), have flourished over the past two years by finding and fulfilling the wishes of the rich.
But it's not only the wealthy who desire the halo of luxe. And though the economy is strong but not spectacular, retailers of all stripes are attempting to give off an aura of luxury. Midmarket retailer J.C. Penney (JCP
) recently launched its high-end Nicole Miller line, and J. Crew offers limited-edition apparel and jewelry for over $2,000.
RICH ASPIRATIONS. Even discount retailers refuse to be left behind as they court upscale consumers: In the run-up to the holiday season, Target (TGT
) bought up all the ad space in The New Yorker, and Wal-Mart (WMT
) pitches splashed the pages of fashion bible Vogue (see BW Online, 10/7/05, "Wal-Mart Gets the Fashion Bug").
As the gap between high end and low end starts to shrink, the challenge for luxury retailers is how to retain their specialness when rivals all around them offer what used to be available at only the finest boutiques. "If extraordinary becomes ordinary so quickly, how does luxury inflate its value to attract the exclusive buyers?" asks Pamela Danziger, president of luxury research and consulting firm Unity Marketing, and author of Why People Buy Things They Don't Need.
Some premier retailers, including Coach (COH
) and Tiffany (TIF
), have embraced consumers who aspire to opulence but may not be in the top rung of spenders. In fact, the aspirations of the not-so-rich fired up the engines of growth at Coach, which has worked to make luxury affordable, with handbags that can range in price from $138 to $1,900 (see BW, 11/7/05, "Coach's Split Personality"). And the affordable line of silver jewelry at Tiffany has increased foot traffic at the famed store with the turquoise boxes and white ribbons.
PRICE PERCEPTIONS. Statistics suggest the world of big spenders is continuing to grow. According to the World Wealth Report 2005 from Merrill Lynch and consultant Capgemini, the number of millionaires in the U.S. grew 10% in the past year, to 2.7 million, surpassing the 2.6 million in Europe. "Incomes continue to explode at the top rungs," says Wendy Liebmann, president of WSL Strategic Retail.
Retailers in the highest echelons like Neiman Marcus have eschewed the Coach strategy of offering more moderately priced goods. The exclusive approach seems to be paying off: Neiman Marcus' sales per square foot have grown at a much faster pace than those of other luxury stores; that figure today stands at $555, compared to $350 at crosstown rival Saks Fifth Avenue (SKS
), which strayed to attract more customers.
Still, the richest customers are becoming harder to please. Finding the balance between an item's price and its perceived worth is increasingly tricky in the luxury market, experts say. Affluent consumers, who have shown that they understand value, now regularly boast of shopping at warehouse-club retailers like Costco (COST
) and even buy groceries and other staples at Wal-Mart. If they perceive that they can get the same merchandise at a lower price, chances are they'll bolt.
CONSUMER VALUES. What's hard for Wal-Mart or Banana Republic to match is the kind of shopping experience offered at a store like Bulgari or Bergdorf Goodman. For this reason, higher-end retailers can't afford to blunder on the customer service that they have built their reputations on. Whether it's the personal-shopping experience at Neiman Marcus or the extra attention to detail at The Ritz-Carlton, these high-end names have managed to deliver a superior service that few competitors can match.
Yet, even here, lower-end retailers are moving in on the action. Best Buy (BBY
), for example, has introduced a personal-shopper program to guide customers around the store as they buy electronics.
Luxury retailers in the U.S. are being confronted by another brand of challenge -- the arrival of fast-fashion names like H&M and Zara, which have already upended Europe's retail industry. These nimble-footed chains offer the latest fashion at low price points and can move the designs on their racks at lightning speed. Many of their styles are copies of designer merchandise displayed at Neiman's and Bergdorf's. "To stay ahead, high-end retailers will have to learn to be as fleet-footed," says Liebmann.
As the competition increases, luxury retailers will have to start attaching more meaning to their products in a tangible way, says Unity Marketing's Danziger. One method is to align products and brands with consumers' values system. John Hardy, the jeweler whose work is showcased at Neiman Marcus, provides one example: Buyers flock to buy his jewels, not just because they're high design, but because of his reputation for using environmentally friendly working conditions -- among other things, Hardy's factories are secured by thorny bougainvilleas creeping over mud-brick walls, rather than the razor wires that protect other factories.
LIMITED APPEAL? When all else fails, luxury-goods purveyors can rely on limited editions to retain exclusivity. Neiman Marcus has sold out all 75 of the $65,000 Lexus GS 450H, a luxury hybrid car. But the lower end is moving in on that territory as well. J.Crew has a limited-edition, silk ivory gown for $2,995, a special-edition, three-button coat for $2,500, and a gold charm bracelet for $2,900. Yet, unless these limited editions are really one of a kind, they quickly lose their cachet.
At the other end of the spectrum, luxury retailers that offer lower-priced items to attract more buyers may suffer a loss of brand image. For instance, Mercedes was criticized by many customers for diminishing its brand and image when the auto maker offered its 200-series cars at a low price of $25,000.
Some wonder if Coach tempts a similar fate, though it has been growing sales at double-digit rates for the past two years and is on track to deliver a stellar performance this year. "How long will be before someone says, 'How exclusive is it if it's on everybody's shoulder?'" asks Liebmann of WSL.
BORDERLINE WEALTH. Tiffany is maintaining its image as a store for the wealthy, with ads in magazines and newspapers that showcase $50,000 brooches rather than its $200 silver earrings. Brand consciousness also may be why Saks is trying to take ownership of the higher-end cashmere market, with its "Wild About Cashmere" line in New York's Fashion Week and a children's book, titled Cashmere If You Can, about the cashmere goats who live in the store.
And Nordstrom (JWN
), which has had strong sales and profits, isn't sitting still. In August, it purchased a majority stake in Jeffrey Kalinsky's company, Just Jeffrey, which owns two cutting-edge luxury stores in New York and Atlanta.
But given Wal-Mart's aims of selling $10,000 diamonds, the sides in a nasty battle could be forming. "For the luxury retailers, what makes the difference between a great year and a good year is how the borderline wealthy shop," says Milton Pedraza, chief executive of the Luxury Institute, a consulting firm. And retailers are watching to see how that plays out this holiday season.
Gogoi is a reporter for Business Week Online in New York