Luxury Goods Market (and Buyers) Depressed
It may not be obvious, but well-heeled New Yorkers Rita May and Lorraine Machiz are on designer diets.
Every season, May used to spend up to $1,200 to treat herself to a new Giorgio Armani suit, but not this spring. “The economic slowdown is making me more cautious,” she said. “I’m looking for things that have more value.”
As for Machiz, news of layoffs and drastic stock depreciations have put her in such a bad mood that she doesn’t feel like shopping.
“I just went to Bergdorf Goodman, and all I bought was room spray,” she said.
Belt-tightening by the well-to-do, along with the drastic spending cuts by those who have made and lost paper fortunes, is causing problems for luxury retailers who used to have little trouble selling impulse items like hot pink crocodile boots and $20,000 necklaces.
The luxury sector, which accounts for just 2% of the annual $3 trillion in retail sales in the United States, isn’t exactly falling apart, said Carl Steidtmann, chief economist at PricewaterhouseCoopers.
But luxury merchants have joined the economic malaise that already has taken a toll on retailers catering to the middle and upper-middle classes.
Already, Tiffany & Co., burned by a sharp decline in holiday sales, warned this month that fourth-quarter earnings will be below Wall Street estimates. Its competitor Bailey Banks & Biddle, a division of Zale Corp., saw holiday sales unchanged from a year ago.
Meanwhile, December sales at Neiman Marcus Group, which operates Neiman Marcus and Bergdorf Goodman stores, and Saks Fifth Avenue came in below expectations. And at Bloomingdale’s, chairman Michael Gould described its fourth-quarter designer business as “disappointing.”
“The luxury market is shrinking,” said Gerald Celente, director at The Trends Research Institute in Rhinebeck, N.Y. “The wealth will stay with the moneyed class, but the dot-com bourgeoisie will be taken out of the retail mix, along with the class of paper-rich investors.”
Celente estimated that 15% of adults are now able or willing to buy luxury name-brand products, half the number of a year ago.
Stock Market Decline Affecting Retail Sales
Sung Won Sohn, executive vice president and chief economist at Wells Fargo Bank in Cleveland, said the “wealth effect”--the value increase of consumers’ homes and investments--accounted for 20% of overall retail sales gains in 1999. That figure had dropped to 10% by last December, and by the end of 2001, Sohn believes the wealth effect will be zero.
“The stock market is definitely dampening retail sales,” he said. “People’s confidence has been shaken, and they’re cutting back on spending or postponing purchases.”
The overall retail slump hasn’t affected all luxury purveyors, particularly those that have a perceived investment value.
Giorgio Armani SpA, known for its classic tailored suits, reported a 20% sales gain last year to nearly $1 billion, and it is expected to fare well this year. And the latest quarterly report from leather goods maker Coach Inc. beat Wall Street estimates.
Fur sales, boosted by hefty coverage from fashion magazines, seem to be still flying. All types--from $1,295 muskrat coats to $250,000 sable versions--are selling well, according to Diva Lynch, director of membership services for the Fur Information Council.
Top-of-the-line automobiles like Rolls Royces and Bentleys are expected to keep selling well, Celente said. The typical buyer of such cars, which cost up to $360,000, has a net worth of $14 million to $18 million.
“Our customers are better insulated than most,” said John Crawford, a spokesman for Rolls-Royce and Bentley Motor Cars for North America.
While shoppers like Rita May now stress value, they’re not depriving themselves of all impulse purchases. May said she hasn’t cut back on buying designer shoes, and she’s booked a trip to the Galapagos Islands.
And Machiz said she’ll buy something if she needs it, though with some guilt.
“I look at some of my friends who lost so much money in the stock market, and I feel terrible,” she said.
Practicality is a new byword for buying, as tony shoe retailer Stuart Weitzman has found in recent months. Boots and loafers sold much better than its more fanciful footwear.
“You could really see the economic shift in taste,” said Wayne Kulkin, vice president of marketing. He added that spring sales have been a bit slow.
ABC Carpet & Home, which sells $250,000 Oriental rugs and other expensive home furnishings at its four stores, isn’t waiting until things get better. It’s now working to wring better deals out of suppliers after a sluggish holiday season.
“We want to pass along better prices for consumers,” said Evan Cole, chief executive officer. “People are not in the same euphoric mood.”
