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Oakley unveiled a new model of sunglasses in November, proudly announcing the Elite C Six as its most expensive pair yet, at US$4,000 each. The company justified the steep price thusly: “More than 24 hours of 5-axis Computer Numeric Controlled (CNC) machining sculpts carbon fiber components that are hand assembled with a Beta Titanium spinal structure.” Got that?
Probably not. But such is the breathless language of luxury goods, a sector that has taken a beating over the past year. Some companies, such as Oakley, believe it’s due for a comeback-but it has a long way to climb. Globally, sales of luxury goods are expected to drop by 8% to approximately US$225 billion this year, according to consulting firm Bain & Co. The market in North America will suffer the most with a 16% decline.
The aversion to conspicuous consumption during a recession should come as no surprise. Not only is saving in vogue, but ostentation is considered distasteful. Nevertheless, luxury-goods companies were trying to maintain a buoyant attitude last year as 2009 approached; Bain & Co. even suggested in an October 2008 report that some ritzy categories (particularly watches) would remain strong.
But it now looks like no segment will emerge unscathed, and watches are among the hardest-hit products. The Federation of the Swiss Watch Industry, which accounts for nearly the entire luxury timekeeping market, reported that exports plummeted 26.4% during the first six months of the year, contributing to a loss of more than US$2 billion.
The damage extends far beyond watches. Sotheby’s auction house had a net loss of more than US$80 million by the end of September, compared with a $35.7-million profit for the same period in 2008. Net profit at luxury carmaker BMW Group tanked by 96.4% during the first nine months of the year. And De Beers, the world’s top diamond producer, saw sales during the first half of the year fall by more than 50%, to US$1.7 billion.
The sector was not immune to layoffs, either. Italian fashion house Gianni Versace was forced to slash 350 positions worldwide this fall-more than one-quarter of its workforce. The private company had little choice, given the impact of the recession on sales. “No organization can allow a situation like this to continue,” said CEO Gian Giacomo Ferraris in announcing the job cuts in October. Upscale retailer Neiman Marcus Group axed 375 people in January, and competitor Saks Inc. took even more drastic measures. The chain eliminated 1,100 jobs, about 9% of its workforce.
Luxury retailers such as Saks were also faced with rising inventory levels, and had to make a tough decision between discounting goods to clear shelves or sticking with exorbitant prices to maintain brand integrity. Many took the former route. But even after discounting, Saks was still grappling with double-digit declines in comparable store sales. The company is now trying a strategy of deliberately keeping inventory low and selling products at full price in order to foster an air of exclusivity, thereby encouraging consumers to spend for fear the desired items will sell out. It’s unclear whether the gambit will pay off.
The larger issue for the makers and retailers of luxury goods-and the more frightening one, from their perspective-is whether a new breed of consumer will take shape when the economy stabilizes, one that is not likely to drop $14,500 on a Zagliani crocodile handbag. A September poll conducted by the Harrison Group and American Express Publishing suggests this nightmare could come true: nearly 70% of respondents with $100,000 or more in discretionary income said the recession had changed their spending priorities. Even more worrying is that only 40% said they will go back to the way they shopped before the recession hit.
That survey was limited to Americans, however. Bain & Co. argues that Asia, where sales have remained relatively strong, may overtake Europe and North America as the world’s largest market for luxury goods. Sales will tick up 1% worldwide next year, but a full recovery in the sector won’t occur until 2011, the firm predicts. By then, the hard times of 2009 could seem like a distant memory, and the allure of $4,000 sunglasses could once again be tough for the wealthy to resist.
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