Formerly free-spending shoppers who were "trading up" to high-end goods are now less likely to treat themselves to that Gucci bag
Is the "mass luxury movement" dead?
It certainly looks that way. Executives at luxury retailers such as Saks (SKS), and high-end brands ranging from Coach (COH) to Karl Lagerfeld, are bemoaning the disappearance of free-spending shoppers. "You're seeing more pressure on that aspirational luxury consumer at our entry-price points," says Steve Sadove, chief executive officer at Saks. The New York luxury department store reported that sales at stores open for a year or more slowed to a miniscule 0.8% gain in December, compared with a 25.7% increase in the previous month.
"Entry prices" are, of course, a relative concept for outfits like these. Still, in the last few years, many retailers had posted phenomenal growth rates thanks to middle-income shoppers who were able to trade up in an era of easy money. Gas was cheap, as was credit. And there was a ton of cash left over after taking out home equity loans or refinancing mortgages. With more green in their pockets than ever before, consumers ratcheted up their tastes accordingly and bought goods from designer and luxury-brand names that previously were reserved for the rich.
Luxury companies responded by offering new categories of goods that the not-quite-über wealthy could afford, effectively transforming prestige goods into what some called "masstige." Coach started offering handbags for as low as $148 and key chains starting at $28, compared to about $1,200 for a higher-end leather bag. Better-known haute couture designers like Stella McCartney, Roberto Cavalli, and Lagerfeld designed pieces for mass retailer H&M (HMB) that sold out in hours. Discount chain Target (TGT) signed up high-end names like Isaac Mizrahi, Cynthia Rowley, and Liz Lange to its stable of designers. Department stores like Nordstrom (JWN) touted their affordable luxury offerings. H&M's sales slowed down in November, while Target's same-store sales in December fell 5% as shoppers spurned its higher-margin apparel and home offerings, both of which attract the most designers.
Consumers Rein in Spending
But today, that same middle-income shopper is under immense pressure. Gas isn't cheap anymore, credit is hard to come by, and many of the same people who rode the housing bubble now see their monthly mortgage payments jumping while home values plunge. It makes for a nervous consumer who doesn't exactly feel like treating herself. "There has to be some rethinking from luxury retailers right now, because the lower end of the high-end market has evaporated," says Brian Bethune, an economist at financial analysis firm Global Insight.
Take Tricia Ehrlich, a 38-year-old mother of three in East Setauket, N.Y., who runs her own online boutique. Ehrlich has a soft spot for classy jackets and matching shoes; in November, she spent $300 on a Perry Ellis black shearling textured jacket and bought a black suede Coach bag for $250. But Ehrlich has shelved plans to make a purchase this winter. "I'll probably hold off until spring. We spent a lot on refurbishing our house last year, and I know we're not going to reap the benefit of that, so the last thing I need right now is another jacket," says Ehrlich.
Retailers Revise Projections
That's not too surprising, given the headlines a middle-income consumer faces every day, says Michael Silverstein, a managing director at Boston Consulting Group and author of Trading Up: The New American Luxury. "She hears that banks have tightened their lending and listens on CNBC that credit markets are intense, so she's going to be careful with her money and look for value," Silverstein says.
Coach saw its eight-year growth streak come to a screeching halt during the holiday season. It recently took the highly unusual step of issuing discount coupons to drum up sales. CEO Lew Frankfort says that the 20% annual growth in handbags since the second half of 2003 has ended. He's dialed down growth expectations accordingly. "Our assumptions going forward are built upon 5% growth," says Frankfort. Sales of Nordstrom's more affordable brands, "Point of View" and "Narrative," faltered, and prices had to be marked down. At Nordstrom stores that had been open at least a year, sales fell 4% in December as compared with the same period a year earlier, after an 8.7% increase in November.
A tougher question faces luxury companies, however: Will the trade-up customers come back? The answer isn't clear. Consumers are in a state of flux, and are hard to read. Trudy Sullivan, CEO of upscale women's apparel chain Talbots (TLB), said her core affluent customer is demanding more classic clothes and "wants us to be serious." Yet the slightly younger, less affluent customer who had been dropping in once in a while is in a "show-me stage," and "wants us to be somebody else." Sullivan's solution? She has posted winning Talbots styles from the past 60 years in a room at the company's Hingham (Mass.) headquarters. She's hoping those classic campaigns will give her inspiration in a time of great uncertainty.