Dreaming of Luxury Sales Amid Recession

Consumer spending on luxury goods has plunged. So why are some purveyors of high-end goods betting big?

By Christopher Palmeri

Fashion entrepreneur Hanna Rochelle Schmieder was experiencing her own market meltdown last fall. The clothing boutiques to which she sold her line of colorful scarves and T-shirts embellished with song lyrics were shutting down, slashing orders, or asking for extended payment terms that her small business, Lyric Culture, couldn't afford to meet. So did Schmieder fold her tent? To the contrary: The founder of the three-year-old Los Angeles-based company pitched to retail giant Bloomingdale's (M). It worked. Suddenly, like a small-town singer picked for American Idol, Schmieder had a shot at stardom.

In late May, Schmieder began rolling out her clothes in Bloomingdale's stores across the country. The line—T-shirts start at $63, hooded sweatshirts at $150—will be featured in exclusive Lyric Culture areas, decorated with album covers and Gibson guitars. Schmieder thinks her clothes, which feature song titles such as "Give Peace a Chance" and "All You Need Is Love," will appeal to customers in these troubled times. "People are looking for something positive, uplifting," she says. "There's always tons of opportunity when there's chaos."

As the economy reels, the luxury retail business is looking pretty chaotic. Tiffany & Co. (TIF) was just the latest high-end brand to take a hit, reporting on May 29 that its U.S. sales fell 32% in the first quarter. The day before that, in a clear sign of the times, ritzy toy seller FAO Schwarz said it would be acquired by discount chain Toys R Us. On May 27, Polo Ralph Lauren (RL) said it had taken a $48 million charge in the fourth quarter to cover layoffs and store closings. The consulting firm Bain & Co. expects worldwide sales of luxury goods to fall as much as 20% in the first half of this year. "Luxury shoppers are spending less, traveling less, and feeling less confident," says Bain partner Claudia D'Arpizio.

Why the upsurge? Follow the money

So why are some high-end entrepreneurs doubling down on their bets? How can anyone think of opening a new $2.4 billion resort—as Lawrence Ho and James Packer will do with their City of Dreams casino in Macau on Monday, June 1—or any of the new fashion boutiques and exclusive restaurants that are still popping up in Miami and New York?

Partly it's explained by the old line from bank robber William "Willie" Sutton: You go where the money is—or in this case, what's left of it. Some of the activity also reflects the endless optimism of entrepreneurs. After all, luxury ventures are also closing down every day, with less fanfare.

But a number of purveyors of higher-end goods also believe the recession offers fresh opportunities as customers rethink their brand loyalties. This means businesses must take bigger risks, accept lower returns—even eat some losses. But particularly for small companies with little to lose, expanding now may offer the best chance at longer-term survival.

"Many brands are trying to figure out what's next, how do I reinvent myself, how can I serve the people that can afford me?" says Milton Pedraza, chief executive of the Luxury Institute, a consulting firm. "There's a lot of soul-searching going on." Adds customer researcher Pam Danzinger: "When the recession ends, there will still be some fundamental changes. The luxury consumer is off the treadmill now. They're thinking about 'what do I need, what do I really want?'"

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