Thursday, April 10, 2008

Tighter economic conditions mean luxury can become luxury again.

At a time when many people are bemoaning the death of affordable luxury, one has to wonder whether there isn’t a group of people who are secretly happy about it. And no, I don’t mean anti-consumerist killjoys and blue-nose I-told-you-sos. I mean the CEOs and major shareholders of the world’s biggest luxury companies. The reason? That the credit crunch will stop the dilution of their brands and allow them to focus again on selling only to the truly rich.

These companies have spent much of the past decade assiduously expanding their brands and retail outlets across the U.S., Europe and new markets in China, Russia, India and other rapidly developing regions. And don't get me wrong, they like making money, lots and lots of money, from these markets but they are also continually mindful of the fact that their products could become over-exposed.

Look at what happened to Burberry a few years ago; every teenager and spiv on the planet was wearing their trademark plaid, usually in the form of a low-cost baseball hat or scarf, and, more to the point, not the more high-priced designerwear. That became a turn-off for the big spenders who Burberry really wants to attract. Why shell out thousands of dollars for a dress or suit, the Platinum card users thought, when everyone else is wearing something with the same plaid on it. (Visit the Burberry site today and you won't see a whole lot of plaid, fyi.)

Over the past month or so many luxury brands have been predicting flat if not reduced growth for 2008 as the world seems to slide inexorably into a recession. Many companies, such as Gucci, Polo Ralph Lauren, Hermès, Prada and LVMH announced record earnings for 2007, largely on the back of shoppers armed with foreign currencies, temporarily flush homeowners or secretaries maxing out their third credit card. Walking down the streets of Manhattan these days it seems as though practically every woman is carrying a Prada or Louis Vuitton bag (the real thing, not a knock-off). If I were an executive at either one of those companies, I would see that as a bad thing.

The problem is that luxury companies have to walk a fine line between record sales and ubiquity. Those profits often come at the risk of alienating their top customers. These are people who can afford anything and don't want to look like the hoi polloi. If everyone starts carrying a Vuitton bag, their reasoning goes, time to start carrying something else.

Now, as we reported today, LVMH reported profits of $2.96 billion in 2007, up 8%, on sales of $24.1 billion, also up 8%. PPR also already announced a 16% rise in annual sales, helped by an 8.4% gain at Gucci, in advance of its earnings report scheduled for Feb. 27.

The concern, for the short-term at least, is that most analysts estimate that 2008, even with shoppers in developing nations spending like sailors on leave, is unlikely to be as good as last year. And while many industry watchers believe the recession will be short and that the markets in China and India will only continue to grow, the next eleven months will see fewer and fewer consumers buying luxury goods they could never really afford in the first place.

While that will have an undoubted impact on their bottom line, they upside is that this pause in the recent spending frenzy may give many luxury houses a chance to re-establish their connections with their top tier customers. With the shops less crowded and the exclusivity of their brands more secure, companies like LVMH, Tiffany and Prada will be in a better position when the credit markets loosen up again, economic fears subside and the aspirational consumers return to their stores.