Friday, April 25, 2008

Luxury Buyers Tighten Purse Strings

Retailers who serve the highest income consumers have always thought that they were immune to a recession. Historically, that has been true, more or less.

“Old-money” consumers traditionally have kept spending, regardless of economic cycles. But this time around, high-end merchants are reporting that their wealthy customers are cutting back.

Among jewelers, Tiffany & Co., the world-renowned jeweler, reported that sales of jewelry above $50,000 were modestly lower in the fourth quarter of 2007 versus the same period a year ago. Historically, this has been the fastest growing price range for the company.

Other jewelers report that their customers are shopping down. That is, they are buying a three-carat diamond when they would normally have purchased a four- or five-carat diamond. Or, those customers are re-working a piece of estate jewelry, rather than simply buying a new piece.

Other luxury merchants have reported sales slippage. Coach, Nordstrom, Saks, Neiman Marcus and others have reported either a sales decline or only a modest increase. Overseas, even brands associated with the super rich are under stress. PPR, which owns Yves Saint Laurent, Stella McCartney, and Balenciaga, as well as Compagnie Financiere Richemont, the Swiss parent of Cartier and Baume & Mercier, report that the pace of growth has slowed.

Most economists and industry watchers don’t expect the current soft retail climate to firm up until after the November presidential election. Most say that regardless of who ends up in the White House in 2009, the prospect of change will likely boost affluent shoppers’ spirits, and thus increase their appetite for luxury goods.

Niemira, the economist, points out that luxury shoppers have a more direct relationship to the stock market than other consumers. The market’s gyrations are worrisome to those consumers. “Worry is not good for the psychology of spending,” he says. In other words, luxury shoppers can still afford to spend $400 on a handbag, but they are feeling less wealthy, so they delay the purchase.

Which Merchants Benefit?

Some merchants will continue to post solid sales gains during this recessionary period. One obvious example includes retailers with international exposure. Tiffany & Company, which derives 41 percent of its sales from international markets, expects overseas stores to post significantly larger sales gains than its U.S. stores in 2008. Further, the company plans to accelerate the opening of new stores in overseas markets.

Despite some weakness at the high end, most retailers of high end goods continue to post sales gains well above mass market merchants who target middle-income consumers. If a merchant is considering moving upscale, this might be a good time to do it, according to business consultants.

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