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VIDEOLuxury Goods Go Bad
By
Scott Reeves Feb 11, 2009 10:15 am
Forced to slash prices, upscale brands struggle to maintain air of exclusivity.
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But how can a company maintain its upscale image when discounting?
Many luxury brands face this conundrum in the sour economy because even upscale retailers find they must cut prices or die.
The market downturn has undone a tacit understanding in the luxury-goods industry that governed distribution and pricing. No one suggests that designer labels will soon show up at Wal-Mart, but deep discounting by department stores has forced some boutiques to close, or try to subsist on thinner profit margins.
Major companies like Saks (SKS) and Nordstrom (JWN) don't want to keep too much inventory on hand because styles can change quickly - the fashion cognoscenti wouldn't be caught dead wearing last week's hot item at this week's polo match.
The need to clear inventory led Saks to cut prices by as much as 70% on some designer items before the holiday season got frantic. In New York, a pair of $535 Manolo Blahnik shoes could be had for $160, the Wall Street Journal reports.
Price cuts at Saks forced rivals Neiman Marcus and Barney's New York to follow suit. That was great news for shoppers - and a catastrophe for small, independently owned boutiques. Major stores can discount Prada, Gucci and Dolce & Gabbana, but boutiques have nowhere to go, and some closed because the economic model no longer made sense.
Makers of designer products plan to fight back. Some may split their product lines, withholding some items from department stores and offering them only at their own stores. This would create doubly exclusive labels with -- manufacturers hope -- prices to match. But it's unclear that the gambit will get customers to open their wallets.
The planned bifurcation of snooty stuff drives the department stores nuts because they drive most of the sales of goods with snob appeal. Some department stores are punching back by leasing space to big-name labels such as Louis Vuitton and Fendi.
The typical shopper at Saks has an annual household income of $175,000. That would seem to be recession proof, but it's not immune to the downward track of the Dow Jones Industrial Average - a fact upscale retailers recently discovered.
The market downturn kept once-reliable shoppers at home - and even private sales offering up to 40% off at major chains couldn't get significant numbers into the store. With the holiday shopping season approaching, Saks did the unthinkable: deep price cuts.
That erased profit margins of 50% or so and eroded profits in an already slow holiday season.
Many upscale shoppers apparently like the idea of a bargain on spiffy goods. But today's discounts create a future problem for retailers: Will customers demand discounts when the economy rebounds?
Look for lavish services -- manicure, dear big-spending customer? -- and other gimmicks to lure upscale customers back - and expect them to last about as long as the memory of the recent market downturn.
No positions in stocks mentioned.
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