Email | Print    Type Size  -  +

The luxury market loses its luster

The $270 billion industry thought it was recession-proof. But its growth is slowing, and anxiety is higher than a pair of Jimmy Choo pumps.

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

Meet 2008's style setters Meet 2008's style setters Meet 2008's style setters
Fortune's second annual Luxury Portfolio features the moguls, merchants and master craftsmen who are defining the business of luxury.
The world's most expensive streets The world's most expensive streets The world's most expensive streets
Every city has one - a retail thoroughfare that houses the most exclusive stores. Real estate slowdown or not, these luxury corridors are still thriving - for now, at least.

(Fortune) -- The Yves Saint Laurent boutique on Madison Avenue on Manhattan's Upper East Side is always the epitome of luxe cool, even on a recent warm August afternoon. Its impeccably polished black cabinets are filled with the latest must-have accessories, among them a python Muse handbag that retails for $3,295 and $760 red sandals with four-inch heels. Chic, unsmiling clerks fiddle with the clothing, which includes a $17,000 hand-painted floral gown.

Indeed, the only thing marring this perfectly impenetrable tableau is a small brushed-silver box in the window with a single word printed on it: "Sale."

In its own refined way, the venerable luxury business is showing signs of weakness. Besides the discounts at the Gucci Group's YSL shop in New York (some items were marked down by about 50%), retailer Saks Fifth Avenue started its end-of-season sales far earlier than usual this year. In London, remarks one garmento, "you could shoot a cannon down Jermyn Street," home to a handful of bespoke shirt makers. And Italian high-end clothier Brioni concedes that some American customers who used to purchase five suits a year are downsizing to three.

Luxury is still faring better than general retailing, but after five years of strong growth, the business is hunkering down to withstand a triple onslaught: fast-rising costs for everything from diamonds to freight; a consumer retrenchment in the core U.S., European, and Japanese markets; and, for the predominantly European producers, a sharp appreciation in the value of the euro against the dollar and other currencies.

Consultant Bain & Co. now expects that the $270 billion luxury market will grow about 2% this year once exchange rates are factored in; that's still in positive territory, but sharply down from the 6.5% growth in 2007. A survey by the Italian trade group Altagamma in June showed that operating margins at many brands were flat or falling.

Retailers' reactions

And luxury is losing its luster on Wall Street: Deutsche Bank in July slashed its earning forecasts for the entire sector; it rates none of the luxury stocks a buy. Most troubling is the news from luxury's biggest distributors, upscale department stores such as Saks (SKS) and Neiman Marcus. Under huge pressure to improve their own flagging performance, they are curtailing orders for next year, demanding steeper rebates, and discounting unsold merchandise far more quickly than they used to.

"I've done this for a long time, and this is one of the most volatile times I've ever experienced," says Angela Ahrendts, CEO of British brand Burberry.

Just a few months ago executives of the world's leading luxury companies insisted that their businesses were recession-proof. Bernard Arnault, the founder and chief executive of France's LVMH (LVMHF), which owns brands ranging from Givenchy to Dom Pérignon, was speaking for the entire industry when he told a conference in Moscow last winter that luxury would be less affected than other sectors, and added, "I am quite confident we can get through this crisis."

The very richest buyers, Arnault and his peers argued, would always find money for elegant baubles and designer handbags. And newly affluent customers in China, Russia, and other emerging markets would more than compensate for any softness in consumer spending in the developing world. Indeed several major luxury groups, including LVMH, Gucci, Tiffany (TIF), Coach (COH), Burberry, and Richement Group, all showed solid revenue growth in the first half of the year.

'A crisis of values'

But there's little question that the broader economic slowdown - and persistent pessimism - in the U.S. and elsewhere will hurt luxury's growth prospects and perhaps force some brands and retailers to rethink the very essence of luxury. "Everything that surfed on the wave of bling is going to be called into question," says Jean-Christophe Bédos, CEO of upscale French jeweler Boucheron.

Just as luxury retrenched after the excesses of the 1980s and dotcom eras - even high-end consumers rejected over-the-top jewelry and outré fashions in favor of understated cashmere sweaters and insignia-free garb - the luxury mania of recent years, too, may be on the way out. The toning-down already has begun: At Yves Saint Laurent, for example, one of the big hits at the moment is a ready-to-wear collection called Edition 24 that is not only less expensive than its other collections but also - gasp! - deliberately designed to last more than one season.

It's one early answer to what's shaping up as an existential question for the top brands: Even after the global economy stabilizes, will anyone want $2,000 handbags, $5,000 watches, and $300 sunglasses? Or is there a risk that "luxury" will go the way of yuppies and become a fad that many would prefer to forget? "This is a crisis of values," says YSL CEO Valérie Hermann.

At Burberry, CEO Ahrendts is girding for a slowdown by trying to make her operation more efficient. She has folded 21 scattered distribution centers into three regional hubs and says she hopes that better sourcing will help to ease pressure on margins. "The good news is that the sector is still outperforming others over the next two years," she says. "It's just a matter of getting through the storm by focusing on the right markets, the right suppliers, and the right categories. We've got to run a tighter, smarter business."

Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.