Even luxury labels feeling ill effects of consumer skid
Posted on Sunday, January 27, 2008
URL: http://www.nwanews.com/adg/Business/215036/
In the luxury-goods business, bleak is the new black.
After four years of galloping growth, the good times for highend brands — long considered the most resilient retail segment — have abruptly ground to a halt.
The consumer slowdown now appears to be affecting companies across the entire luxury industry, from those that sell only at the very highest end to those that in recent years have expanded into “affordable luxury” items within reach of the middle class.
Shares in Swiss luxury conglomerate Cie. Financiere Richemont SA, owner of the Cartier brand, dropped 6. 7 percent Wednesday after the company reported a slowdown in Christmas sales growth, missing analysts’ estimates. December sales at Italian menswear brand Ermenegildo Zegna fell short of the company’s expectations — and have gotten worse so far this year.
Coach Inc., whose handbag sales have been on a tear for the past decade, said last week that same-store sales at the company’s full-price retail stores sank 1. 1 percent in the quarter ended Dec. 29.
“We are not immune to a slowing consumer environment,” Coach Chief Executive Lew Frankfort said.
And in the most concrete sign yet that its profit margins are hurting from the weak dollar, Louis Vuitton, the world’s largest luxury brand and the flagship of conglomerate LVMH Moet Hennessy Louis Vuitton, raised prices of its luxury handbags and apparel in its U. S. stores by 5 percent last week — taking a risk that its well-heeled customers will keep buying even as an economic slump hits and market turmoil persists.
Some consumers are cutting back on their shopping. Over the summer Jennifer Mereu, a 39-year-old real-estate broker in Boston, bought Prada platform sandals, Chanel ballet flats and Michael Kors casual platform shoes, among other things. Now, Mereu said, “I am recycling, seeing what I have in my closet.”
She said her financial situation hasn’t drastically changed, but she’s concerned about “uncertainty ahead.”
Krystian von Speidel, a 32-year-old event planner in Hartford, Conn., rethought his spending after his stock portfolio, which included shares of Citigroup Inc. and Target Corp., declined in val- ue. Although he ordinarily would have splurged on a $ 1, 200 vest from Thom Browne’s Black Fleece collection at Brooks Brothers, he says he held back and bought a similar item at Old Navy for less than 10 percent of the price.
Luxury downturns in the United States and Japan are testing one of the industry’s biggest bets — that demand for pricey wares in emerging markets such as Russia and China can grow fast enough to pick up the slack. Since the last luxury downturn in 2002 and 2003, big conglomerates including Richemont, LVMH and PPR SA’s Gucci Group have rapidly expanded into these countries as a hedge against downturns in mature markets.
So far those moves have insulated some of the industry’s biggest players. For instance, Swatch Group AG, owner of the high-end Omega and Breguet watch brands, last week said sales surged 17. 6 percent last year, helped by growth in Asia and the Middle East. Its dependence on the United States, which only accounts for 10 percent of its sales, is limited.
Since the last downturn in 2002, Tiffany & Co. has made efforts to preserve its high-end image, raising prices of its silver jewelry, which is an entry-level item for less affluent shoppers. It has also diversified, adding new products including watches and sunglasses, and stepped up the pace of its international expansion.
“One of the reasons... we are projecting a good fourth quarter is because of the geographic diversity of the firm,” said Michael Kowalski, chief executive of Tiffany. Sales at U. S. stores slid 2 percent in November and December, in contrast to a 5 percent rise in international sales, at constant exchange rates. Still, the company generates about 60 percent of its sales at home.
But other big risks remain. Companies that have expanded into the lower-price “accessible luxury” category are now much more dependent on middle-class consumers than they used to be. As these customers traded up to $ 148 Hermes ties and $ 500 Louis Vuitton bags, the size of the luxury-goods industry nearly doubled to $ 234 billion from 1996 to 2006, according to consultancy Bain & Co.
As a result, many in the luxury industry are being dragged into the consumer-spending morass that’s afflicting their less-exalted peers.
Coach, which pioneered accessible luxury in the United States with its $ 300 handbags, resorted to deep discounting to lure Christmas shoppers into stores.
“Some of our consumers traded down to lower-priced items,” Coach CEO Frankfort said.
However, it appears richer consumers continued to spend: At Coach, handbags costing $ 400-and-up accounted for 22 percent of handbag sales in the fiscal second quarter, up from 13 percent in the year-earlier period. And the company said its net income rose 11 percent in the quarter, thanks to strong sales at outlet stores and overseas. But it trimmed its gross profit margin guidance for 2008 and said that it will continue its stepped-up promotions.
Many luxury-goods companies are now running further upmarket where elite consumers, the thinking goes, are less vulnerable to economic downturns.
Burberry Group PLC, where sales of lower-price apparel and accessories have helped revenue grow over the past five years, said Jan. 15 that year-end sales in its stores fell short of expectations and it might not meet its 2008 profit forecast, pushing down shares that day 16 percent.
Known for its signature tartan check, the company has more recently tried to bulk up its highend offerings, and says sales of its new upmarket products, such as the $ 1, 495 Beaton bag, have grown more than that of less-expensive items.
In November and December, Saks Fifth Avenue’s sales climbed 10 percent from the year-earlier period as wealthy shoppers across the country snapped up expensive items like designer jewelry and exotic-skin handbags. Sales in more affordable categories, such as small leather goods, grew more slowly, said Stephen Sadove, Saks Inc. ’s chief executive officer. That indicates all but the wealthiest shoppers are cutting back.
“We are cautious in that we recognize the market’s volatility,” Sadove said. “But the longer term trend toward luxury... is certainly positive going forward.”
Italian jeweler Bulgari SpA hasn’t seen any deceleration in sales, said Francesco Trapani, the company’s CEO. “From December sales, there’s no clear message a slowdown has started,” he added.
Bulgari doesn’t have as many lower-price goods as other luxury brands.
“Bulgari is less exposed than other [luxury-goods companies ], because it is high-end. In general, humans are not inclined to change their habits,” Trapani said.
But efforts to attract wealthy shoppers with super-exclusive items could fall flat if rich consumers reject ostentatious displays of wealth as they did in the early 1990 s.
“The rich are different than we are. But there comes a time that even the rich understand that there’s some anxiety in the world,” said Peter Solomon, chairman of Peter J. Solomon Co., a New York investment bank that specializes in the retail sector.
Meanwhile, companies are finding sharp differences in cities across the United States. Boutiques in Costa Mesa, Calif., and Bal Harbour, Fla., have been weak for Ermenegildo Zegna. In December, the brand recorded sales increases only at its New York and Las Vegas stores — and Las Vegas has fallen into the red this month, CEO Ermenegildo Zegna said.
“Florida and California are two big states that ended up quite below expectations,” Zegna said. “We were expecting too much.”
Independent brands could have a harder time coping with declines in the U. S. market than conglomerates that have spread their risk across many different markets and consumer segments, analysts say.
“Prada and Versace are companies that have to endure more pain than those with broader shoulders,” said Luca Solca, luxury-goods analyst at Sanford Bernstein in London. Information for this article was provided by Stacy Meichtry of The Wall Street Journal.