Correction Appended: Sept. 17, 2009
As fashion editors, department store buyers and couture afficionadoes congregate along the catwalks for New York's Fashion Week shows, luxury retailers and designers may be looking upon beauty but their thoughts are likely on the ugly economy.
The crippling economic downturn with its mounting job losses and frozen credit markets has extended far beyond mainstream America, hitting high-end consumers in their Gucci pocketbooks. "This is one of the worst financial crises of our time, and [luxury] has been one of the hardest hit markets for retailers," said Monica Aggarwal, a director in Fitch Ratings Retail Group.
As analysts scan the landscape they see a virtual Who's Who of battered luxury chains. "Saks and Neiman's sales are horrendous. Tiffany was down 27% in U.S. same-store sales last quarter, Bulgari was down 21%, Harry Winston sales were down 49%, and [LVMH Moet Hennessy] Louis Vuitton down 23%," says Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking services firm. "If you look at Madison Avenue, it's a ghost town in terms of store closings. It's an absolute disaster."
Although many retailers say the worst is over, industry experts believe many high-end retailers remain in "survival mode" and that more could fail before the sector rebounds.
What's clear is that the future is uncharted. In past economic downturns the luxury end of the market was largely unscathed as high-income shoppers tended to be less affected by the ebbs and flows of the economy and more impacted by stock market fluctuations.
But the luxury market expanded in recent years to include new demographics, as surging home prices and easy access to cheap credit transformed ordinary people into the nouveau riche with an appetite for chic goods. Many used their homes as instant banking machines, tapping home equity loans to snap up clothes, handbags and shoes from the world's most prestigious labels. TV shows, such as Sex and the City, Project Runway and The Rachel Zoe Project added to the hype.
Luxury sector sales almost doubled to $80.4 billion in 2008 from $44.1 billion in 2003, said Neil Hendry, global director of consulting for consumer and financial services at Datamonitor Group, a research and analytical company.
But all of that changed when the stock market collapsed, housing prices plummeted, and credit markets seized up. Not surprisingly, many recent converts to luxury shopping quickly reversed course and went downscale. But what caught retailers off guard was that long-time luxury shoppers grew more frugal, too. The widely publicized bailout of Bear Stearns, the takeout of cash-strapped Merrill Lynch, the government rescue of American International Group, the collapse of Lehman Brothers and the meltdown in the credit markets all served to rattle the upscale crowd, as many work in the financial industry. Fashionable free-spenders morphed into penny savers.
In response, upscale department stores such as Saks Inc., closely-held Neiman Marcus and Nordstrom Inc., started slashing prices to unload a glut of inventory. Saks fired the first volley, slapping 70%-off signs on luxury designer clothing in early November 2008. Neiman and Barneys frantically followed suit.
The fire-sale prices blindsided smaller boutiques and designer-owned stores, and broke an unspoken cardinal rule with fashion houses not to deep discount luxury names.
"It was a wake-up call," said Steven Kolb, executive director of the Council of Fashion Designers of America.
All of this took a toll on sales and earnings at upscale department stores and chi-chi fashion houses around the world. Luxury department store sales are down 25% to 30% on average from their peak in early 2008, estimates Aggarwal.
Luxury designer retailers and fashion houses have taken most of the worst blows, with some, such as Bill Blass, Fortunoff, Christian Lacroix and IT Holding SpA (which owns the Gianfranco Ferre label) either filing for bankruptcy protection or liquidating their assets. Several more, such as Prada, Bulgari, Mariella Burani and Valentino Fashion Group, are treading water under a tidal wave of debt.
Prada and Ferragamo, spooked by the upheaval, postponed their planned IPOs until 2010.
Aggrawal doesn't expect luxury retail sales to rebound until late 2010 or 2011 at the earliest.
So what's the next move for ritzy retailers? Department stores cut new merchandise orders for the upcoming holiday season by at least 20% to bring supply in line with demand, and began pressuring fashion houses to offer lower-priced goods. "They needed to get traffic into their stores," says Milton Pedraza, chief executive of the Luxury Institute LLC.
Luxury brands responded by reining in spending, closing unprofitable stores, and offering secondary lines with lower price tags.
Ralph Lauren, Donna Karan, Calvin Klein, Dolce & Gabbana and Armani have been offering secondary lines for years to cater to mid-priced spenders, and many more designers followed suit in recent years, such as Roberto Cavalli's Just Cavalli, John Galliano's Galliano, and Alexander McQueen's McQ lines.
Some have signed deals with even cheaper retailers, such as Jimmy Choo designer Tamara Mellon's deal with H&M, Anna Sui's clothing line for Target, and Vera Wang's partnership with Kohl's. This week, Narciso Rodriguez announced plans to sell a line of his clothing exclusively on e-bay.
"They had to get more creative," said Steven Kolb, executive director of the Council of Fashion Designers of America.
Some are more discrete, hosting sample sales in dark industrial buildings in Manhattan and using invitation-only third-party websites, such as brandalley.com, gilt.com, and billiondollarbabes.com, to sell excess inventory at heavily discounted prices.
However, some observers worry that all the discounting and secondary lines could tarnish a brand's upscale image in the long-term. "You want to avoid the Pierre Cardin catastrophe," says Sanford C. Bernstein & Co. analyst Luca Solca, who was referring to the way Cardin's apparel wound up in bargain basement bins at discount retail stores because there were few checks and balances to control quality, distribution and pricing.
The distressed environment could pave the way for consolidation.
A survey, released this month by the Luxury Institute, found more than half of wealthy consumers with annual incomes exceeding $150,000 believe there are too many luxury brands, and 44% think many luxury brands have become commodities.
Pedraza expects "15% to 20% of brands in luxury categories, particularly the marginal brands, will go under."An earlier version of this story incorrectly identified net-a-porter.com as an invitation-only discount retailer; it is a full-price fashion retailer that requires neither invitation nor membership.