High-End Stores Are Hurting From the Rich’s Lapse of Luxury

After the stock market plunged late last summer, Diane Allen, owner of 23rd Street Jewelers in Santa Monica, had a customer bow out of buying a $12,500 vintage diamond necklace.

“She said she had to move around funds and sell some stock,” Allen said. “Then she called back and said she was too affected by the stock market to make the purchase.”

Luxury goods retailers remain hopeful about their sales prospects as the holiday season approaches. But with the stock market continuing its unpredictable swings and financial troubles swirling around the globe, it’s clear that at least some well-to-do consumers already have clamped shut their pocketbooks, scaling back on designer clothes, Gucci bags and Tiffany jewelry.

Sales at Tiffany & Co., for instance, have dropped at its Beverly Hills, San Francisco and New York stores. Saks Fifth Avenue and the parent of Bloomingdale’s last week announced declines in same-store sales, or sales at stores open at least a year. And a slew of upscale fashion designers has fallen victim to economic woes here and abroad.

“Consumers have gotten hit between the eyes trying to become millionaires on Wall Street, and I think people, even the rich, are going to be more concerned about how impulsive they are in spending,” said Harry Bernard, a New York-based fashion industry consultant.

Late last month, the Conference Board reported that consumer confidence in this country fell in October to its lowest level in almost two years. It was the index’s fourth straight monthly decline since reaching a peak in June.

Perhaps more troubling was the decline of Americans’ expectations for the coming six months, which does not bode well for retailers, the research group found.

“The upper-middle to lower-upper classes have been hurting from the stock market, and I think their discretionary buying will be less than it was a year ago,” said John Pitt, who monitors retailing for LJR Redbook Research in New York.

U.S. retailers have also been hurt by a loss of spending by tourists from Asia. Asian tourism to cities such as Los Angeles, San Francisco and New York has slowed, and the Asians who are coming aren’t spending as freely on luxury products as before, Pitt said.

A drop in tourist trade has hurt Tiffany. The fine-jewelry retailer saw a drop-off in third-quarter sales at its New York flagship store, which accounts for about 30% of the company’s business.

Although strong sales in Japan helped offset the company’s overall performance, the poor showing of the Manhattan store, along with the San Francisco and Beverly Hills outlets, has caused concern.

Salomon Smith Barney analyst Maureen McGrath estimated the decline at the New York store to be 10% in August and September and about 5% in October.

“It’s a combination of a drop-off in tourist spending and the local economy,” McGrath said.

The troubled tourist business is an extension of the woes in Asia, where luxury goods makers are taking a noticeable hit, analysts said. For instance, Gucci saw its second-quarter profit fall nearly 8% because of slumping sales of leather handbags in Asia. Likewise, LVMH Moet Hennessy Louis Vuitton, the world’s largest luxury goods maker, said its profit declined more than 6% during the first half of the year.

However, wealthy Americans aren’t expected to pull back as hard, because the economy hasn’t been under as much strain.

“It takes a lot to scare an American consumer,” said David Wyss, chief economist for Standard & Poor’s DRI in Massachusetts. “We like to spend money. It takes more than a little stock market decline to keep us from spending our money.”

The next Saturday night reservation available at Spago in Beverly Hills still is more than a month away. The Mercedes-Benz dealer in Beverly Hills continues to sell as many luxury cars as it did last year, said sales manager Alex Amatuzio.

And just as Allen, the Beverly Hills jeweler, braced herself for the further results of Wall Street’s woes, another customer came in and bought the $12,500 vintage diamond necklace.

“Overall, we had a very good year, and I’m optimistic that we’ll have a typical Christmas,” Allen said.

Indeed, the National Retail Federation last week predicted that consumers will spend 5% more this holiday season than they did last year, assuming no further negative surprises take place.

But economic uncertainty means that even luxury goods companies need to offer good value, analysts say. A designer label will go only so far.

Chanel surprised the fashion world last month when it announced that it was shutting down its highly acclaimed Isaac Mizrahi business because of poor sales. Kenar filed for bankruptcy protection this year, and the financially troubled Anne Klein is up for sale.

Orange County-based St. John Knits failed this year to meet analysts’ earnings expectations after its sales had grown at double-digit rates for 16 straight quarters.

In July, Donna Karan announced plans to cut prices on some items in its DKNY clothing collection to attract more customers.

“Unless designer businesses provide luxury products that are considered top-quality and maintain an acceptable price value, they’re going to have trouble,” Bernard said.

So luxury retailers are not taking any chances.

Saks Fifth Avenue is sending out more catalogs to more people. And along with featuring the retailer’s traditional high-end merchandise, including a $250,000 sapphire-and-diamond jewelry set, the catalogs will also prominently feature gifts priced at less than $50.

Saks sales associates are now trained to assist customers throughout the store, as opposed to being limited to one department. The retailer believes improvements in customer service could translate into more sales.

“We’re trying to increase buying across the spectrum,” said Sheri Wilson-Gray, executive vice president of marketing at Saks, which reported a 1% decline in same-store sales for the four weeks ended Oct. 31. “We want to be prepared for whoever comes through our doors. We’ll just see what happens.”

Dallas-based luxury retailer Neiman Marcus, which has seen a 2.3% drop in same-store sales this year, is also taking steps to boost fall and holiday sales.

Normally, the retailer hosts two in-store parties in the latter part of the year for its best customers, in which they can shop, eat, see entertainment and earn double points for their purchases. (The points can be redeemed for various prizes.)

But in September, as fears about the economy mounted, Neiman Marcus decided to add an additional fall party.

“In this environment, we need to be even more event-driven to get customers in our stores,” said Peter Farwell, spokesman for Neiman Marcus Group. “We believe the [economic] turmoil in August affected our business, and we realize we have to work harder to generate business.”

Indeed, well-off consumers say they’ve become more choosy about how they spend their money.

Marcelle Abell-Rosen, 35, who lives in TriBeCa, a chic Manhattan neighborhood not far from Wall Street, isn’t planning on curbing her holiday spending but said she and her husband have scaled back plans to furnish and decorate their 2,000-square-foot loft.

“There’s a lot of fear on Wall Street, and that’s causing real estate prices in our neighborhood to go down,” she said.

Uncertainty about the economy is at least a part of the reason Rodi Rosensweig has curbed her sometimes impulsive shopping habits.

“Nowadays, I don’t walk in a store and buy clothes with a leopard pattern or something that’s lime green just because it’s in,” said Rosensweig, who owns her own public relations firm in New York. “I’m more careful about what I buy.”

Said Scotty Dupree, editor of Luxe magazine, which covers businesses selling luxury products: “The general consensus is that people don’t expect Christmas sales to be as strong as last year. But things are not that bad.”