Strategy

Luxury goods: Bling sting

Hey, big spender: where'd you go?

Last summer, guests of Toronto’s ultra-chic Hazelton Hotel would lounge on the patio and tell the sommelier to bring them the best bottle of wine. Now they’re asking to see the list. “The flash of six months ago is gone, and it will probably be gone for several years,” says Matthew Opferkuch, the general manager of the property. Meanwhile, American Express reports that high-end clients who once regularly vacationed in the South Pacific are trading down — to shabby old Europe. Evidently, even the super-rich aren’t immune to these troubled times.

Not surprisingly, the wealthy’s less extravagant attitude has hurt the market for luxury goods. Bulgari SpA, an Italian supplier of diamond-encrusted watches and other fashion accessories, reported in March an 89% plunge in quarterly profit. Paris-based LVMH Moët Hennessy-Louis Vuitton SA, one of the world’s largest luxury-goods companies, recently missed analysts’ estimates for its second-half profit by about $80 million. Members of the Paris Chamber of Commerce reportedly think conditions in the luxury sector are so dire they plan to organize a support group for the city’s small suppliers.

Looking ahead, the rest of the year doesn’t look much more promising for the bling industry. After growing at a compounded annual rate of about 7% over the past four years, the roughly $300-billion global luxury-goods market could decline by 10–15% in 2009, according to estimates by Bain & Co., the consulting firm headquartered in Boston. Claudia D’Arpizio, a partner in the company’s Milan office, says that 2009 will probably be “the worst year for luxury-goods consumption in recent memory.”

And yet some spots in the industry might still shine as bright as a Rolex on the beach in Capri. Take Toronto’s The Private Collection. For an annual membership fee, the business lets car enthusiasts borrow exotic rides, such as the Lamborghini Gallardo, whose 520-hp engine can rocket the vehicle from 0 to 100 km/h in 4.2 seconds. Its roster of clients, which comprises mostly middle-aged male CEOs, is growing, albeit slowly. “I’m in the fortunate position to offer someone a Ferrari for $30,000 instead of $300,000,” says Eric Siebert, the founder and president of the company.

Companies that understand the current mindset of the rich could also do well—or at least outperform their competitors. Canada’s well-heeled want personalized luxury products and services that help them bring out their individuality rather than impress others, according to an American Express study released in March. And they want items that are relatively unknown or difficult to get. (One Canadian request to the concierge service for the Centurion card was for tickets to a 2008 taping of Saturday Night Live featuring Sarah Palin.)

Despite the widespread blahs, the fact remains that the industry seems poised for a bright long-term future. Bain anticipates consumers in Russia, China, India and Brazil, which together boast a population of about 2.7 billion people, will increase spending on luxury goods by 20–35% over the next five years. The potential for growth in emerging markets is likely one reason the Chinese government is eyeing the industry. According to a newspaper story in the South China Morning Post, managers of China Investment Corp., the country’s US$200-billion sovereign wealth fund, might buy the stock or new debt of companies including LVMH, Geneva-based Compagnie Financière Richemont SA (which owns brands such as Cartier and Piaget), and Paris-based PPR Group (which markets, among other products, fashion labels like Gucci and Alexander McQueen).

Unless a Japanese-style Lost Decade is in the offing, the global economy will recover within the next few years, and so too will the market for luxury goods. Further in the future, baby boomers will become much less important to the sector than younger demographics. (People spend less once they retire.) Harry Rosen, the upscale men’s clothing retailer based in Toronto, has anticipated this shift and has long targeted younger customers. “The good thing about these people is that even though they’re not in the income bracket you would define as affluent, they’re not afraid to indulge in a cashmere scarf or pair of shoes,” says Larry Rosen, the chairman and CEO of the company. Yet while Rosen remains upbeat about the future, even he isn’t immune to month after month of sales declines. “I sort of keep a brave face at work,” he says, “but then I’ll go home and pound the walls.”