With Good Times Rolling, Labels Have
The Luxury of Planning for Bad Ones
September 29, 2006;PageB1
MILAN -- As the luxury-goods industry enjoys one of
its biggest booms ever, the mood on the catwalk during fashion week
here has been bright and upbeat: glittering mini-dresses at Gucci,
canary yellow jackets from Ferragamo, and toe-tapping pop music at
nearly every show.
Buoyed by a better economic outlook in both the U.S.
and Europe, affluent shoppers have boosted sales at major European
luxury-goods groups, the world's leading players, by an average of 14%
in the first six months of this year, according to Swiss bank Lombard
Odier Darier Hentsch. Sales are expected to reach a record of nearly
$200 billion by year end -- higher than when sales of shoes, watches,
dresses and other luxury items previously peaked five years ago,
according to luxury consultancy Intercorporate.
To meet demand, fashion houses are aggressively
opening shops again after a long hiatus. Louis Vuitton recently
inaugurated a new boutique in Budapest, while Valentino and Ferragamo
signed leases in India. French fashion house Hermès International is
expanding its flagship Paris boutique so it will take up half a block.
"It makes people feel confident if there are more people getting rich and the rich are getting richer," Gucci Group
Chief Executive Robert Polet said in an interview. Sales at the group,
which includes the core Gucci brand, Bottega Veneta, Yves Saint Laurent
and others, increased 20% between January and June.
Behind the scenes, though, fashion houses are planning
for the next, inevitable downturn. Their strategy: Make their business
less dependent on tourism flows -- a traditional driver of sales -- by
developing stronger local clienteles.
Luxury-goods companies were caught off guard when the
1990s go-go years screeched to a halt with the Sept. 11, 2001 attacks.
One of the industry's top sources of revenue in the past decade has
been high-spending tourists in places like Hawaii and Europe, where
many Asian tourists shop. That source suddenly shriveled for more than
two years as people stopped traveling because of terrorism fears, then
the SARS virus and war in Iraq. Added to the weak dollar, which made
European goods more expensive for American consumers, sales plummeted.
On the runway, the looks reflected the pessimism as designers in 2002
and 2003 turned to military silhouettes, cargo pants and somber colors.
Gucci opened stores in wealthy enclaves to combat downturns. |
Luxury goods executives, such as LVMH Moët Hennessy
Louis Vuitton Chief Executive Bernard Arnault, insist that they are
seeing no early symptoms of a downturn. Yet U.S. luxury goods consumers
polled by consulting firm Unity Marketing in the second quarter said
they were much less confident about spending because of worries about
their personal finances. Analysts say a cooling of housing prices, and
terrorism scares like this summer's arrests in an alleged London plot
to blow up airliners over the Atlantic are possible risks. And some
executives admit that the current growth spurt isn't sustainable long
term.
"We've got to be realistic, at the rate we're growing,
it's hard to imagine it continuing forever," says Alan Grieve, a
spokesman for luxury-goods company Cie. Financière Richemont SA.
Richemont clocked an 18% increase in sales in the period between April
and August, but Mr. Grieve says the firm is targeting high-single-digit
sales over the next several years.
Richemont, whose jewelry and watch brands include
Cartier and Vacheron Constantin, was one of the hardest hit by the last
industry slump. It is now preparing for worse times by putting more
accessibly priced products on shelves. Cartier, for example, expanded
its best-selling Love collection, which dates from the 1970s, into a
30-piece line of bracelets and necklaces.
Necklaces with a small gold hoop on a satin cord sell
for around $495, compared with $6,700 for a ring from its new, more
artistic, orchid-themed collection. The Love line has been a huge
success in attracting new customers to the brand -- especially young
professionals in the U.S. The line's ad campaign -- set against a New
York-like skyline -- resonated with local consumers.
But a top focus of fashion brands is to burrow deeper
into each of their markets by extending to smaller, yet wealthy
enclaves. Gucci recently opened stores in Naples, Fla. and East
Hampton, N.Y. Its second Southern California boutique, in Costa Mesa,
is aimed at a less-highbrow clientele than its Rodeo Drive store in
Beverly Hills, which sells more fashion items rather than logo bags,
says Gucci Group's Mr. Polet.
The luxury-goods industry "is more resilient not by
chance, but because companies have reacted to reinforce their key
brands," says Armando Branchini, managing director of Milan-based
luxury consultancy Intercorporate. "They have rethought the product
range and the target consumer."
French fashion house Louis Vuitton, a unit of LVMH, is
soon planning to open stores in secondary Chinese cities such as
Shenyang and Wenzhou. "Ten years ago when we opened our first store in
Beijing, there were very few clients," says Mr. Arnault. "Today, it's
very different." Analysts from Lombard Odier Darier Hentsch estimate
that the Vuitton brand generates the highest portion of its sales from
China of any major luxury fashion label, at 7%.
The French fashion brand known for its brown and gold
LV logo has also multiplied its presence in the U.S., recently opening
a boutique in Nashville, Tenn. Vuitton has tried to whet consumers'
appetites in the U.S. by bombarding them with flashy new products, such
as 2003's colorful Murakami logo bag or its recent denim styles
incorporating the brand's monogram.
The idea is to make the changes alluring enough that
women will buy a new handbag every year, even when times get tough.
Analysts say luxury-goods companies are, in part, succeeding.
If American women buy many more handbags every year
now than ever before, says HSBC Holdings PLC luxury analyst Antoine
Belge, "it's not just because the value of their houses has gone up,
but it's a cultural trend."
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