicted that the market for woman’s leather goods (exclud- ing shoes) in Greater China would more than double in the coming 5 years, from $1.2 billion to $2.5 billion. His goal was to raise sales from the current $30 million (3% market share) to $250 million (10% market share).

A key factor to stimulate growth is the firm’s decision to manage its own stores. In Japan, Coach took direct control of its retail stores in 2001—the right time to control the destiny of the brand according to Bickley. Likewise, Bickley declared that “the time has come for us now in China to establish an in-store experience and build a brand” (BusinessWeek, June 4, 2008).

Describing the difference between the Chinese and U.S. consumer, Frankfort said: “In China, there’s a lux- ury consumer that represents perhaps 0.05 percent of the population—very small but with enormous purchasing power.

Sources: “Handbag Brand Coach Plans Major Expansion in China,” http://www.iht.com/articles/2008/05/29/style/coach.php; www .coach.com; “Coach Bets ChineseOpen the Purse Strings,”Wall Street Journal Asia, May 30–June 1, 2008, p. 28; and “Coach Builds Its Brand in China,” BusinessWeek, June 4, 2008.

That’s not our primary target. Our target is the emerging mid- dle class who have gone to university and are now getting 30–40 percent [pay] increases a year. . . . These women are trading up and investing in plasma TVs and laptop computers andCoach bags. They are looking forways to broaden their life and Coach is one way. . . . There are some consumers who are extremely wealthy, and hopefully our limited-edition product will attract them, but they are not our primary thrust.”2

The next frontier would be India, though for the time being that market was on the back burner because of infrastructure problems. Bickley observed: “In India, distribution networks and local partners are still learning a lot about the industry. There are no proven partners locally.”

DISCUSSION QUESTIONS

1. Will Coach be able to replicate its Japan success story in China? Why was the firm successful in Japan? 2. Reflect on Coach’s targeting strategy.What are the alterna- tives? Coach decided to focus on the emerging middle class— do you agree? 3. Around the time that Coach announced its Asia expansion drive the global economy entered a deep recession. To what extent would the recession affect Coach’s strategy inAsia (pri- marily Japan and China)?Will Coach need to revisit its plans? If so how?

2“Coach Bets Chinese Open the Purse Strings,” Wall Street Journal Asia (May 30–June 1, 2008): 28.

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CASE 7-2 HYUNDAI CONQUERS EUROPE

Car companies spend huge amounts of money on adver- tising to promote their brands. However, Hyundai Motor, the Korean carmaker, received an unsolicited boost to its image from Volkswagen, one of its main competitors in Europe. A video shot at the 2011 Frankfurt Motor Show shows Martin Winterkorn, Volkswagen’s CEO, examining a Hyundai i30 compact. Wowed by the car’s adjustable steer- ing wheel, he observes to his entourage: “Nothing rattles. Why can they do it? BMW can’t. We can’t.” The video posted on YouTube has been seen more than 1.7 million times (http://www.youtube.com/watch?v=YpPNVSQmR5c). One of the YouTube comments states: “It’s always good to know your enemy. I’m guessingMr.Winterkorn is thinking we have a tough fight ahead.”

In the U.S. market, Hyundai and its sister brand Kia have jumped to the number 2 spot among foreign car companies. In 2011, the company sold 1.13 million cars in the United

Sources: “The Contender,” Bloomberg Businessweek, January 30 to February 5, 2012, pp. 21–22; and “Hyundai Set to Shift Up Gear in Drive for Expansion,” Financial Times, December 16, 2010, p. 26.

States—more than triple Volkswagen’s sales. Hyundai’s value proposition of reliability, quality, and long warranties enabled the company to double its global car sales between 2004 and 2011. The company has now set Europe as a top priority.

To implement its European strategy, Hyundai expanded the capacity of its car plants in the Czech Republic and Turkey and opened a new 150,000-units capacity plant in Russia in 2011. On the marketing front, Hyundai became a sponsor of theWorld Cup soccer and hired German soccer icon Jürgen Klinsmann as brand ambassador. It also customized its prod- uct line to local tastes by focusing on vehicle styles that are popular in Europe such as hatchbacks and wagons. In 2011, its market share jumped from 4.5 to 5.1 percent, ahead of Toyota, Mercedes, and Volvo.

Hyundai would also like to climb up the ladder by launch- ing more upscale vehicles. One example is the €42,290 ix55 sports utility vehicle (Veracruz in the United States). This strategy of selling luxury cars at lower price points than its European rivals mirrors what Toyota did with its Lexus line and Nissan with Infiniti, except that Hyundai is not building a new brand.

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Short Cases • 3

DISCUSSION QUESTIONS

1. Why is Europe so critical for Hyundai? 2. Hyundai is a relative latecomer in the European market. Yet, the company has been growing fast with its market share rising from 4.5 percent in 2010 to 5.1 percent in 2011.What has been the magic formula behind Hyundai’s success so far?

3. Hyundai planned to increase its European sales by about 25 percent to 5,000,000 cars by 2013. Part of its strategy is to move up into higher price tiers. Do you agree with this strat- egy? Are there other strategic initiatives the company could pursue to achieve this target?

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CASE 7-3 LEGO FRIENDS (A)

In 1932,OleKirkChristiansen founded a company forwooden toys in the Danish city of Bilund. His mantra was “Only the best is good enough.” Eighty years later, the LEGO group has become the world’s third largest manufacturer of play mate- rials with 10,000 employees. In addition to its classic LEGO brick sets, the company has over 25 product lines. The com- pany, known for its iconic plastic toy bricks, has been described as “the hottest toy company in the boy segment, and maybe the hottest in toys overall.”3 Sales in the first 6 months of 2012 were $1.5 billion or the equivalent of 12 billion LEGO bricks—six for every child on the planet.

Among the “10 characteristics for LEGO” spelled out in 1963 by the founder’s son, Godtfred, is: “For girls and for boys.” Still, until 2011, LEGO had primarily focused on boys. LEGO was largely perceived as a boys-only toys brand. In the United States, for instance, LEGO’s research showed that only 9 percent of the current active LEGO households reported that the primary user of the product is a girl. As Peggy Orenstein, author of Cinderella Ate My Daughter, noted: “Theymight as well have a no girls allowed sign” inside LEGO stores. Over the years, LEGO has had five strategic initiatives targeting the girls segment. For instance, in 1997, it launched the Scala (1997–2001) line consisting of special bricks and tiles that were printed with birds and flowers. Instead of building cities, girls could design necklaces. Paradisa (1991–1997) had a desert island theme with a lifeguard stand and country club. None of these initiatives ever became blockbusters. Clikits, launched back in 2003, encouraged girls to customize bracelets and room decoration. Some failed because they misunder- stood gender differences in howkids play.Others did not really fit with LEGO’s core products. For instance, the beachy mod- els of Paradisa lacked the detail of standard LEGO characters while Clikits was nearly unrecognizable as a LEGO product.

Sources: “LEGO Is for Girls,” Bloomberg Businessweek, Decem- ber 19–December 25, 2011, pp. 69–73; http//www.legofriends.com; http://en.wikipedia.org/wiki/Lego_Friends; “Why Do Boys and Girls Have Similar Interests, But Very Different Toys? Toy Makers Still Behind in Closing the Gender Gap,” http://adage.com/article /news/toy-makers-closing-gender-gap/237154/.

3“LEGO Is for Girls,” http://www.businessweek.com/magazine/LEGO- is-for-girls-12142011.html.

One global kids study conducted by agency the Market- ing Store Worldwide surveyed 4,000 children aged 6 to 12 in 12 countries. The study findings showed that while the gender gap is closing in several areas for kids, the chasm is still wide for toys. The study found that boys and girls gen- erally engage in similar activities such as camping, cooking, or gardening. Their usage of electronics is also highly similar except that boys tend to be more into gaming while music appeals more to girls. However, the gap for toys remains vast. For instance, around 50 percent of girls said dolls were in their top three favorite toys compared to only 2 percent of boys. On the other hand, close to 40 percent of boys ranked building and construction toys among their favorites versus only slightly over 10 percent for the girls in the study. Such gender disparities were consistent across the world and biggest in Mexico.

With the new LEGO Friends line, the toy firm hoped it would finally be able to bridge the gap and crack the girls mar- ket. The development of the new line was based on extensive field research. It set up research teams of top in-house design- ers and outside consultants. Small teams were sent out to Germany, Korea, the United Kingdom, and the United States to observe how girls play and interview their families. One finding was that beauty was a hot button for girls. Apparently LEGO fell short on that dimension. Girls absolutely hated the iconic mini-figure, a 4-cm4 boxy plastic man with swiveling legs. The research also revealed that girls love role-play and that they love to build. However, while boys tend to construct kits in a “linear” mode (rapid and just as shown on the box), girls like to take breaks and rearrange according to various story lines without necessarily completing the whole model.

LEGO Friends includes 29 “minidoll” figures—slightly taller, more detailed, and curvier than the traditional minifig- ures. There are five main characters that come with names and back stories.5 The minidolls’ hands can handle acces- sories such as handbags and hairbrushes. The sets depict scenes in the fictional town of Heartlake City, which has a beauty salon, a purple convertible car, a splash pool, a horse academy, a veterinary clinic, and a café (with cupcakes). The bricks are less complicated than traditional LEGO pieces. LEGO learnt that the relationship between girls and the doll-figures

41 5/8 in. 5Andrea, Emma, Mia, Olivia, and Stephanie.

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4 • Case 7 • Global Segmentation and Positioning

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differed from the one between boys and LEGO minifigures. Boys would play with the figures in the third person. Girls, however, needed figures they could identify with and that looked like them. LEGO’s design team knew they were on the right track when girls told the teammembers that they wanted to shrink and be in the town. The product line also introduces six new color schemes including lavender and azure (bright pink was already part of LEGO’s color palette).

LEGO plans to roll out the new line during the 2011–2012 Christmas season in France (December 15, 2011), the United Kingdom (December 26, 2011) and the United States (January 1, 2012). In the U.S. market, Wal-Mart, Toys “R” Us, and Target plan to carry the new product range.

DISCUSSION QUESTIONS

1. How do you assess the new LEGO Friends line expressly targeted to girls? Is the toymaker on the right track? Why or why not? 2. How would you position the new line toward LEGO’s tar- get (5+-year-old girls)? 3. Where should the new line be shelved inside stores like Wal-Mart or Target? With other LEGO toys or with girl-oriented toys? 4. LEGO decided to roll out LEGO Friends first in France, the United Kingdom, and the United States. What criteria would you use to decide on the next wave of countries to intro- duce the new product range? Does the line have the potential to become a global blockbuster? 5. For many of LEGO’s more traditional lines targeted toward boys are cobranded (e.g., with Star Wars, Indiana Jones, and Harry Potter). LEGO decided not to do this for the new line. Do you agree with this decision? Why or why not?

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