Posted by: Joe Weber on June 29
By Brian Burnsed
Last year, sales in the luxury retail market flattened for the first time in five years. 2008 was capped by an abysmal holiday sales season that saw retailers offering massive discounts in order to move merchandise. The situation doesn’t appear to be getting better in the near future—Bain & Co. projects that luxury retail sales will be down 10% this year.
Several retail consultants have told me that while wealthy buyers still seem to be spending, the recession has kept what the industry dubs “aspirational shoppers,” middle class buyers who are willing to spend above their pay grade on enticing goods like designer leather handbags or diamond jewelry, away from stores. They make up a larger portion of the luxury consumer market than their wealthy counterparts and have been a key factor in the luxury retail market’s growth over the last decade. Now, those aspirational shoppers are in hiding.
So are there any reasons for luxury retailers to be optimistic? Yes, says Tiffany & Co. CEO Michael Kowalski. I interviewed Kowalski recently for an upcoming magazine piece and he told me that Tiffany is approaching the recession conservatively, unwilling to assume that the economic troubles might relent soon, and that they are prepared to endure more quarters like Q1 2009 that saw Tiffany’s sales slide 22%. However, when the financial storm does inevitably clear, he feels luxury consumers’ spending habits won’t be permanently altered.
“We do believe that the current sales resistance in the luxury space is very much a function of economic conditions at the moment, that there has not been a cultural rejection of luxury,” he says. “As we’ve surveyed our consumers through focus group research we feel quite comfortable with the intelligence that we’re receiving that says when the recession ends and more robust economic times return people will return to luxury.”
Tiffany is one of a few luxury brands that have been willing to brave the financial storm without lowering prices. They’re doing so in an effort to protect their brand integrity, ensuring the Tiffany name still has clout when consumers finally reopen their wallets. Brand and retail experts agree that the outlook will be bright for firms that adhere to Tiffany’s strategy, despite the past year's startlingly low sales. “It is critical to maintain brand integrity despite the overall economic context,” says Janet Hoffman, managing director of Accenture’s global retail practice. “Consumers are addicted to buying. I think they’ll stay addicted to buying. As soon as they have the money to spend at a higher price point, they’ll start to spend it.”
BusinessWeek’s Joe Weber, Patricia O'Connell, Michelle Conlin, Frederik Balfour, Peter Coy, Greg Spielberg and Roger Crockett examine The Case for Optimism by looking past the financial turmoil and economic unrest gripping the globe to focus on the promising future that lies on the other side of this storm. We’ll chronicle the forward thinkers investing in R&D, launching promising new products, entering new markets, or implementing management and leadership.
See why BusinessWeek Editor-In-Chief Stephen J. Adler is optimistic about the economy amid the sharpest downturn since the Great Depression.