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Magazine > Market Survey > News Content

Report: Luxury groups set to hunker down

6/12/2009 3:20:25 PM

Paris/London--Luxury goods groups need to brace themselves for at least two more years of pain, with big-ticket items such as cars and watches suffering most, even if some U.S. brands and retailers are seeing signs of recovery.

Luxury goods executives told the Reuters Global Luxury Summit this week they were doing their best to preserve cash and cut costs, delaying store openings and cutting advertising.

It will probably take longer than first thought to reverse negative trends as consumers feel uncomfortable spending $40,000 on a Chopard watch or $400,000 on a Lamborghini while thousands are losing their jobs and the economic future remains uncertain.

"I think the crisis is very deep," said Lamborghini Chief Executive Stephan Winkelmann, adding the sports car maker had cut production by 30 percent this year.

"A lot of companies are going out of business," he said.

Global luxury goods sales are set to drop by at least 10 percent this year and remain sluggish in 2010, industry experts and analysts predict. Consultants Bain and Co. do not see a full recovery before 2012.

"In my opinion, turbulence will last long, maybe two years," Hermes Chief Executive Patrick Thomas said.

Watchmakers could see the worst in the autumn, said Swiss luxury timepiece maker Parmigiani Fleurier, as overstocked retailers will not want to place major orders before the pre-Christmas season.

Burberry predicted so-called "aspirational" consumers were unlikely to return to buying expensive items any time soon. The British luxury brand has axed 15 percent of staff and cut inventories by 19 percent.

U.S. fashion company Liz Claiborne said it expected sales to remain under pressure for some time as even shoppers who could still afford to splurge had become more thrifty.

"It's not a matter of 'what she can afford to spend?' It's 'what's the price that she can get it at?'" said Liz Claiborne Chief Executive William McComb.

Emerging, but not enough

The longer term prospects of the luxury industry remain attractive as the number of affluent buyers is set to rise further, and several regions such as central Asia, Siberia, Latin America and India have not yet been fully tapped.

But this is unlikely to be enough to make up for the pain in established markets, especially as the slowdown is forcing luxury groups to hold back investments in the newer frontiers.

"Emerging markets growth is likely to contribute the bulk of future luxury goods market growth, but it is not likely to offset the impact of lower macro-economic growth in the next 5-10 years and bring us back to luxury goods market growth of the past 5-10 years," Bernstein Research said in a note.

Geographically, the picture is mixed. China will be one of the only emerging markets this year to enjoy some growth, while other markets such as Russia and the Middle East will continue to reel from the spending downturn.

"I am hoping the market will pick up in the last quarter," said Ramesh Prabhakar, managing partner of Dubai's Rivoli Group, one of the largest distributors of luxury brands in the Middle East.

Rivoli, in which Swatch has a stake, saw a drop of between 15 and 35 percent in its luxury products section between November last year and May this year, compared with a year ago.

Japan, once the world's third largest luxury market behind the United States and Western Europe, is also ailing. Hermes said sales in the country were down 10 percent since January.

A telling detail: In Japan, many men have stopped buying diamond rings to save money.

But in the United States, some executives have spotted signs of recovery and think that combined with lower inventory, they should avoid a repeat of the bloodbath last Christmas, when the industry succumbed to frenzied discounting to clear stock.

"You are seeing some of the green shoots people talk about," said Stephen Sadove, chief executive of upmarket U.S. department store group Saks. "We are in the early stages of what I would call a recovery."

Fashion brand Juicy Couture said better sales trends gave it confidence that it would notch up a high single-digit percentage rise in same-store sales for the year-end holiday season.

Firms dealing with the richest customers, who have generally been less affected by the recession, are even more upbeat.

Rolls-Royce Motor Cars forecast a doubling of sales driven by its new Ghost model, while auction house Christie's said the art market downturn was likely to be less severe than in previous recessions, helped by the fashion for collecting among the wealthy.

For more news from the Reuters Global Luxury Summit, visit Reuters.com/Summit/GlobalLuxury09.

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