China’s Middle Class: the Savior for Coach’s Flagging Sales

Chinese actress Zhu Zhu in an ad for Coach. (Weibo/Coach) While many fashion and leather goods brands are looking to North America as they feel the effects of China's luxury slowdown, accessible luxury brand Coach is seeing the exact opposite phenomenon with its own sales growth numbers. Although brand recently revealed that it’s in need of a North America refresh, reporting fiscal third-quarter sales that dipped 23 percent, it continues to see its popularity and sales grow among Chinese shoppers. An aggressive early mover and pioneering player in China’s “accessible luxury” market, Coach remains a rare success story in mainland China even as other foreign brands continue to be hit by the ongoing anti-graft crackdown. According to the company’s latest financial results, revenue from Coach’s China business increased an enviable 10 percent on a constant currency basis in third-quarter fiscal 2015 and 8 percent in U.S. dollar terms. Coach’s performance is notable as European luxury brands are taking serious measures such as dropping China prices in an attempt to spur sales and fight the parallel online market. But they are particularly impressive considering the brand’s struggles in nearby Japan. In third-quarter fiscal 2015, Japan sales dropped 11 percent on a constant currency basis, and Coach closed two Japan stores, taking the company’s total retail presence to 198 locations. Hit by factors such as a strengthening dollar, Japan sales dipped 23 percent in U.S. dollar terms, potentially due to Chinese tourists being more interested in local brands when shopping in Japan and too low a price differential to encourage Coach purchases in yen. In addition to sales growth, Coach continued to expand its offline retail footprint in China last quarter—itself a triumph in such a difficult and expensive retail market. Coach added four new China locations, taking its total to 165 throughout the country, indicating to Seeking Alpha that Coach’s “branding reset plans are showing positive results.” So why is Coach outperforming when so many Western brands continue to struggle in China? In part, Coach has benefited from its relative immunity to the current anti-corruption crackdown that’s hurt other Western brands with a large retail footprint in the country. Coach has never been expensive or flashy enough to get the attention of investigators—certainly, no news stories have focused on a provincial officials’ secret stash of Coach bags or watches. Another reason Coach maintains good performance among Chinese shoppers is the brand’s adept use of digital marketing, which has built a strong connection to Chinese customers and kept them up to date on new store openings, recent collections, and fostered two-way communication. The brand has also adeptly used brand ambassadors like Chinese-American actor and pop star Wang Lee-Hom to great effect, using Wang as a bridge between the Chinese and American markets (and driving this concept home via a photo campaign on the Brooklyn Bridge). Coach has also aggressively gone after middle-class mothers (themselves a core demographic in the brand’s home market of the U.S.) in China, with campaigns like 2013’s “Hot Moms” effort. That said, if the brand fails to continually innovate and regularly refresh collections to suit market trends, Coach may find itself struggling under the weight of too many stores in China with too apathetic a buyer base. Simply, brands in Coach’s price bracket lack the luxury of Hermès, which can let classic models like the Birkin or Kelly stand on their own for decades. As the recent performance of accessible luxury brand Mulberry—which struggled to find its footing in recent years until bouncing back with its new Lily collection—shows, without a strong creative direction and new collections that excite jaded consumers, the likes of Coach need more than an affordable price tag to drive demand.

China’s Middle Class: the Savior for Coach’s Flagging Sales

On this page

Published May 10, 2015

Sectors

Insights

Company

China’s Middle Class: the Savior for Coach’s Flagging Sales