AdAge: Luxury Market Braces for Slowdown

High-End Brands and Retailers Expected to Feel Pinch as Consumers Re-evaluate Spending Habits

By Natalie Zmuda

Published: September 15, 2008
NEW YORK (AdAge.com) — With massive layoffs expected in the banking industry and the economy in turmoil, marketers are beginning to fear that consumers of luxury goods will be snapping their wallets shut.

Luxury brands such as Tiffany, as well as other high-end retailers, likely will feel the pinch.
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While the subprime-mortgage crisis hit many lower- and middle-income consumers, this latest financial crisis, analysts said, will have more of an impact on the upper and upper-middle classes. “Certainly the New York market directly and the luxury market generically [will be hurt],” said Michael Niemira, director-research at the International Council of Shopping Centers. “It continues to be problematic for the whole economy, further shifting people away from luxury and more toward value and basics. And it’s deferring potential luxury purchases.”

Under pressure for months
With some luxury brands already starting to see a slowdown in sales, several analysts said, this latest development only stands to make matters worse. Milton Pedraza, CEO of the Luxury Institute, noted that even high-end brands have been under pressure for several months, as consumers became jittery.

“The reality is that even at the highest levels of wealth, there is some pullback,” said Mr. Pedraza. “The loss of Wall Street jobs and, more importantly, the effects of a less-liquid market on the economy will mean a few more percentage points of decline in revenues.”

Brands such as Tiffany and Coach, as well as high-end retailers such as Saks Fifth Avenue, Nordstrom and Neiman Marcus, which owns Bergdorf Goodman, likely will feel the pinch.

Part of the cycle
But players in the space still see the downturn as temporary. Mr. Pedraza said the luxury market is cyclical and has experienced downturns before — albeit none as profound as this. “This is deeper,” he said. “It’s not the demise of the luxury market, but it’s a very serious downturn.”

And that will spur a re-evaluation of spending habits. Pam Danziger, founder of Unity Marketing, said consumers today are learning how to resist temptation and are more carefully evaluating their shopping choices. “Once you’ve gotten off the treadmill, why would you get back on? People don’t get rich by spending their money,” she said. “And spending on luxuries isn’t a good place to spend it.”

Focus on Russia, China
As consumers adjust to a new financial reality, so too must luxury marketers. With the U.S. economy in a tailspin, Mr. Pedraza said global luxury brands will further shift their marketing focus toward countries such as Russia, India and China. He also notes that marketing among luxury brands is beginning to focus more on function rather than status.

“[Luxury brands] are focused on marketing the classics — products that have lasting value and heritage,” he said. “In the last few years, because the money was flowing, companies forgot about the functionality of the product and were focusing on the image and status of it.”

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