What price luxury? Well, it just got a whole load cheaper. At Barney's department store in New York, Valentino dresses are 70 per cent off, Christian Louboutin suede boots are down by 50 per cent and Marc Jacobs tote bags are reduced from $1,250 to $629 (Dh4,591 to Dh2,310). In London, the whole of Liberty (home to practically every designer brand) is on sale: 50 per cent off everything. Retailers across the world are suffering. In the UK, the chain store Woolworths has filed for bankruptcy after more than 100 years of trading, while Marks & Spencer has announced it will close 27 stores and cut 1,200 jobs. In the US, it is a similar story with retailers reporting a 2.2 per cent drop in sales over the seasonal period, making it the least profitable holiday period since the index began in 1969.
According to SpendingPulse, which measures sales activity in the MasterCard payments network, the figure is even worse; overall US retail sales dropped by 8 per cent between November 1 and December 24. Some pundits predicted the Middle East would be immune to the credit crunch, but even in Dubai stores were racing to give us money off, even before the post-Christmas sales. Chloé was offering 60 per cent off, Boutique 1 up to 70 per cent off. It seemed half price was the new black as shoppers were inundated with text messages offering huge discounts. With the month-long Dubai Shopping Festival now underway, such price cuts look set to continue.
In the UAE, the consumer trends analysis firm Nielsen has announced a dip in every retailing sector bar food and essential items. Fashion retailing has been particularly badly hit, despite the huge discounts. According to figures released by Nielsen, 65 per cent of consumers plan to cut down on their clothing purchases this year. Some UAE retailers have said they are reducing their profit margins to just 2 per cent in an effort to stay afloat.
The reason for the lack of punters, bar the seriously dedicated or obscenely wealthy, is obvious. People are running out of money, or at least they're running out of enough disposable income to spend on luxury brands. The statistics back this up. According to a report by MasterCard Advisors, sales of luxury goods in the US fell by almost 25 per cent in November 2008, compared with the same month a year ago. Not surprisingly, the luxury brand companies are suffering. Chanel stunned the world in December by announcing it would lay off 200 of its Paris staff. LVMH, which owns such brands as Louis Vuitton, suffered a 40 per cent fall in its share value in 2008. With no end to the credit crunch in sight, what is the future for the luxury brand? Is there any future at all, or will this recession mean the end of the luxury brand as we know it?
We asked leading luxury brands and other experts in the field to answer questions about their sales in the region and plans for surviving the credit crunch. Some brands, including Gucci and YSL have made a corporate decision "not to discuss the credit crunch". Maybe they think if they don't mention it, it might go away. Perhaps not surprisingly, in light of the recent layoffs in Paris, Chanel did not want to participate either.
But others in the industry are braver. They joined M for a round-table discussion on the future of luxury brands and what role the Middle East consumer will play in that future. We invited a designer, an investment banker, two brand consultants and a leading retailer to tell us what the future holds throughout 2009 and beyond.
Zufi Alexander: Focusing on the core products in your collection and consolidating your base of existing clients. Luckily, we have strong relationships with our clients who we are working closely with so that we all survive this difficult time. It is tough for buyers too right now, as many of them have had their budgets cut heavily. We try to work with them in a creative way so that they can still present an interesting and price-sensitive collection to customers. It is also important not to cut any corners to save costs in production; the quality of your product shouldn't suffer because of the current credit climate, or in the long term the brand's reputation will suffer.
Olivier Auroy: First of all, don't let alarmism get the better of you. Be realistic, yet positive. Here's a great opportunity to streamline your operations and product offerings, rethink your business strategy and realign your resources (both human and financial) based on the new realities of the economy. But don't forget to stick to your brand's true positioning. Sian Westerman: Conserve cash: reduce stock levels, convert cash to stock… but without damaging your brand. Consider who owes you money, how much and for how long? If you are a purchaser of goods - for example, some of the big Middle Eastern stores groups - remember that many brands will be around after the recession: memories of non-payment will remain.
Samara Punjabi: All signs suggest that we should brace ourselves for a tough year. An economy built on debt is like living on borrowed time. We need to seek ways to bring stability to the credit cycle. A lot of luxury brands are discounting their goods heavily. Once consumers get used to prices being slashed, will they ever buy at full price again? Alexander: People who buy luxury goods may be exercising caution at the moment, but in the long term they will pay whatever they have to in order to attain the level of quality they are used to. I don't think this will be an ongoing problem.
Aneesh Sharma: As long as discounted prices are sustained for less than a few weeks, this is not an issue - it is merely an attempt to stimulate sales. What's important is what is being discounted. Is it old stock that has to be pushed off the shelves, or is it the latest collection that just isn't selling because customers have tightened their purse strings? If prices of the latest collection are being slashed just to adjust to the demand shift in the short term, this is alarmist behaviour that is invariably detrimental to the long-term value of the luxury brands.
What's more is that the "hierarchy" of brands will be thrown out of balance. Canali is more premium than Armani is more premium than D&G is more premium than Calvin Klein and so on. This pecking order is predominantly based on pricing strategy, since there isn't much of a difference in terms of features or function. Trust me, customers pay attention to the brand hierarchy. Who can forget the once illustrious Pierre Cardin, now left to parade on high streets as a luxury impostor?
Westerman: Consumers will continue to seek quality. Some brands, including those discounting, had reduced their offerings and consumers will now be even more discerning than before. To a degree, the discounting now is of old and excess stock and, in future, the brands will produce less, but it will be of better quality. It may take some time for these effects to flow through, but in time they will show.
Punjabi: Driving an image of luxury and simultaneously achieving enough scale to be profitable is a balance that owners of luxury brands constantly struggle to maintain. Hence, control is key. Unabashed discounting will run down a luxury brand's image. Once "image" is lost, it will be extremely difficult to recover. On the other hand, completely swearing off markdowns altogether will stall the brand's sales turnover. Ultimately, if a customer believes in a brand and its value and what its brand image is worth, they most definitely will buy in the future. Offering limited discounts at a limited period strikes the perfect balance in achieving sales targets and maintaining a brand's high-end image.
Alexander: Again, I think people are shopping less because they are nervous. They have read so many stories in the media that they almost feel guilty for shopping. I think people in this region still have money to spend, but at the moment they are being cautious. They're waiting to see how the credit crunch will affect them. I think that slowly the people who haven't been affected will regain their confidence and hit the shops again.
Auroy: In the Middle East, we have the unrealistic view that we are insulated from the global economic woes. This couldn't be further from the truth. In particular, service-based economies such as Dubai are being (and will continue to be) adversely impacted by the spreading financial crisis. Addressing the credit crunch, this phenomenon has been hampering real growth in the region for months now - just ask anybody who has tried to buy or sell property since the summer. However, the Middle East is likely to recover from this much quicker than most other parts of the world - we are a region full of pragmatic entrepreneurs. When we get handed lemons, we make lemonade!
Punjabi: Recent market surveys reveal an increasing reluctance to spend. Sales have dropped by just a slight per cent, approximately 10 per cent to 15 per cent. Consumers are increasingly unsure about their expenditures in the face of rising living costs and the economic slowdown in some regions. However, I am optimistic that this is just a phase and it has not hit this region as much as it has in other first world countries.
Alexander: As I am from the Middle East, I know exactly how the people here think and how they shop. I grew up in Dubai so I have the same shopping habits as the consumers here. People who aren't from the region sometimes don't appreciate what a sophisticated market we have here. The consumers are incredibly savvy about quality and international trends. The Middle East is certainly one of the most important markets in the world for my brand.
Auroy: For starters, it is rather difficult to generalise such a diverse set, but let me try. The Middle Eastern consumer, or should we say the GCC consumer, is savvy. They are most discerning and are always looking for the latest, the newest, the most exclusive, the best. They are, without a doubt, status-orientated, no matter what social class they belong to - they buy for the emotional benefits more than the functional benefits. They are very brand savvy and recognise what each brand says about their personality. Furthermore, they are value-conscious - whether that "value" is functional or emotional. At the same time, they are, for the most part, less price-sensitive when it comes to spending on luxury than westerners. Luxury is seen as a necessity to express individuality here.
Punjabi: In my view, mall retailing, particularly in Dubai, is mostly predicated on tourism, which has become volatile in this economic climate. However, the upper crust of the Middle East consumer's spending habits is more consistent.
Alexander: I think the luxury brand will save itself. Luxury goods are never going to disappear. They are intrinsically linked with our global society and our expectations of how we represent wealth and success. Luxury brands may have to redefine themselves in the coming years, but they certainly won't face extinction. Even if some of the household names were to disappear, new luxury brands would take their place in no time at all. Maybe it is a good thing for the market to have a period of consolidation and reassessment. Perhaps some brands have become a little blasé of late and become too mass market. The credit crunch may make some brands go back to their roots and focus on quality rather quantity. Auroy: Only the luxury brand can save the luxury brand. There is a great need for them to look at their product portfolios and reassess trends in demand and act accordingly. It is safe to assume that we will see more flash posing as class - outwardly visible luxury items such as loudly branded accessories - and it is the brand managers' responsibility to manage this. In terms of marketing initiatives of luxury brands, the marketing departments will have to pull out their dusty loyal customer rosters and relearn the art of flattery. Gone are the days when Rosie, the up and coming 23-year-old hedge fund manager on Wall Street, dresses from head to toe in Chanel. She'll be shopping at H&M now: she gets no bonus this year.
Westerman: Unlikely, but luxury is not dead or in need of saving - just a little stressed, perhaps. People will want to continue to buy the best. They may just buy less of it. Punjabi: When looking at who actually buys designer brands today, the United Arab Emirates and Hong Kong come out on top, according to a survey done by Gucci. I believe there is a formidable growing market for luxury here in the Middle East.
Alexander: We haven't put any plans on hold at all. Our brand is already represented in most Middle Eastern countries, and we have big demand where our brand isn't available. We are very well-established here so we really want to continue moving forward and build on the loyal customer base we have developed.
Punjabi: Fortunately for Manolo Blahnik, we are at a stage where expansion is inevitable as we are a luxury brand trying to establish a foothold in the Middle East. In fact, we just opened the very first stand-alone Manolo Blahnik shop in Dubai Mall last month. The market for luxury brands, particularly ladies' shoes, is more or less stable, since women, in general, just can't seem to have enough shoes. During a credit crunch there if often a flight to the trusted classics.
Alexander: I am sure that smaller brands, like ours, are in some way in a better position than the big brands. We don't have the huge overheads or the targets that the bigger brands still need to reach. It is easier for a small brand to cut expenditure in ways that are impossible for huge global companies. So, if anything, I think the bigger brands will suffer more than new brands.
Auroy: Trying financial times can be good for some luxury brands and bad for others. It is true that in the big-ticket categories, such as diamonds, property and cars, people will look to the certainty of DeBeers, Emaar and Mercedes-Benz. However, in categories such as fashion, where capital outlay is relatively smaller, we will see more experimentation with niche brands. So the onus lies on the creative directors to come up with true novelty that will float the boat of consumers.
Westerman: Yes, new brands and older ones. The ones that fail will be those that broke faith with their customer. Those that survive will be those that were financially prudent but more importantly those that looked after their customer, worked to build loyalty and trust… and the ones that are providing what clients want now. This means brands that consider their pricing and quality, and those that continue to innovate and develop rather than just standing still.
Punjabi: Competition is keen in the luxury market. As a result of the credit crunch, some of the market's most recognisable names reacted by innovating their product lines and extending their brands to more affordable items. I believe in innovation but am not a fan of diffusion lines - they somehow boomerang and affect the brand's image in the long-term.
Alexander: I think this may be the result of the credit crunch, although it hasn't happened yet. I hope this is the case as it would be good for everyone working in the luxury business.
Auroy: Well, it is more intricate than that. Think of a brand house like Armani. We believe that the premium segment [in this case, Armani Collezioni] will come off mostly unscathed, as this is primarily recession proof. They have a loyal customer base that buys rain or shine. The business moguls of the world still need suits, and they still buy top of the range. At the same time, the accessible luxury brand [the likes of Armani Exchange] will likely see an increase in sales as the mighty begin to fall but still can't give up the association with luxe. The segment that is expected to be hit hardest will be the mid-range product offering [Emporio types]. Such mid-range brands are neither exclusive enough to appease the loyal luxe lovers, nor priced such that the mass luxury consumers can afford this new economic context.
Punjabi: There are two kinds of luxury brands. There is the "affordable luxury", whose sales trend can at best be described as cyclical and therefore more vulnerable to economic changes. "True luxury", meanwhile, are considered as "classics" or "icons" in the market and are predicted to be more stable and can weather any financial climate.
Alexander: Some luxury brands have lost their magic, but the real classics such as Hermès have managed to retain their allure. Auroy: Luxury is about a standard of living for some and an aspiration for others. No matter which half of the world we fit into, luxury provides a sense of satisfaction to all.
Westerman: Yes! The real luxury item brings a feel-good factor, a "well done", a sense of achievement. Times may be tough, but we will all continue to aspire, and luxury goods and the ability to indulge are one manifestation of that.
Punjabi: Every person is unique and "the customer" cannot be categorised as a whole. However, luxury brands are items of desire - something to covet, aside from the obvious fact that these are items of high quality and design. The category's "irresistibility" to the elite is attributed mainly to their desire to acquire something that not everybody has.
