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Haute couture hits hard times

By Peter Gumbel, Europe editor
Last Updated: August 22, 2008: 3:10 PM EDT

The slumping dollar poses particular problems to European brands, since they live or die on their reputation for being made in Europe. Until recently, while demand remained strong, they were able to pass on higher costs to customers. But price rises in today's climate are risky.

"If it's a hand-embroidered dress, there's no difference between $15,000 and $15,500," says Hermann of Yves Saint Laurent. "But if it's a bag, there is an important difference between $1,000 and $1,200." One of her ways of dealing with the currency crunch: She is trying to speed up production in order to get goods to U.S. and other department stores three weeks earlier so that they can stay on the racks at full price longer.

Global expansion

What nobody is going to do, except as a last resort, is cut back on marketing or store openings. That's all about image, the lifeblood of the business. (Some brands are trying to be creative with their marketing dollars. Boucheron's Bédos tells Fortune the jeweler is teaming up with the traveling arts carnival Spiegelworld, which has created a show about the company's 150-year history.) In particular, luxury brands are frantically opening stores in China, Russia, and the Middle East.

Executives like Bernard Fornas, CEO of Cartier, say that this gives their company geographic diversity - especially important at a time when the Japanese and U.S. luxury markets are looking weak. "Not everything goes well or badly at the same time," says Fornas, who is adding stores in Azerbaijan, Ukraine, Qatar, and Saudi Arabia. Cartier is banking big on one market in particular: Fornas expects China to be his single biggest market by 2012, and he's continuing to add new stores there; by the end of this year there'll be 28, up from 22 currently.

Yet diversification has its costs and difficulties, and is far from being an automatic recipe for success. There's no guarantee that Ukrainian or Malaysian consumers, say, will lap up every luxury brand that parachutes into their countries. The best retail locations are pricey or already taken, and rising up the value chain is easier said than done.

Look at Tod's. The Italian shoe group, owned by Diego della Valle, has done well in its home market despite the lackluster economy there, but an aggressive expansion in the U.S. and Japan has faltered. Its profit margins are dropping. And in the first quarter of 2008 its leather goods sales fell by more than 5%, prompting at least one analyst, HSBC's Antoine Belge, to conclude that Tod's business model "is failing." The company says that's not true, and that its strategy remains valid.

Shifting trends

Luxury brands have ridden out important changes in trends in the past. In post-communist Russia, it used to be that the bigger the logo and the gaudier the display, the better it sold. That has changed markedly, to the point where well-heeled Russians now rush to buy understated brands. In China luxury used to be for men only; it's just in the past few years that women's luxury goods like apparel have also taken off. And in Japan the generation of young women in their 20s who drove luxury growth for most of the 1990s are settling down to start families, and no longer have the disposable income, or the appetite for all those handbags, that they once did. As a result, Japan has dropped from about 15% of worldwide luxury consumption to about 12% today, and falling.

The lessons the big brands learned from those changes - and from the last industry contraction, from 2001 to 2003 - is that even as they track the shifts, they need to keep hammering away at the dream. They're not so much selling handbags, suits, or watches as quality, status, and prestige. If consumers start worrying about the pricetag, everyone's in trouble. In luxury "there is no relationship between the product and the price. They are totally disconnected," says Elisabeth Ponsolles des Portes, chief executive of Comité Colbert, a trade group representing French luxury brands.

Brioni CEO Andrea Perrone, for one, is convinced that true luxury will never go out of style. He quotes his grandfather, a founder of the suitmaker, as saying, "Particularly in moments of crisis, men like to dress elegantly." It's a charming idea, and as the world's luxury brands brace for tougher times, they're all crossing their fingers that he's right. To top of page

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