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Future Looks A Little Brighter For The Luxury Goods Sector « Back
Selina Harrison, October 2009
For a long time, the luxury goods sector was considered immune to economic fluctuations. However, the last year has shown that luxury companies are as vulnerable as other consumer companies during a recession. The net worth of the mega wealthy has been dramatically reduced by the fall in stock markets and property values, reducing demand for yachts, cars and designer clothes, among other luxury goods.

Earlier this year, consultancy firm Bain & Company reported that the luxury goods sector was facing a decline of 10 percent, estimating that by 2010 the sector’s value could shrink to €153bn from its 2008 level of €170bn. In response, a new report by KPMG has recommended steps that the sector should take in order to survive the global recession. In the report titled ‘Luxury business: responding to the crisis’, KPMG provides “four golden rules” which, if followed, will allow the industry to emerge from the recession on a stronger footing.

Sales of designer jewellery, watches and particularly clothing have been badly affected by the recession.

In July, LVMH Moët Hennessy • Louis Vuitton S.A, the world’s biggest luxury group, posted a decline in first half profits, falling by 23 percent to €687m compared to the same period last year. Tiffany & Co. and the Swatch Group both reported double-digit declines in sales for H1 2009 and a number of designer fashion houses, including Gianfranco Ferré, Christian Lacroix and Escada, have gone into administration.

In a recent study by the New York-based Luxury Institute, 62 percent of wealthy consumers reported that the state of the economy had changed their views on luxury purchases. Most are now more budget-conscious. Even so, most luxury brands are reluctant to discount the prices of their products, wary of sullying their brands. In order to retain that air of exclusivity and encourage purchases, some designer department stores have taken to holding stealth sales – emailing selected clients with invites to time-slotted online only sales at which discounts of 50 percent or more are offered on luxury goods.

However, price cutting of products alone will not be enough to help the sector through the current recession. KPMG also recommends that the sector take further steps, while retaining the value and quality that customers will look for in a luxury brand.

The first recommendation is to revise market positioning. Unprofitable business lines that are not part of the core business should be disposed of, allowing extra resources to be used on areas that are most likely to sustain revenues. KPMG advises companies to focus on delivering value and the correct level of service to customer; luxury based on brand power alone, and not value, is unlikely to succeed in the current environment.

KPMG’s second recommendation is to cut costs intelligently. Companies that stop communicating their message through marketing could rapidly lose market share and undermine their brand. Continuous cost reduction may be required for survival, but this must be achieved without reducing marketing budgets. The report suggests alternative ways of reducing HR costs without losing skilled staff, such as salary sacrifice and overtime banks.

The third recommendation is to maintain strategic investment. Some companies have frozen investment altogether, wary of increasing debt in this market. However, luxury companies typically need to invest in retail network development. The current climate presents a favourable time for the acquisition of distressed assets that may allow retail expansion. Failure to do so could undermine a company’s competitive position.

KPMG’s final recommendation is to manage liquidity effectively. Many companies still do not have a firm handle on how much cash is being held up within different areas of the business. Luxury companies, accustomed to a focus on product and sales, may be worse than most. Hidden pools of cash must be identified so they can be used to contribute towards core business operations.

In the meantime, the future does look a little brighter for the luxury goods sector. Sales of designer shoes, handbags, and beauty products have weathered the financial storm particularly well. At the end of August, French cosmetics company L'Oréal reported higher than expected profits of €1.37bn for H1 2009. In June, Hermès revealed it was farming crocodiles in Australia to feed demand for its coveted £4000 Birkin bag. Around the same time, Mulberry announced that its handbag sales had recovered, climbing 21 percent in the first 10 weeks of the new financial year. Shoe supplier Kurt Geiger, which operates in upmarket department stores across the UK, also reported double-digit growth in profits for the first five months of the year.

Bain & Company predicts that trading in the developed markets will remain tough for the rest of the year, with growth of around 1 percent in 2010 before a slow recovery. However, despite the recession slowing the pace of development in emerging markets, Bain believes that, as a consequence of increasing personal wealth, growth in global GDP, and rising tourism in Russia, China, India and Brazil, spending will surge between 20 percent and 35 percent over the next five years. This is expected to aid the recovery of the luxury goods sector.

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