View From the Inside: Is the Luxury Sector Recovering?

This recession has been atypical in many ways -- including its effect on the luxury-goods sector. In the other recessions we’ve seen since World War II, the luxury sector mainly stayed intact. However, this time it appears to have lost its luster.

High-end retailers Tiffany (NYSE: TIF  ) and Ralph Lauren (NYSE: RL  ) have been battling for sales, while off-price retailer TJX (NYSE: TJX  ) -- owner of T.J. Maxx and Marshalls, which sell designer clothing at reduced prices -- just raised its full-year sales outlook.

Consulting firm Bain & Co. projects the luxury sector won’t recover until 2011 or 2012. However, the sector is weathering the storm by using smart pricing strategies and inventory management.

Altering pricing strategies
High-end accessories retailer Coach (NYSE: COH  ) has rebalanced the pricing of its current assortment of handbags. By increasing the proportion of handbags introduced at prices below $300 from about 30% in fiscal year 2009 to 50% now, Coach has been able to reduce its average retail in handbags by about 10% to 15% in its North American retail stores. “This rebalancing gives the consumer more choices at prices she is willing to pay or is able to afford … [allowing us to] still generate excellent margins,” said Lew Frankfort, chairman and CEO of Coach.

Similarly, Saks (NYSE: SKS  ) is also reconfiguring its pricing strategy by shifting a greater amount of inventory into more moderate price ranges, while still maintaining high-level pricing within brands. "We have a strategy that’s all about what we call ‘high-end and accessible luxury,'" Stephen Sadove, chairman and CEO of Saks, said in an interview. “That means selling luxury at a good, better and best price point.”

Saks has shifted a slice of its pricing from the “best” price point down to “good” and “better.” “We’ve learned that people continue to like brands, and they don’t want to trade down from one brand to another, but will [buy at lower price points] within the brand,” Sadove said. “So if customers happen to love Prada -- within the brand of Prada, they’re changing some of their desires relative to price points.”

High-end department store Nordstrom (NYSE: JWN  ) has also lowered prices through the second quarter on its brands. The retailer said on its second-quarter earnings call that it expects lower-than-average prices through the end of this year compared with last year.

In contrast, luxury retailer Tom Ford International is being very judicious about adjusting prices, with the exception of adjustments made for currency fluctuations, which may alter prices depending on the region. “We looked at the overall collection and there were some price points that we adjusted, but the basic positioning of the brand was not changed,” Domenico De Sole, chairman of Tom Ford International, said in an interview.

Tom Ford International is situated at the very high end of the luxury goods market, which means its higher prices go along with the brand positioning. If the company were to lower prices dramatically, it would risk altering its brand image and positioning.

“If you have a brand and you have a certain price positioning, which every brand has, that’s what you are,” De Sole says. “You can address some of the pricing issues, but Chanel cannot become [Gap (NYSE: GPS  ) ]. You can change some prices, but you can’t change who you are.”

Consumers and the outlook for luxury
Higher-end consumers are beginning to resurface after taking a hiatus since last fall. “We’ve seen that consumers are gradually coming back to visit stores and malls at levels they did not in recent quarters,” says Coach’s Frankfort. “We are also seeing improvement in consumers’ attitudes. Clearly, we’re well over the worst, which was last holiday season.”

Saks’ Sadove agrees that the trend in shopping compared with the beginning of the year is “substantially better,” though still down from in the past. “I would describe it as if we’re in a little bit of an ‘L,’ where it went straight down and we’re now at the bottom of the ‘L,’ where it’s stabilized,” says Sadove.

After a difficult spring, De Sole says he is starting to see a slow recovery and better performance in the U.S. this fall: “I suspect this fall will be an improvement compared to a year ago, but nothing special.”

The executive says he thinks next spring is going to continue to be difficult, but that we’ll see a recovery toward the end of 2010 or the beginning of 2011.

Luxury in the new normal
Luxury is evolving as a result of the recession. In the “new normal,” Coach’s Frankfort says he doesn’t expect spending to return to previous boom levels. Saks’ Sadove says some of the euphoria seen in the 2007 period will probably be tempered. He says he thinks there will be a return to basics in the luxury sector, such as limited distribution, exclusivity and less supply.

Besides muted spending levels, Frankfort says the recession has changed the way consumers look at luxury: “Luxury is no longer simply about price. The definition of luxury has evolved and value is a component, along with innovation. Creativity is the key and scarcity is important. Those companies offering great product at compelling prices -- whatever those price points may be -- will be winners, irrespective of their positioning.”

Going forward, Sadove says the consumer is going to focus on value for some time. “I think the day of putting a logo on something and charging an outrageous price even though the quality isn’t there is long gone,” said Sadove.

In contrast, De Sole says luxury will revert back to its roots eventually. “I’ve led through a lot of crises in my career, and I’ve seen things that have been very difficult and people have said, ‘Oh, this is going to change things forever,’” said De Sole, who served as Gucci’s CEO for nearly 10 years. “The reality is that things will never change forever. Some difficult times were short, others were much longer, but eventually things get back to normal. People buy luxury products. It goes back in history forever. The real issue is how long the difficult time is going to last.”

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Fool contributor Jennifer Schonberger does not own shares of any of the companies mentioned in this article. Coach is a Motley Fool Stock Advisor selection. The Motley Fool has a disclosure policy.


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