Monday, November 10, 2008

Luxury Blues: Singing "Stormy Weather"

Sometimes luxury markets have the easiest time weathering the ups and downs of the economy. After all, the people who can afford these items are often a bit more insulated from all the turbulence. This time around, however, the recession seems to be coming down hard on the whole retail parade, from the discount marts to the upscale boutiques. Even more distressing, of course, is the fact that the financial storm isn’t concentrated in one geographic area, but has hit international markets hard, too. According to the Financial Post,

Almost every stop on the retail spectrum is beginning to get hit, with reports of luxury spas starting to offer deep discounts and retailers such as Bergdorf Goodman offering free shipping as the holiday sales season ramps up early.

A quick survey of the luxury landscape suggests that people with a big stash of cash under their mattress are hording their pennies a bit, partly as a way of keeping above the potential flood waters and partly to keep a low profile. Surprisingly, in a culture that has encouraged a lot of profligate spending and visual "bling," many wealthy buyers are suggesting that it’s gauche to indulge while others struggle to keep their homes and pay the bills.

For example, a few weeks ago, Polo Ralph Lauren opened an enormous new store in Paris. At the same time, Executive Vice President Charles Fagan was quoted in the Wall Street Journal with this caution: "We're being prudent. We're very aware of our inventory and expenses."

Note though, that most of the luxury expansion is occurring in so-called “new markets,” like China, Russia, and India, where the base of wealthy customers has been rapidly expanding. Not so in the so-called "mature markets" like Japan and the US. Here in the States, things have changed since a May survey suggested that Middle Class Millionaires would continue to spend despite feeling an imminent recession. About half of those surveyed by The Affluentialist said that in 2008, they were planning on taking a vacation whose cost exceeded $10,000; More than half expected to be spending on home improvements, luxury cars, and second homes.

But here we are in November, and the news from a survey by consulting company Bain & Co. was not good. They predicted that the worldwide luxury goods market will likely enter a recession in 2009. According to the recent report,
"The impact of the financial crisis will bring some sectors into a recession," said Claudia D'Arpizio, a Bain partner based in Milan and lead author of the study. "How much and how long depends on part on how companies react. The most resilient will be those with strong international and diversified brands."
The two key points for retailers are in the last statement. First, it's still possible to reach key global markets – sectors where spending is still happening and luxury goods are still freshly affordable in developing economies. Second, it's really important to have a diverse but relevant set of products that resonate with wealthy consumers. Despite difficulties with brand loyalty in the regular retail market, the luxury sector relies heavily on the continued presence of aspirational brands and the power of the name. Expect to see more ad campaigns and design elements focused on tradition and longstanding value. After all, is it any surprise that Ralph Lauren, whose original inspiration was a reassertion of preppy WASP cache, is most likely able to weather the storm?

Monogrammed Wellies and a bejeweled trenchcoat anyone? If that's too much, maybe just some bright yellow to ward off the rainy day blues.

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