H2 Economics Holiday Homework (2016 RI Promo)

(You will be required to submit this to your tutor in the first week of school in 2018)

Question 1: The market for leather and leather bags

Extract 1: Control of raw materials

Paris-based design house, Chanel has purchased another one of the lamb hide tanneries
responsible for providing its leather, Megisserie Richard, France-based tannery, known for its
specialty leather. This is not a novel development for Chanel; it acquired its long-time lamb hide
provider, French tannery Bodin-Joyeux, at the end of 2013.

Looking beyond Chanel towards a much broader industry trend, luxury brands have been buying
up their leather suppliers. In 2013, luxury conglomerate, Kering, which owns YSL, Gucci, and
Balenciaga, among others, acquired a majority stake in French tannery, France Coco. Rivals LVMH
Moët Hennessy Louis Vuitton, Prada and Hermès similarly acquired their most integral suppliers
several years ago. The control from the raw material to the shop shelf gives luxury brands a
competitive advantage; it aids them to guarantee long-term supplies and defend the high-quality
image they want associated with their products.

Source: www.reuters.com, accessed 25 July 2016

www.thefashionlaw.com, 12 July 2016

Figure 1: U.S. Luxury Handbags Industry – Sales Revenue Growth Rate

Source: marketrealist.com, accessed 25 July 2016

Extract 2: U.S. Handbag Wars: Who Will Survive?

Competition is strong in the U.S. luxury handbags industry. Coach was the pioneer and broke new
ground in the American affordable luxury industry. Despite a growing handbags and accessories
market, the company’s market share in the U.S. declined consecutively, from over 35% in 2008, to
23% in 2014. A number of new entrants, such as Michael Kors and Kate Spade are cutting into its
share.

As a luxury and discretionary brand, creating the right brand image for its products and effectively
marketing the brand are vital to Coach’s sales. Brand image is created and marketed by the
company’s in-house creative marketing, visual merchandising, and public relations team. In 2014,
the company spent 2.7% of net sales, or US$130 million on marketing activities. In contrast, rivals
Michael Kors and Kate Spade spent US$65.7 million and US$59.3 million, or 2.0% and 4.7% of
revenues, respectively.

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Over the last few years, Coach added new lines of merchandise and opened dozens of factory
outlets in an effort to boost sales. However, the company might have unwittingly eroded the aura of
exclusivity that made it so valuable in the first place. Coach’s products are much cheaper than those
of European luxury brands such as Hermès, Chanel or Louis Vuitton. It derives two-thirds of its
North American sales from lower-priced sales at factory outlets. This accounts for nearly half of its
total sales, a percentage that is too high for a true luxury brand.

Competitors Michael Kors and Kate Spade, appeal much more to younger consumers. Tapping on
its online prowess, Michael Kors has a fan base of millions on social media platforms such as
Instagram and has ramped up ecommerce and mobile-commerce offerings.

Coach is now trying to re-brand its image after heavy discounting had tainted its brand. It has cut
back on promotional events at stores and has returned to the semi-annual sales model followed by
most luxury fashion brands. The number of flash sales at its e-commerce site has also been cut
down. Efforts such as these and shutting down of under-performing stores are intended to increase
sales and profit margins, while maintaining its brand value.

Source: http://marketrealist.com, 16 January 2015

http://www.forbes.com, 5 January 2016
Extract 3: Bangladesh’s tanneries

Fine leather products from Bangladesh are admired in the luxury markets throughout the world.
However, these leathers are manufactured in the fifth most polluted area of the world – Hazaribagh
– a residential district that is also home to 90 percent of Bangladesh's tanneries. The area is
infamous as an environmental and health disaster, with the waste from chemicals used for treating
leather dumped untreated into streams that lead to the Buriganga River. Toxins are carried
downstream and contaminate water used for bathing, cooking, swimming, and irrigation. Chemical
waste also seep into the soil and contaminate groundwater systems that provide drinking water for
nearby communities, resulting in skin diseases, jaundice, dysentery, asthma, and gastric ulcers.

Source: http://www.voanews.com, 21 June 2016

Extract 4: Cost and benefits of relocation

Life is about to change in Hazaribagh, the old tannery district of Dhaka, Bangladesh's capital. In
2001, the High Court directed the government to shift the factories from Hazaribagh to Savar, a
mostly vacant area about 30 kilometres from Hazaribagh. Whereas crowded Hazaribagh has no
room for effluent treatment plants, such facilities will be at the heart of the proposed leather industry
zone. The government set June 2015 as the deadline for shifting the factories to Savar. Muhammad
Abdul Hai, general secretary of the Bangladesh Tannery Association, says the cost of relocating
will be so high that many tanneries will close rather than relocate.

The push to modernize Bangladesh's US$1 billion leather industry, which provides income for some
30,000 families, is not just domestic. European and North American leather buyers are under
increasing pressure to adhere to international environmental standards for leather-making. The
European Commission, for example, is considering banning the import of leather made in
Hazaribagh.

According to the Bangladesh Finished Leather, Leathergoods & Footwear Exporters' Association,
the country is endowed with an abundance of raw hides and cheap labour. Once the tanneries
relocate to Savar and embrace socially responsible practices, the association predicts that sales of
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leather and leather items will triple. It expects more footwear manufacturers will set up plants in
Bangladesh to take advantage of its leather and abundant labour force.
However, tannery industry leaders said the government has failed to grasp the complexities of
transferring these factories. Tanneries make use of heavy rotating drums that are so sturdily
anchored into the ground that they are practically unmovable. Without government assistance, the
relocation will not be financially viable. Tanneries have reportedly asked the government for a
US$35 million subsidy to facilitate their move. Many also fear that they may lose their
competitiveness after being forced to shape up their safety and environmental practices.

Throughout Hazaribagh, tannery workers are resigned to moving. Commuting daily from Dhaka to
Savar will prove difficult, considering workdays that last 11 or 12 hours and the slow flow of traffic.
Tannery owners have promised to provide housing to workers but not to their families. Many workers
claim the government has not spared a thought for them. “I have been working in this industry for
15-20 years. What am I supposed to do now?” Md Rana, who works at a tannery that will shift to
Savar, has other concerns. “I don’t know the arrangements there. I cannot even take my family as
there will be no accommodation in Savar.”

Source: https://pubs.acs.org, accessed 25 July 2016

http://www.voanews.com, 21 June 2016
bdnews24.com, 2 April 2016

Questions

(a) With reference to Figure 1, describe the trend in sales revenue for the U.S. luxury [2]
handbag market.

(b) Explain how “control from the raw material to the shop shelf” raises barriers to entry [2]
to the luxury bags market.

(c) With the aid of a diagram, explain how the entry of new competitors affected the [4]
profits of Coach?

(d) Evaluate the effectiveness of business strategies adopted by luxury handbags [8]
producers to achieve their aims.

(e) (i) Explain the type of market failure in Bangladesh’s tanneries. [4]

(ii) Discuss the factors that the Bangladeshi government should consider in its [10]
decision to relocate the leather tanning industry.
[Total: 30 marks]

Copyright Acknowledgements:

Figure 1 © www.marketrealist.com
Extract 1 © www.reuters.com, www.thefashionlaw.com
Extract 2 © www.marketrealist.com, www.forbes.com
Extract 3 © www.voanews.com
Extract 4 © https://pubs.acs.org, www.voanews.com, bdnews24.com.