The luxury sector has been basking in the comfort of a boom for years. As the wealthy have got wealthier and the mass market has bought into this opulent lifestyle, these retailers’ tills might as well have been made of gold.
But in the past few weeks, there have been murmurings that the sector’s sparkling performance might be starting to lose its lustre. Bernard Arnault, chairman of LVMH, deemed the outlook “worrisome” at the company’s 2007 results – despite posting a full-year profit rise of 8 per cent. Richemont, which owns brands including Cartier and Chloé, said demand was slowing and, although Burberry recorded a surge in third-quarter sales, its retail sales were lower than anticipated.
Are these the early signs of a wider, more serious trend, or will the good times continue to roll, despite a perceived backdrop of low consumer confidence?
Many believe discussions about economic doom are overstated. Growth might have slowed in the luxury market, but the double-digit growth of previous years has been exceptional. Now it’s simply good – but still far better than many high street retail counterparts could hope for at the moment. Merrill Lynch senior luxury goods analyst Antoine Colonna envisages high single-digit growth this year. “There’s deceleration, but it’s not the end of the world. Unless there is a global recession, it will be a good year,” he says.
As Selfridges chief executive Paul Kelly points out: “Yes, events have affected financial institutions and markets, but the world hasn’t stopped turning.” He says the business has suffered no backlash whatsoever. “In fact, it’s got even better,” he says.
Likewise, Harrods managing director Michael Ward says the store’s growth has been consistent over the past four quarters. “I’d have thought we would have seen some impact in the last quarter and we haven’t,” he says.
Aquascutum president and chief executive Kim Winser sees no sign of a downturn within her business either. “It’s absolutely booming”, she says.
In the main, luxury retailers can thank two groups of shoppers for their extremely healthy balance sheets in recent years. The first is those enjoying the rapid creation of wealth in emerging markets such as Russia, China, India and Brazil. Net-a-Porter vice-president of sales and marketing Alison Loehnis says the growing awareness of brands in countries like these has assisted the sector hugely. And the fact that the online luxury fashion business ships to 170 countries has helped it capitalise on this growing international appreciation.
The second is the all-important aspirational shopper. The fact that many luxury retailers have made their brands more accessible with the launch of low-ticket items such as sunglasses has benefited sales even further. As PricewaterhouseCoopers director Olivia Gillan says: “People can now buy into a lifestyle – that’s quite different to the luxury market 10 years ago.”
A little indulgence
PwC research last year found that a fifth of UK consumers now own at least one genuine luxury item and almost a third aged 35 to 44 intended to spend more than£500 on luxury goods over the next two years.
But herein lies a potential problem. These aspirational shoppers are the ones who might start to rein in their occasional splurges. Marc Cohen, director at Ledbury Research, which helps brands understand the wealthy consumer, expects that those retailers with the greater exposure to the mass consumer market will start to struggle. Kelly is not so sure, though. “By pure definition, people will always want to be aspirational. They will always find the money,” he says.
The other types of luxury retail shoppers are tourists and the super wealthy. Most of the former are likely to continue their holiday shopping trips – particularly in light of a weakening pound. And luxury retailers catering to the very wealthy are more insulated, because their target market can remain blissfully oblivious to most people’s everyday concerns such as hikes in mortgage repayments or rising utility bills.
Loehnis says that, while sales continue to grow strongly across the business at Net-a-Porter, they are rising fastest among its highest-end premium brands. “Brands with more accessible price points are growing, but not as strongly,” she says.
However, this is not to say that retailers that target the top tier of spenders are entirely immune to potential difficulties. Bernstein luxury analyst Luca Solca forecasts that structural growth will continue, but says that when GDP growth slows, so does the growth of luxury.
Harvey Nichols group chief executive Joseph Wan says that although he believes luxury sector profits will continue to soar on a global level thanks to the fast-growing emerging markets, he is more concerned about the domestic outlook. “We’re experiencing a lot of negative macro factors that will hurt consumer spending,” he says. One is the proposed non-domicile tax levy. Another is the£25 congestion charge for gas-guzzling vehicles in London.
The issue is not always about cash itself, explains Wan. It’s to do with how it affects people’s general mood. “That will affect even the super wealthy,” he insists. “If you live in Belgravia and you’re told that driving around in your Bentley will cost you£25 a day, how would that make you feel? It’s the principle, not the money.” And, without the feel-good factor, he believes people shop less often and buy only their intended purchases, rather than picking up a few pairs of Manolo Blahniks that might catch their eye.
Wan is particularly angry about government plans to crack down on non-domiciled residents – whom it is estimated spend£16.6 billion a year in the UK. It’s not just about the annual tax of£30,000 – for many in the super-wealthy category, this would equate to little more than a few bottles of Pétrus. Changes that might convince them to leave in droves include losing entitlement to personal allowances against income and the capital gains annual exemption. There are also plans to close loopholes surrounding offshore trusts.
Ward, although upbeat about how Harrods will fare, agrees this is a concern. More than half of its sales come from the 5.7 per cent of its customer base categorised as the “jet-set elite”. He says that, of all the potential threats to the UK luxury market, the non-domicile tax changes could be the most significant.
Whatever happens economically, there will, of course, be both winners and losers within the luxury sector. Guy Salter, deputy chairman of Walpole British Luxury, the body that represents more than 70 luxury brands, including Asprey and Jimmy Choo, says: “I remain incredibly optimistic about luxury as a whole, but there could be quite a bit of pain,” he says. He expects to see continued good performances from the superbrands and a “huge amount of activity within new niche brands”, but forecasts life could get tougher for those in the middle ground, which have not found it easy.
Winser echoes his thoughts. “I don’t think the sector will suffer, but certain brands within it might. Those that might hurt are those in the middle,” she says.
To steel themselves for potential difficulties, retailers need to go back to basics. As the popularity of their products has gathered momentum, some brands have lost focus on the principles upon which “luxury” was founded. One of those basics is delivering value for money. Consumers will still pay luxury ticket prices, but they’re not stupid. Salter warns: “This is where the sector has gone off a little. There is temptation to cut corners. If someone can’t see the difference between something they could get at the high end of the high street, the appeal’s not going to be there.”
Some have also lost the art of treating customers well, he adds. “Shoppers often find they have a more fun experience going to the high street than to a snooty Bond Street store,” he says.
Stay true to the brand
Another mistake would be to focus on gaining short-term sales at the expense of preserving brand exclusivity. Gucci has said any future product development will be upmarket – wise, given that aspirational consumers may spend less. Gillan says luxury retailers will need to “focus back in on the core consumer of very wealthy and foreign visitors and make sure they’re going back to their roots in terms of providing genuinely unique product that isn’t commoditised”.
Harrods has poured money into 120 shop refits in the past year. Ward says it’s vital to create a “beautiful retail environment and invest in people” to provide the best possible service and give consumers a reason to go there. “On the high street, shoppers are failing to see what they get from the middle ground,” he adds.
Regardless of economic negativity, Kelly believes success is about “good product, good service and creativity”. Selfridges’ Wonder Room opened in September and shoppers have not been deterred by the eye-wateringly expensive product it houses. “From the numbers I’ve seen, the response has been fantastic,” says Kelly. It stocked some of the products already, but people were not sufficiently aware of them. Once those brands moved to the Wonder Room, sales “doubled overnight”, he explains.
Winser says luxury retailers must retain individuality at all costs. “The luxury customer is shrewd and they can tell when a brand is not being true to itself.”
And they also need to shed any remaining reservations about online. As Salter says: “They are well behind the curve on this and it’s ridiculous they think it’s not for them.” Loehnis agrees. “Time is the new luxury and the efficiencies online shopping offers are unrivalled,” she says, adding that selling online acts as a footfall driver for stores.
Ultimately, no one can tell the luxury sector’s fortune, but two things are clear. One is that branching out to mass consumers has made some players more vulnerable. Secondly, in the UK, all retailers are operating in a very different market to that of 12 months ago. Failure to recognise that and respond accordingly may well mean the glittering world of luxury retail becomes an altogether less glamorous place.