Coach Inc. (NYSE:COH) is a leading American marketer of luxury handbags and other fashion accessories. Witnessing slower sales growth in the North American region, it is focusing on China to drive its business. Coach registered 40% growth in annual sales in China in its most recent quarter, as compared to a mere 1% annual growth in the North American market.
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China’s luxury market is growing rapidly fueled by an expanding middle class, rising credit card penetration and higher luxury spending by women. We believe that the market will continue to grow at a strong pace in the future. While sales in China accounted for less than 7% of Coach’s sales in fiscal 2012, we estimate the proportion to increase in the future, as Coach aims to aggressively expand its presence in the region.
In this article we evaluate the opportunities in the Chinese luxury market, current trends driving demand and potential risks that could impact the growth rate in the region. We also analyze Coach’s strategy to expand its footprint in China.
What Is The Estimated Size Of The Luxury Market In China?
The luxury spending by Chinese consumers has grown rapidly over the last decade. According to McKinsey, while Chinese shoppers represented only 1% of the global luxury spending in 1995, their share increased to 27% in 2012. By 2015, China is expected to represent one-third of the estimated $175 billion global luxury market.  Rapid expansion in the Chinese luxury market offers significant growth opportunity for Coach as other developed markets continue to suffer from economic uncertainty.
In addition to higher demand from China, the increasing demand from Chinese shoppers markets outside of China is another important growth driver for the global luxury market. Chinese customers make a significant percentage of their luxury purchases abroad as luxury goods’ prices are more expensive in the country due to high tax rates or other restrictions. According to Bain & Company, 60% of the total luxury spending by Chinese consumers is made abroad.  In the U.S., Chinese customers account for 15% of overall luxury sales according to Ralph Lauren. 
Thus, we feel it is critical for Coach to build its brand image in China to leverage the growing demand from Chinese customers.
What Are The Factors That Could Contribute To A Faster Growth Rate
An expanding middle class, rising credit card penetration and increased luxury spending by women as well as a younger population are the key factors driving the growth of luxury market in China.
Growing middle class
A rapidly expanding middle class is one of the key factors driving the luxury market in China. At the top end, there are more than a million “millionaires” in mainland China, who have personal assets of over $1.5 million according to widely cited Chinese research firm Huran. The authors further mention that for every “known” millionaire, there are two that are under the radar.   According to a McKinsey & Company partner who heads the Greater China consumer goods practice, the figure is growing by around 20% annually. 
The expanding middle class will drive the demand for Coach’s products as it is viewed as an affordable luxury brand.
Increasing credit card penetration
An increase in the number of credit card users in China is another factor contributing to the rising Chinese luxury market. While less than 50 million credit cards were issued in 2005, the figure increased to 221 million in 2010. MasterCard forecasts the number of credit cards in China to more than triple by 2020. 
Increased luxury spending by women and younger population
Another important factor contributing to the growth is higher luxury spending by Chinese women. While men account for 55% of luxury goods market in China as compared to the global average of 40% according to CLSA, the share of women is rising as they gain more spending power.  Additionally, increasing demand from younger shoppers who aspire to wear luxury brands is also bolstering luxury sales in China. 
What Are The Possible Roadblocks That Can Slow The Growth In China?
Gifting, which includes personal and corporate gifting, accounts for a significant percentage of luxury sales in China. However, changes in Chinese culture and anti-corruption measures taken by the Chinese government have negatively impacted luxury gift sales in China.
According to a report by HSBC, the trend of wealthy Chinese men to keep mistresses has been on a decline. As Chinese men are more inclined to buy luxury products for their mistresses, this social change is expected to have a negative impact on the sales of luxury gifts in China.  Moreover, the Chinese government wants to restrict gifts received by government officials to check corruption in the country. Gifting luxury goods was previously common in China, but these recent controls have impacted sales.
Any decline in Chinese economic growth could also have a direct impact on the Chinese luxury market as the sales of luxury goods are directly dependent on the disposable income of consumers. However, while these factors may present some roadblocks to growth, we feel the Chinese demand will continue to increase rapidly in the future, on account of rising middle class in the country.
What Is Coach’s Strategy in China?
Coach is focusing on the direct-to-consumer business in China to enhance its 6% market share in the Chinese luxury market.  In fiscal 2009, it acquired its Chinese operations from its former distributor, the ImagineX group, to gain more control over its brand. Since then, it is heavily expanding its footprint within the region. Having added 30 and 25 stores in China in fiscal 2012 and fiscal 2011 respectively, it plans to open 30 more stores in the region in fiscal 2013. In addition, Coach recently opened an e-commerce site in the country to leverage rising Internet penetration in the country.
Coach has adapted its product portfolio to suit Chinese tastes. It also invests heavily in consumer research to better understand consumer’s preferences in China and introduces new designs every month.  Its growing focus on men’s products has also helped it leverage the men’s opportunity in China, as men’s products accounts for more than 50% of the Chinese luxury market.
We feel Coach will continue to register double-digit sales growth in China over the next few years on account of the robust growth potential in the Chinese luxury market and its aggressive expansion plans in the region. However, we feel that as the market is expected to be driven by shopping for more personal products as compared to gift products in the future, Coach will have to continuously evolve its product line to cater to changing consumer tastes. If its products fail to remain unique in the Chinese market, then we feel its demand may suffer in the region.Notes:
- Chinese shoppers ‘biggest spenders on luxury goods’, South China Morning Post, December 13, 2012 [↩]
- Chinese shoppers world’s top luxury goods spenders, while China luxury market cools to seven percent growth in 2012, Bain & Company, December 12, 2012 [↩] [↩]
- Ralph Lauren Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, February 6, 2013 [↩]
- GroupM Knowledge and Hurun Release Wealth Report [↩]
- Meet the average Chinese millionaire: 39, plays golf, and owns an iPad, Business Insider, August 01, 2012 [↩]
- Luxury sales boom in China, where giving gifts is an art, USA Today, January 15th 2012 [↩]
- Don’t Underestimate China’s Luxury Market, Harvard Business Review, December 12, 2012) ((Luxury lifestyles in China/HK, CLSA, January 2011 [↩]
- Luxury goods sales in the bag for male fashionistas, The Irish Times, February 5, 2013 [↩]
- Chinese Mistresses to Blame for Global Luxury Slowdown?, CNBC, September 11, 2012 [↩]
- Coach to step up efforts in Greater China market, WantChinaTimes, July 1, 2012 [↩]
- Coach in China, Daxue Consulting [↩]