February 25, 2009
Luxury Hits the Sales Rack
By Tom Ryan
Luxury-goods sales are
expected to fall 15 percent this year, according to Bernstein Research,
as even the well-to-do are trading down or cutting back on unnecessary
expenditures. According to the Wall Street Journal, luxury brands
must decide how much of the slump is cyclical and how much reflects a permanent
change in consumer behavior.
The slowdown represents
a sudden turnabout for a sector that some felt could be recession resistant.
From 2003 to 2007, the global luxury market grew on average seven percent
a year, and future growth was expected to be driven by
"an ever-expanding minority of ultra-wealthy individuals." Many
of these individuals were expected to come from emerging markets.
But
Saks began slashing prices by 70 percent on designer clothes before the
holiday season even began, and soon Neiman Marcus and Barneys joined Saks
in cutting prices and canceling orders. Smaller boutiques such as Scoop
and Intermix in New York City were forced to sell their goods for less
than they bought them.
"All of these stores
are chasing the same customer," Faith Hope Consolo, head of retail
leasing at Prudential Douglas Elliman, told the New York Post. "And
that customer is only chasing goods that are 80 percent off."
According to the Journal,
the steep discounts in the high-end channel ended up "toppling longstanding
agreements on pricing and distribution, and destroying the very air of
exclusivity that designers are trying to sell."
Ms. Consolo told USA
Today that one strategy that has works for some designers is rolling
out lower-priced lines to appeal to the "slightly less affluent,
thereby increasing their potential market." For example, Roberto
Cavalli has a line at H&M with prices ranging from $350 for long
gowns to $34.90 to leopard-print camisole. At Saks, Cavalli’s prices
range from $2,195 for a silk halter gown to $575 for a diamond-chain-print
tee.
The risk is that lower
prices can impair a luxury brand’s value in the eyes of consumers. On the
other hand, maintaining a premium positioning could be fruitless if a protracted
or even permanent reduction in conspicuous consumption ensues. A luxury
positioning also requires heavy investments in advertising. French cosmetics
group L’Oreal last week blamed cuts in advertising spending for a 3.5 percent
fall in operating profit in 2008.
Discussion Question:
Should luxury brands and designers be lowering prices? How risky is it
for high-end brands to bring in lower prices or lower-priced extensions?
What’s the best strategy to do so?
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Like so many of the economic “miracles” of the last 20 years the luxury segment grew beyond its natural state, driven by easy credit and the top end of the middle-market consumers reaching for aspirational symbols of wealth and status. The luxury manufacturers and retailers who have avoided the excesses of many of their consumers by avoiding the lure of expansion through taking on enormous debt and who have remained true to their artisan heritage will survive and even thrive in what is sure to be a slower growth sector for many years to come.
The emerging market consumer will continue to drive growth for many but a new sense of sanity will likely pervade this category for many years to come. The brands that choose to create lower price products for H&M and other value retailers will manage to continue growing for a time but will likely lose the luster of their true luxury heritage. If the design of the product remains excellent they may find a new niche for their brand at lower price points. Otherwise those brands will either wither and die, or become simply a moderate brand.
That may be fine for investors, but surely removes them from the pantheon of true luxury brands. You’ll never see Hermes or Cartier in H&M and I wager brands like these will be here in 2109.
Has the target customer group shrank so much, or changed their basic shopping DNA so profoundly and permanently that luxury retail will never be the same? I don’t think so.
Discounting for premium brands is deadly to their basic proposition of who they are. And to their bottom line. The basic math shows that a retailer with a 45 percent gross margin, who takes even a paltry 25 percent markdown, has to sell nearly 70 percent more merchandise just to make the same gross-profit dollars. These luxury retailers might be wise to hold the line, sell a little less and maintain their brand positioning.
I agree with several of the other commenters that luxury is not dead and that these retailers need to get creative beyond deep price cuts on how to attract the shopper. As Paco Underhill talked about in the article from Time (2/22 – How Consumers Shop Differently Today) there are a lot of people who have money to spend but “the era of bling is over.” I’ve also read recently in the WSJ about people forking over a lot of money to buy that “one great piece.” So maybe there’s something there. Maybe it’s less conspicuous to choose one item over many. Maybe it’s about that “must-have exclusive” that’s a great investment. Maybe people would like to donate to a charity when purchasing. There have to be ways for retailers to make people feel good about spending their money. It’s worth doing the research to evaluate with customers how their money could be considered well-spent.
The price of a product–luxury goods or not–is set when money changes hands, not when you place the amount on the tag. If the price being set on the tag is not going to make money change hands, then your ‘brand’ will not matter at all. For a brand to be a value at all, it has to be sold.
Those that can overpay, will always overpay. The environment today is one in which those that could occasionally overpay can not. If, as a retailer, you can afford to only sell to those that can, then price adjustments are not necessary. If, however, your sales rely on a percentage that occasionally purchase, then reaching those consumers will require an adjustment.
Retailers will have to make the decision whether or not they can afford to offer a value to retain the occasional consumer. The other alternative is to fill out the other factors in the value equation besides price. These too become the most important in this type of an environment. When the value judgments are being made daily, they still go beyond price. If that were not true, Nordstrom’s recent report wouldn’t have been possible.
Luxury is going to be “unfashionable” for a while. No less popular than ever with those who want to pay for it (not to be confused with those who can “afford it”). But those who want to pay for it will still want it. And when the anti-conspicuous consumption tide turns–and it will–those consumers are going to want to go back to aspirational brands they remember. Not some discount rack version that they find at the end of the recession.
If your brand is truly worth what you are charging today, suck it up and stick it out. If it wasn’t worth your prices to start with–hope you saved last year’s bonus check.
Maybe the prices of luxury items are coming down to what they should be. My big complaint about luxury items is that so often the quality just doesn’t justify the money. Consequently when things get really competitive they can’t hold their position on the basis of value. Rich people don’t get rich by throwing their money away.
While I was going through my Jaguar phase years ago, I looked great in that car both days during the month it was actually running. $700 shoes fall apart faster than $29 ones from Payless. If the cost/benefit is high and reliable, you can keep the price up no matter what. Sure you lose some customers who can’t afford those products any more, but that’s a bargain compared to reducing the price 80% for everyone.
It’s going to be very hard to get the customer back in the mood to pay regular price for luxury goods, now that the gates have been opened. It’s one thing to “incentivize” your most loyal customers with occasional discounts or rewards programs; it’s another thing entirely to discount luxury goods at 70% off at the height of the season. I understand retailers’ need to drive traffic in the door (and inventory out of the door), but some of them have done long-term damage to the credibility of so-called “regular” prices. The damage done to the relationships between luxury retailers and their vendors (who are being asked in many cases to pick up the tab) could be even more damaging. It’s understandable that the luxury customer is going to ask why she was overpaying all these years in the first place.
Look at Nordstrom’s announcement to open more Rack stores. If there are fewer luxury dollars chasing the same amount of luxury goods, those goods are either worth less or go unsold.
Of course, if you know who your customers are and whether they are still shopping (at full price), you’ll have less to mark down.
Brands matter for luxury but there are many who are and will continue to be luxury buyers that got their money by being smart. Smart merchants know how to market and sell to those customers and will be well positioned when things get better, even with discounting.
A CIO at one luxury retailer says that their target audience is a woman with $150,000 per year in disposable income. That’s a tough bar to reach. Bringing in less expensive merchandise may tempt those of us with a desire for a splurge, but who wouldn’t dream of spending $2,500 for a sweater.
You can’t just keep prices high indefinitely in this environment and say you’re trying to protect the brand image. This is especially true in apparel which has enjoyed outrageous margins for years. Even people with money have come to realize they are getting ripped off by upscale brands that are manufactured in the same Chinese factories as the knock-offs.
And if you’re going to move to lower priced line extensions, do it the way Coach did it. This venerable brand went after a new younger and hipper consumer. I swear, sometimes I think the stores are more crowded than Wal-Mart.
You don’t sell fashion as a logical decision. If so, people would have flocked to the merch. Instead it sat, no need, over-discounted, surly sales clerks. Fix the brand–fix the people selling it. Luxury is not dead. Quality is still quality. Desperation retail is still just a coupon.
It seems that Ralph Lauren, as with so many other things, has already created the best answer to this question–multiple brands. They’re created an assortment of brands that can adjust to the whims of consumers, globally. During the past few years, pumping up their premium brands made sense, perhaps going forward, the partnership with Penney’s makes the most sense. In any case, like a merchandise assortment, if you’ve got options, they can be tweaked to provide optimum profitability to the whole.
Were the consumers that were purchasing the luxury items all in the wealthy group who could afford to purchase the items or were some of the consumers the “wanna-bes” who could afford an occasional item or to purchase an item on sale? There are a significant number of people who have lost wealth and may not be able to afford the items; however, if the items are sold at a lower price what happens to the image of the items? When consumers can afford the higher prices, will they be willing to pay them if they know they could get them for less? Luxury products are in a difficult position–there is a shrinking market. Is it possible to create another line with a different name at a lower price and keep the price level of the current line?
Luxury has its ups and downs. Assuming that the economy will look up at some point of time in the near or distant future, luxury brands will shine again, even if they’ve muddied themselves slightly in the puddles of discounting.
Public (and industry) memory is short, especially in fashion, where you might be as good/bad as your last collection. There are plenty of luxury brands which had once been pushed to the dustiest back shelves, that have come back into fashion in recent years. So I’m sure many of the brands will be forgiven their current trespasses.
And, as a precursor to that, someone’s going to come back very soon with the bumper sticker from the post dot-con days which read: “I want to be irrationally exuberant again!”
I was curious what a “diamond-chain-print tee” was, and was hoping–praying really–that it wasn’t just a t-shirt, so I went to Saks’ site and had a look: $575 for the “smooth Italian jersey” and $795 each for a skirt and a pair of sandals…total $2165 (all modeled by an attractive woman whose price wasn’t mentioned).
I don’t know how big the audience for this (type of) outfit is but the math is pretty simple: if there are fewer luxury $$ being spent, they will either have to be spread over lower prices or fewer sales (bankruptcy of suppliers and retailers); I imagine we will ultimately see a combination of the two (hint: Cadillac and Packard lowered their prices and survived the Great Depression, Pierce-Arrow didn’t and didn’t).
Lowering prices is extremely risky for any designer brand hoping to hang on to its brand cache (and brand equity). Not all high-end shoppers are cash-rich spend thrifts and most now compliment value fast-fashion finds (H&M, Zara, Target, etc.) with select “investment” pieces at higher price points. When the prices for those pieces plummet, it sets a new baseline, particularly as higher-end shoppers struggle with rationalizing those purchases (morally and financially).
Price cuts also have the effect of ruining it for everyone. I blogged about my trip down Robertson Blvd. in L.A. last holiday as full-price boutiques tried to compete with 70% off designer flagships just down the street. Customers were indignant at the contrast, vowing to never pay full price again. My favorite stop was at the new Chanel store…beautiful surroundings, fabulous fashion, great service, and full price!
All “luxury” brands aren’t alike. Some want multiple audiences (Ralph Lauren wants JC Penney customers and customers for clothes at 5 times the JC Penney price) and some just want a single narrow slice (Cartier). Some aren’t consistent (Chanel fragrances are sold at JC Penney but the clothes are only found at a few very high-end stores, none of whom is named JC Penney). Some license their names to others (almost all the luxury fashion brands) and some won’t (Coach, Bally). Some luxury brands “bend” by catering to aspirational shoppers, not just the truly wealthy (Tiffany). Some won’t bend (Patek Philipe).
Luxury is most certainly NOT dead although terribly out of favor at the moment — but it will return full force and will be returned to by all those who want to be partakers — for whatever reason — those multiple reasons eloquently detailed by other commentators.
Fashion and the fashion customer do have a SHORT memory span.
Mr. Lilien’s post is great — The trick for our dwindling number of High End specialty retailers is to make it through to the other side.
I hope that, for whatever reason THEY ALL make it through to the other side.
Certainly, others can arise to take the place of well known entities, but they may not do it the same way and may not have the same flavor as those few we still enjoy from the old days — Saks Neiman’s, Bergdorf’s — these are age old carriage trade stores. Their loss would end connection to a time of genteel posh stylish emporiums — I could fill the page with long gone names of greatness. We fortunately still can experience these remaining few and I hope it stays that way.
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Like so many of the economic “miracles” of the last 20 years the luxury segment grew beyond its natural state, driven by easy credit and the top end of the middle-market consumers reaching for aspirational symbols of wealth and status. The luxury manufacturers and retailers who have avoided the excesses of many of their consumers by avoiding the lure of expansion through taking on enormous debt and who have remained true to their artisan heritage will survive and even thrive in what is sure to be a slower growth sector for many years to come.
The emerging market consumer will continue to drive growth for many but a new sense of sanity will likely pervade this category for many years to come. The brands that choose to create lower price products for H&M and other value retailers will manage to continue growing for a time but will likely lose the luster of their true luxury heritage. If the design of the product remains excellent they may find a new niche for their brand at lower price points. Otherwise those brands will either wither and die, or become simply a moderate brand.
That may be fine for investors, but surely removes them from the pantheon of true luxury brands. You’ll never see Hermes or Cartier in H&M and I wager brands like these will be here in 2109.
Has the target customer group shrank so much, or changed their basic shopping DNA so profoundly and permanently that luxury retail will never be the same? I don’t think so.
Discounting for premium brands is deadly to their basic proposition of who they are. And to their bottom line. The basic math shows that a retailer with a 45 percent gross margin, who takes even a paltry 25 percent markdown, has to sell nearly 70 percent more merchandise just to make the same gross-profit dollars. These luxury retailers might be wise to hold the line, sell a little less and maintain their brand positioning.
I agree with several of the other commenters that luxury is not dead and that these retailers need to get creative beyond deep price cuts on how to attract the shopper. As Paco Underhill talked about in the article from Time (2/22 – How Consumers Shop Differently Today) there are a lot of people who have money to spend but “the era of bling is over.” I’ve also read recently in the WSJ about people forking over a lot of money to buy that “one great piece.” So maybe there’s something there. Maybe it’s less conspicuous to choose one item over many. Maybe it’s about that “must-have exclusive” that’s a great investment. Maybe people would like to donate to a charity when purchasing. There have to be ways for retailers to make people feel good about spending their money. It’s worth doing the research to evaluate with customers how their money could be considered well-spent.
The price of a product–luxury goods or not–is set when money changes hands, not when you place the amount on the tag. If the price being set on the tag is not going to make money change hands, then your ‘brand’ will not matter at all. For a brand to be a value at all, it has to be sold.
Those that can overpay, will always overpay. The environment today is one in which those that could occasionally overpay can not. If, as a retailer, you can afford to only sell to those that can, then price adjustments are not necessary. If, however, your sales rely on a percentage that occasionally purchase, then reaching those consumers will require an adjustment.
Retailers will have to make the decision whether or not they can afford to offer a value to retain the occasional consumer. The other alternative is to fill out the other factors in the value equation besides price. These too become the most important in this type of an environment. When the value judgments are being made daily, they still go beyond price. If that were not true, Nordstrom’s recent report wouldn’t have been possible.
Luxury is going to be “unfashionable” for a while. No less popular than ever with those who want to pay for it (not to be confused with those who can “afford it”). But those who want to pay for it will still want it. And when the anti-conspicuous consumption tide turns–and it will–those consumers are going to want to go back to aspirational brands they remember. Not some discount rack version that they find at the end of the recession.
If your brand is truly worth what you are charging today, suck it up and stick it out. If it wasn’t worth your prices to start with–hope you saved last year’s bonus check.
Maybe the prices of luxury items are coming down to what they should be. My big complaint about luxury items is that so often the quality just doesn’t justify the money. Consequently when things get really competitive they can’t hold their position on the basis of value. Rich people don’t get rich by throwing their money away.
While I was going through my Jaguar phase years ago, I looked great in that car both days during the month it was actually running. $700 shoes fall apart faster than $29 ones from Payless. If the cost/benefit is high and reliable, you can keep the price up no matter what. Sure you lose some customers who can’t afford those products any more, but that’s a bargain compared to reducing the price 80% for everyone.
It’s going to be very hard to get the customer back in the mood to pay regular price for luxury goods, now that the gates have been opened. It’s one thing to “incentivize” your most loyal customers with occasional discounts or rewards programs; it’s another thing entirely to discount luxury goods at 70% off at the height of the season. I understand retailers’ need to drive traffic in the door (and inventory out of the door), but some of them have done long-term damage to the credibility of so-called “regular” prices. The damage done to the relationships between luxury retailers and their vendors (who are being asked in many cases to pick up the tab) could be even more damaging. It’s understandable that the luxury customer is going to ask why she was overpaying all these years in the first place.
Look at Nordstrom’s announcement to open more Rack stores. If there are fewer luxury dollars chasing the same amount of luxury goods, those goods are either worth less or go unsold.
Of course, if you know who your customers are and whether they are still shopping (at full price), you’ll have less to mark down.
Brands matter for luxury but there are many who are and will continue to be luxury buyers that got their money by being smart. Smart merchants know how to market and sell to those customers and will be well positioned when things get better, even with discounting.
A CIO at one luxury retailer says that their target audience is a woman with $150,000 per year in disposable income. That’s a tough bar to reach. Bringing in less expensive merchandise may tempt those of us with a desire for a splurge, but who wouldn’t dream of spending $2,500 for a sweater.
You can’t just keep prices high indefinitely in this environment and say you’re trying to protect the brand image. This is especially true in apparel which has enjoyed outrageous margins for years. Even people with money have come to realize they are getting ripped off by upscale brands that are manufactured in the same Chinese factories as the knock-offs.
And if you’re going to move to lower priced line extensions, do it the way Coach did it. This venerable brand went after a new younger and hipper consumer. I swear, sometimes I think the stores are more crowded than Wal-Mart.
You don’t sell fashion as a logical decision. If so, people would have flocked to the merch. Instead it sat, no need, over-discounted, surly sales clerks. Fix the brand–fix the people selling it. Luxury is not dead. Quality is still quality. Desperation retail is still just a coupon.
It seems that Ralph Lauren, as with so many other things, has already created the best answer to this question–multiple brands. They’re created an assortment of brands that can adjust to the whims of consumers, globally. During the past few years, pumping up their premium brands made sense, perhaps going forward, the partnership with Penney’s makes the most sense. In any case, like a merchandise assortment, if you’ve got options, they can be tweaked to provide optimum profitability to the whole.
Were the consumers that were purchasing the luxury items all in the wealthy group who could afford to purchase the items or were some of the consumers the “wanna-bes” who could afford an occasional item or to purchase an item on sale? There are a significant number of people who have lost wealth and may not be able to afford the items; however, if the items are sold at a lower price what happens to the image of the items? When consumers can afford the higher prices, will they be willing to pay them if they know they could get them for less? Luxury products are in a difficult position–there is a shrinking market. Is it possible to create another line with a different name at a lower price and keep the price level of the current line?
Luxury has its ups and downs. Assuming that the economy will look up at some point of time in the near or distant future, luxury brands will shine again, even if they’ve muddied themselves slightly in the puddles of discounting.
Public (and industry) memory is short, especially in fashion, where you might be as good/bad as your last collection. There are plenty of luxury brands which had once been pushed to the dustiest back shelves, that have come back into fashion in recent years. So I’m sure many of the brands will be forgiven their current trespasses.
And, as a precursor to that, someone’s going to come back very soon with the bumper sticker from the post dot-con days which read: “I want to be irrationally exuberant again!”
I was curious what a “diamond-chain-print tee” was, and was hoping–praying really–that it wasn’t just a t-shirt, so I went to Saks’ site and had a look: $575 for the “smooth Italian jersey” and $795 each for a skirt and a pair of sandals…total $2165 (all modeled by an attractive woman whose price wasn’t mentioned).
I don’t know how big the audience for this (type of) outfit is but the math is pretty simple: if there are fewer luxury $$ being spent, they will either have to be spread over lower prices or fewer sales (bankruptcy of suppliers and retailers); I imagine we will ultimately see a combination of the two (hint: Cadillac and Packard lowered their prices and survived the Great Depression, Pierce-Arrow didn’t and didn’t).
Lowering prices is extremely risky for any designer brand hoping to hang on to its brand cache (and brand equity). Not all high-end shoppers are cash-rich spend thrifts and most now compliment value fast-fashion finds (H&M, Zara, Target, etc.) with select “investment” pieces at higher price points. When the prices for those pieces plummet, it sets a new baseline, particularly as higher-end shoppers struggle with rationalizing those purchases (morally and financially).
Price cuts also have the effect of ruining it for everyone. I blogged about my trip down Robertson Blvd. in L.A. last holiday as full-price boutiques tried to compete with 70% off designer flagships just down the street. Customers were indignant at the contrast, vowing to never pay full price again. My favorite stop was at the new Chanel store…beautiful surroundings, fabulous fashion, great service, and full price!
All “luxury” brands aren’t alike. Some want multiple audiences (Ralph Lauren wants JC Penney customers and customers for clothes at 5 times the JC Penney price) and some just want a single narrow slice (Cartier). Some aren’t consistent (Chanel fragrances are sold at JC Penney but the clothes are only found at a few very high-end stores, none of whom is named JC Penney). Some license their names to others (almost all the luxury fashion brands) and some won’t (Coach, Bally). Some luxury brands “bend” by catering to aspirational shoppers, not just the truly wealthy (Tiffany). Some won’t bend (Patek Philipe).
Luxury is most certainly NOT dead although terribly out of favor at the moment — but it will return full force and will be returned to by all those who want to be partakers — for whatever reason — those multiple reasons eloquently detailed by other commentators.
Fashion and the fashion customer do have a SHORT memory span.
Mr. Lilien’s post is great — The trick for our dwindling number of High End specialty retailers is to make it through to the other side.
I hope that, for whatever reason THEY ALL make it through to the other side.
Certainly, others can arise to take the place of well known entities, but they may not do it the same way and may not have the same flavor as those few we still enjoy from the old days — Saks Neiman’s, Bergdorf’s — these are age old carriage trade stores. Their loss would end connection to a time of genteel posh stylish emporiums — I could fill the page with long gone names of greatness. We fortunately still can experience these remaining few and I hope it stays that way.