Saturday, February 7, 2009

The Luxury Market amidst the Recession and Other Bedtime Stories

It's natural to think that in times of downsizing and economic difficulties for the vast majority of people in the western world via a domino-effect of the world economy, prices of goods should follow and adjust to demand and reduced affluence. Interestingly and somewhat perversely, the luxury market differentiates itself from the above mentioned syllogism in its agressive ~yet macroeconomically sane~ swift that seemingly raises prices to truly unatainable levels for most. The crux of the matter is why? What repurcussions is this creating? And where will it stop? In discussing this with online acquaintances, some of which happen to be investors, I came across interesting and eye-opening facts from which I deduct some conclusions concerning the marketing course that is being shaped.

The business headlines were rampant with pessimistic sounding news: Porsche sales skidding by 36%, Daimler sales sliding by 35%, Tiffany cutting forecast, as their post holiday sales declined by 21% and the luxe store Saks Fifth Avenue cutting jobs after facing a decline of their stock from $18 to $2.41 per share. So did Burberrys. "After a holiday season marked by steep discounting, the sector, whose clientele traditionally didn't worry about price, finds itself forced to redefine "luxury" while searching for ways to lure paying customers back into their stores." [source]. The quintessential American group of fragrances and cosmetics, the Lauder Group, cut forecast too, cutting 550million$ of costs by laying off people. And yet, right and left, I have been watching prices get raised in many items that are specifically attached to the point of focus of this very venue, ie.fine fragrance.

There were rumours by the end of last year that luxury brands would lower their prices, but so far nothing in that direction has materialized. Ironically, lowering the prices damages the prestige, the image, the very "unattainability" which is de iuro the very definition of luxury itself. During hardship people will specify their purchases geared by the very notion of prestige and what is perceived as quality, i.e. buying things that are not cheap but also do not lose their value long-term. Brands like Hermès or Chanel are sort of benefiting from this course, treating it to different effects: Whereas Chanel ~having the most recgnisable luxe brand on the planet~ is trying to handle both the wanna-be luxury participants crowding for its more mainstream products and the connoisseurs hankering after the more arcane , Hermès is playing it old-school, patrician sang froid (ie. not seen to be making an effort, although obviously nothing is left to chance). To wit: Their fourth-quarter revenues rose 6.2%, despite a 13% drop in Japan.[source] "The definition of luxury is going to evolve," said Saks Chief Executive Steve Sadove in an interview. "Consumers still want brands and luxury even though they may think of it differently. Anyone that says luxury is dead, they are wrong". Across the board, top-end retailers are trimming costs and inventory and launching initiatives aimed at drumming up business without resorting to profit-eroding discounts. A sense of urgency is evident, as the economic downturn that has been pinching the rest of the retail sector for months finally caught up with the premium end of the market. [source]

Yet the French luxury giant LVMH buoyed by strong performances from Parfums Christian Dior and perfumery chain Sephora, has flouted the global recession by posting full-year global sales growth of 4% and keeping profits despite everything. Which is the probable explanation and rationalisation of the bombardment of launches from their fragrance lion-share holder, parfums Guerlain, which we have been discussing here for some time now and which incidentally raised their prices of their boutique catalogue as of last week. But other players in the field aren't far behind as French beauty giant L’Oréal is set to open its first ever standalone combining two of its brands, the US-based Kiehl’s and Japanese makeup artist and beauty brand Shu Uemura, in Strasbourg, France, this month. A new shop with rather upmarket brands? Who would have thought it a good move. And yet! Diptyque has been issuing new products and is set to raise their prices too. Certain American e-tailers of niche fragrances on the other hand have been cunningly raising their prices without much fanfare while all the while advertising sales to their numerous customers, when the parent company of Euro-origin has not raised their own prices to the same products!

Furthermore, there are subdivisions within the luxury beauty market that is knowing a growth instead of a downturn: "The beauty business may be suffering as a whole in the US and Europe, but the natural personal-care segment posted double-digit growth in both regions, according to new data from US market-research group Kline & Company" [source].

The question of how to price luxury items and the outlook for the sector sparked a lively debate among two top executives attending the Financo event, namely between Mickey Drexler, chief executive of J. Crew Group Inc and Neiman Marcus's Tansky. The latter defended his end of the market with these words: "We've been forced to compete on price and price alone, and we don't like it," he said. "It's essential that we as an industry find a way to put a stop to this. There remains a segment who wants finer things. Unique and special merchandising is still selling better than mundane things. We have to retrain our customers. We are trying to think outside of the box that's not price-driven." To that there are other sympathizers and accolytes: "I don't think people are going to stop aspiring," said Marty Wikstrom, non-executive director of Compagnie Financiere Richemont SA, a founding partner in Atelier Management LLC, which specializes in buying and developing luxury brands. And furthermore, it's spelled out for us by Terry Lundgren, chief executive of Macy's: "It's time to make sure you've got exciting inventory. Certainly industry inventory has to be in line with consumer demand. It's been out of whack for too long. There's too much sameness. You need to have merchandise harder to find and have it special." Trunk shows, designer appearences, pampering of good customers is following too to rekindle the buying desire bug.

So there in a nutshell you have the direction the market is going to in the following months or even next couple of years. It is only the more mid-market brands that will try to interject more affordable new products in their inventory to try to attract and retain spending from their core clientele so as not to lose them. (Low-end market is considered non applicable as the initial outlay doesn't seem that important from the point of view of the consumer). Don't expect cut-backs from your favourite luxury and the select niche brands which will survive unscathed, however; on the contrary do expect them to raise their prices and agressively demand your choice over other competitors' products by making their merchandise -and I quote- "hard to find" and "special"!
It's high time we bring the luxury market back to task and remind them the time-honoured economic law of supply and demand.


  1. Wow.
    Bless you for your exaustive research on this timely subject, E dear.
    Signs of the times, my love.

    Anybody tell you lately, how much we appreciate all you do ?

  2. Rappleyea12:54

    The best economic sources that I've read say that this will all get much worse before it gets better. I'm afraid that many of these luxury brands will end up cutting their costs by using cheaper materials and labor in an effort to maintain their profit margins, all the while maintaining their exorbitant prices. It all sounds a lot like the line falsely attributed to Marie Antoinette: "Let them eat cake!".

    Supply and demand WILL get them in the end.

    Great piece, Helg. Thank you!

  3. Fiordiligi14:19

    Thank you so much, dear E, for this piece. I too have been following developments in the luxury goods market with interest. I fear Donna is right; cost-cutting is already rampant with many luxury perfume brands seeking low-cost substitute ingredients for their scents in order to ensure their proft margins are maintained, while Hermes (non-perfume) goods reach ever-more stratospheric levels with their pricing and waiting-list exclusivity.

    It will be interesting to see how all this plays out. Will there be a backlash, or will we continue to buy our small luxuries to compensate for perceived or actual hardships in other areas of our lives?

  4. kathleen16:21

    Thank you for this info, E. chayaruchama said it very well, what would we do without you?

  5. mikeperez2317:25

    Wonderful article Helg.

    Your last line about 'supply and demand' was on the tip of my tongue the entire time I was reading the article. I giggled when I read it.

    Go 'Team Supply and Demand'! Let's get 'em and STOP buying, I say.


  6. My dearest I,

    you flatter me so! It is a sign of the times that we need to dissect them so, I guess. I hope something changes sooner rather than later.

  7. Donna,
    you're very welcome, my dear. I fear for that as well, although I am hesitating to assign them such bad intentions. But it does leave one questioning how the operations can continue to be viable.
    Let's hope the situation turns at a reasonable amount of time.

  8. Dearest D, what an interesting question! It is certainly this which has the luxury sector keeping afloat, IMO. Remains to be seen to what extend small luxuries can be sustained at the current rate.

  9. Awww, kathleen, thank you, I appreciate your kindness.
    I'd like to think that we can still articulate some independent voice from consumer to consumer.

  10. My dearest M,

    thanks so much and hope you're very well! How are things?
    Glad I made you giggle. It's really simple. If we refuse to buy at those raised prices, they might get the message after all.

  11. Luxury brands are very "sensitive" to the exchange rate fluctuations as well. Chanel raised their prices in UK by 10% in January this year with the excuse that £ is on free fall, yet two weeks later the Bond Street boutique decided not accepting any international orders outside of Europe, so why the price raise...? Also Hermes raised their prices for the scarves by more than 10% during the beginning of this year.

  12. Mmmm. makes one think doesn't it! Yes they may go for cheaper ingrediants but then again - I wonder if they have thought about "volume" in sales. Now , I might just buy one Guerlain bottle instead of two , for I have to cut back on my spending and lets face it Helg - the most money they put into each product is not the contents or the bottle - its the advertising and you know what - I couldn't care less what face tries to flog a scent - if its a "stinker" to me I will not buy it. Really Helg, we are not that stupid are we?? When we have limited money we get real SMART, don't we??? LOL

  13. Salaam12:32

    Maybe a difference is to be made between mass luxury affordable to many and real luxury affordable to only a few.
    there is no doubt that mass luxury market is generating the wealth while real luxury is generating the image.
    the process of cost-cutting on the mass luxury products is part of the construction from the beginning. It will be accelerated because the crisis will hit economically and psychologically the customers of this market.
    The customers of the real luxury market know no crisis, they have and shall become more wealthy, because for them crisis is an economic opportunity.
    It is probable that the mass luxury producers, rather than cutting on quality, which is difficult to do more than it has already been done, will find other solutions. They can be many, but they will depend from the strategy that they decide to follow against the loss of buying power from their market. These are mass production logics and they will not be not different fron any other mass products strategies such as clothing or high tech.
    What surely these brands will do is what already Elena has noted, a mediatic show of the real luxury products, because in the crisis, the real capital that these houses must at all cost protect is their image, and this is where the crisis comes to them as an opportunity, the opportunity to gain image.
    AbdesSalaam Attar
    Composer perfumer

  14. Thanks so much for this fascinating and informative article, albeit depressing as well. :)

  15. M,

    something tells me they have calculated everything and are hoping to "catch us" one way or another.

    Hey, hope you're having some relief from the heat. It was so sad listening to the news...Hang in there!

  16. Salaam,

    thanks for a most interesting and erudite comment. Yes, there is a distinction and we;re painfully aware how some of the rich see this as an opportunity for becoming richer.
    May time reward the meritous, is all I can say.

  17. Anita,

    you're welcome. It needed to be said, I guess. Thanks for commenting!

  18. Anonymous04:38

    Dear Helg,

    Ironically enough, I'm procrastinating from preparing for an economics course...and guess what--I'm reading your post!

    Quite frankly you did a fairly good job at discussing the issues. (There is a reason why Joy was launched during the great depression.) Still, just to balance out the argument I have to point out a few issues.

    1. Real Inflation vs. Artificial Inflation

    Many fragrance houses (unless producing most of their ingredients) have to purchase their supplies, leaving them vulnerable to real inflation (long-term fixed contracts notwithstanding). Most companies try to hedge against natural inflation (2%-3% in North America and Europe) by naturally growing the prices in the same rate--or else the profit will be eroded by the inflation.

    Going above the natural inflation rate, however, will just be brands' push for more profit, unless their suppliers have compounded the problem by increasing their prices by the natural inflation rate as well.

    The problem is, of course, whether the inflation is anticipated: otherwise the company exhibits no real growth.

    2. Currency Exchange Risk

    Now, this isn't macro-economics: this is more of a finance concept. Depending on which country your are referring to at what time fragrance prices are going to up if the currency exchange rate alters. About two months ago the Canadian dollars dropped...and Hermes and Tiffany & Co. jacked up the prices. This is pretty straight-forward so I won't get into the details.

    3. Brand equity

    Now here's a really complicated problem.

    While I know selling, say $80 CAD a bottle is a lot, the pricing component of 4P marketing matrix model (the other being product, place and promotion if you want to keep track) dictates that there has to be a consistency in the pricing strategy along with other SBUs (strategic business units), which I cannot stress the importance for some brands.

    So now there's a brand image issue if a fragrance is priced (perceptively) too low: a potential brand equity dilution can result to a certain audience (thankfully I'm not one of those people).

    To illustrate let's say a fashion house sells leather bags for $2,500 and dresses for $5,500 (just picking numbers on top of my head). Now, suppose the brand also has fragrances and the EdP sells for $80 and the lipstick for $30.

    Well, during the current recession I've seen prices for the dresses to drop as low as 30% to around $3,850 plus tax...but can managers do the same for fragrances, when they are considered entry level fragrances and are not (technically) phased out by the end of the season? From a brand image point of view (and again, not my opinion)...drop prices is not a good idea.

    So what does it come down to? It's all about brand image (sigh): nothing pulls in the audience than the old "I know you can't have it because you are too fat/poor/etc etc"...

    BTW, last but not least: there are always people who get richer in the midst of economic downturn. (It's no secret that the Kennedys made their fortunes during the depression, partly because they anticipated the 1928 market crash by shorting their stocks.) I'm now seeing so jobs being in great demand because we now needs different things. The bottom line? Remember the old cliche that the Chinese phrase for "crisis" (危機) consists of "danger" and "opportunity"? Well, the old adage rings true in this case. It's all about how firms manage their portfolios now--pure and simple.


  19. Anonymous04:40

    Oops...a correction on the example above...30% off of a dress--not a dress for 30% of its original price. (My math isn't that bad.) xD

  20. Dear A,

    your procastrination proved timely and mind-proding for all of us benefiting from your excellent analysis! (and I know your math is on a par too!)

    You're absolutely right of course and it makes perfect sense: inflation keep-up (so there is a sense of profit nevertheless) and exchange rates are "naturals", in that I don't believe we actually blame the industry for those factors per se. After all, every company that wishes to remain functioning has to go through calibration of those. Although as pointed out so succintly by you and Elysium it depends on how those aspects are treated each time and with how much respect to the end consumer.

    However brand equity is indeed rather complicated, especially as mentioned regarding fragrances where the margins are less to begin with (in comparison with a dress, I mean). It makes one pause and think, so thanks for elaborating.

    Love the Mandarin quote (so true!), didn't know it!


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