Moreover, its affordable luxury niche doesn’t offer the competitive moat of high quality in the way that, say, Louis Vuitton does. Similarly competitors like Michael Kors Holdings Ltd (NYSE:KORS) or Ralph Lauren Corp (NYSE:RL) are capturing market share within handbags and accessories. Moreover, RL has vastly more experience with men’s retailing and less of a brand reputation to protect. In other words, it can afford to be aggressive on pricing.
The expansion of its footwear activities is nothing new in the marketplace. Indeed, J.C. Penney Company, Inc. (NYSE:JCP) is making the category a key part of its turnaround success. In a sense the troubles at JCP and other department stores are reflective of the weakness in the mid-market, and the response of many of these companies is to jump on the footwear and accessories bandwagon.The difficulties at JCP also imply that there is more significant market disruption to come as the department stores adjust strategies and sales channels in order to fight for share within a weakening market.
In summary, I think that Coach Inc. (NYSE:COH) is looking to expand in categories in which it is not an established leader, while facing increasing competition and potential margin erosion in its core market. On the other hand, a glass half full assessment of the same facts would argue that Coach is leveraging the power of its existing brand in order to generate profits within higher growth categories.
Where Next for Coach?
My hunch is that investors follow the trends in the retail market, and Michael Kors Holdings Ltd (NYSE:KORS) has the hot hand right now. Moreover, the weaker traffic reported at Coach’s stores also means weaker traffic for its growth categories. Coach Inc. (NYSE:COH) finds itself in a tricky situation. Does it increase promotions in order to drive traffic but possibly lower the brands perceived value, or does it hold pricing and try to drive growth through other categories?. At the moment it seems to be arguing for the latter. This could prove a risky strategy if the mid-market consumer doesn’t come back.
We may well see strong growth from areas like footwear and men’s accessories, but the core, handbags and women’s accessories, remains the key to its future growth. My hunch is that the challenges in its core market could go on longer than many people think and the company will need a stronger overall retail market in order to start growing its core North American market again. The key metric to follow is traffic, and until that comes back I will keep Coach Inc. (NYSE:COH) on the monitor list.
The article Where Next for the Affordable Luxury Market? originally appeared on Fool.com and is written by lee Samaha.
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