Strategy & Competition

In Luxury Sector, Discounting Can Be Dangerous


Amid the diamond earrings and crystal picture frames that sit in a Tiffany (TIF) display, one thing never appears: signs hawking discounts. That doesn't mean there are no bargains. Late last year, Tiffany quietly nudged down prices for engagement rings—one of its biggest sellers—by about 10%. Salespeople tell customers about the reductions, but otherwise there's no publicity.

Tiffany is trying to keep its iconic baby-blue box from losing its luster. For CEO Michael Kowalski, that means holding firm on the overall pricing strategy. "It's about maintaining the long-term value of the enterprise," he says. "If we were to abandon that, the consequences would be significant." The dilemma that Tiffany and other purveyors of luxury goods face is how to use price cuts to woo customers without tarnishing their brands. Some have chosen to be discreet by refusing to advertise sales or by e-mailing "exclusive" offers to select clients. Others are more aggressive in hawking discounts to clear inventory and boost revenue.

Bain estimates that sales of luxury goods will fall 10% this year. Others are more pessimistic. The result, experts say, is that brands from Chanel to Chloé have marked down items to entice customers through the door. (A Chanel spokesperson says price reductions are simply the result of a stronger U.S. dollar. Chloé declined to comment on its pricing strategy.)

The beleaguered Saks Fifth Avenue (SKS) isn't shy about holding sales. Faced with an inventory glut last fall, Saks cut prices up to 70% during the height of the holiday shopping season, placing signs in stores and firing off e-mails promoting heavy discounts. CEO Stephen I. Sadove says: "We did the right thing." The move rid Saks of excess inventory, he explains, and "it hasn't hurt the [brand] image."

But retail experts argue that price cuts could prove to be perilous for luxury retailers. "The losers [in this recession] will be the ones who destroyed their brand through the discount model," says Janet Hoffman, global managing director of consultancy Accenture's retail practice. "We won't see the damage from that necessarily today, but we'll come back in a year and be able to [notice]."

A DELICATE BALANCE"We're not trying to hide anything," Tiffany's head of investor relations, Mark L. Aaron, says of his company's cuts. "It was our acknowledgment of the environment. It was a gesture that we made to consumers."

Executives are well aware of the need to woo today's frugal buyers while trying to maintain tomorrow's prestige. That's one reason why Tiffany's Kowalski has taken a stance against price cuts. But the company is being forced to look at everything from layoffs to store closures in response to the punishing retail climate. And even industry critics who warn of the perils of price cuts acknowledge that luxury goods purveyors have to take action to boost their bottom lines. "How long is it going to be before you start to see consumers come back and start spending in the way retailers need them to spend?" asks George Belch, professor of marketing at San Diego State University. "At some point you have to capitulate and say, 'We've got to generate revenue.' " For those at the top end of the pricing pole, adds retail consultant George Whalin, cutting prices "quietly is certainly a much better way to do it than to advertise."
Brian_burnsed
Burnsed is an editorial assistant for BusinessWeek based in Washington.

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