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?