Summary
Many luxury brands are reducing prices going forward as the dollar strengthens to the Euro and demand constricts. The combined effect of Strong Euro/High Demand skyrocketed luxury goods prices during the past few years. But retail prices coming out of Italy and France from luxury brands could decline more than 20% in the next 9 to 12 months, while aspirational brands producing out of China/Asia will see little, if any, pricing maneuverability. Aspirational brands look to be facing big challenges even when the climate improves because key luxury brands can more easily adjust pricing and work aggressively to gain traction in the new economy.
Analysis
Over the past few years prices of luxury goods have increased tremendously. Part of this was due to the weakness of the dollar. As the former President of ultra-luxury handbags and accessories design house Lambertson Truex, I saw average retail prices in the handbag market double since fall 2006. In 2003, $800.00 was considered a big price for a handbag. Earlier this fall a similar bag would cost as much as $2400.00.
Much of this inflation was caused by the Euro growing from less than 1.30 in 2006 to almost 1.60 this summer. Brands have to factor in currency conversions 4 to 6 months in front of the cycle so most of the goods we see in stores this fall likely factored a Euro trading at 1.60 or more. Customer demand also caused price increases. The combined effect of Strong Euro/High Demand skyrocketed luxury goods prices. Retail prices increased proportionally to Euro factoring, while gross margins remained solid and buyers continued to shop as demand for exclusive luxury products gained momentum. The more expensive, the better.
That luxury has stopped dead in its track as luxury shoppers have quickly stalled in the difficult economic environment. These shoppers are typically resilient because they have a pretty substantial buffer to weather economic downturns. Current conditions are extremely challenging for most though, and it is clearly affecting luxury shoppers.
This very difficult shopping environment has spawned an extremely aggressive promotional climate in the luxury channel. Regardless of currency conversions, demand has fallen sharply and markdowns are huge. I certainly have never seen such aggressive promotion in the luxury channel. Luxury brands, and especially their retailers, are giving away the farm in order to turn inventory into cash. It would have been next to impossible to get your hands on a Bottega Veneta or Gucci bag last year at this time without paying full retail. Now Saks Fifth Avenue and Neiman Marcus, among others, are providing "friends and family" discounts of 40% or more. This heavy promotional climate won't likely go away soon, and luxury brands will do everything possible to reduce retail prices assertively going forward because the days of endless luxury consumption are over for the foreseeable future.
The strengthening of the dollar provides a great opportunity to reduce retail prices going forward. I believe we will see average retails come down on many luxury goods items this spring and inventories will be dramatically tightened. Aspirational brands like Coach, on the other hand, have a very limited ability to reduce pricing without eroding margins. They have no Euro/Dollar conversion and the brand's massive quantities ensure already deep supplier discounts. It appears to me that aspirational consumers, which typically purchase higher-end products from broad-channel brands, currently have the choice of buying a Coach handbag for roughly $650.00, for instance, or a YSL bag on sale for less than $900.00. In my experience working with aspirational and luxury goods consumers, this is a no-brainer he or she will buy the YSL even if Coach bag is discounted.
Most importantly, one can be sure the luxury brands will continue to be extremely competitive during, and exiting, this economic malaise. Luxury brands producing out of Italy and with strong brand distinction/awareness appear to have much more pricing/margin maneuverability when compared to aspirational brands. And while ultra-luxury prices and showy products appear to be out of style for a while, aspirational brands look to be facing big challenges even when the climate improves because key luxury brands can more easily adjust pricing and work aggressively to gain traction in the new economy.
