Although many market analysts predicted the end of luxury fashion and lifestyle brands in mid- recession 2009 after retail sales of luxury products dropped more than 30% in less than six months, it seems that the majority have proved the experts wrong. Burberry, LVMH and even Tiffany (hit quite hard by the Japanese earthquake and tsunami) posted better than expected earnings for the current quarter. Higher-end retailers including Saks and Nordstrom also experienced growth (albeit minimal at about 2%) and both reported the largest growth segment to be spring 2011 designer collections. It turns out that the extremely wealthy never stopped spending as predicted, and the aspirational customer who used to buy their “look at me, I made it” handbag on credit (forced to cease purchasing when money dried up), has been replaced by the well-educated consumer who still holds an upper-income status and feel enough reprieve from the financial markets to indulge in their favorite four figure splurges again. The demand for luxury branded goods also continues to grow to unprecedented levels in developing countries such as China and Brazil. So, if it is true that the luxury market is the shining beacon of hope for the retail industry, what has insiders buzzing with doubt and trepidation? In one word? Instability.
The dramatic events in the Middle East and the disaster in Japan have brought new challenges to many luxury brands and retailers, especially in the more volatile areas such as Bahrain and Egypt, with the former experiencing more than a 50% decrease in luxury sales in the past six months. Suzy Menkes, fashion writer for The New York Times, brings up a great point in that although many CEO’s are adverse to discussing money and market share while revolutionaries are dying every day in the fight for freedom, the ousting of dictators may actually be very good news for luxury brands. Why? Because history has shown that without a dictator, the likelihood of a middle class developing is quite high, and the middle class after all, is the aspirational shopper that sustains the life of many brands (what we call critical mass). As Sidney Toledano, chief executive of Christian Dior in Paris, puts it “What we like is stability,” “We want to go into countries where there is a middle class and where we see some immediate potential.”
To see Mr. Toledano’s point, look no further than Egypt. In a country with over 83 million inhabitants, there are many luxury brands that have very minimal presence and are now hoping that as democracy takes root, a market economy will also, thereby allowing brands to rush in and fight for market share of the disposable cash floating around (and believe me, there are many Egyptians with cash ready to burn). To provide some perspective on the potential that the opening of a new market holds, consider for a moment that Fendi, one of the world’s most recognizable luxury brands, has not a single branded item for sale in the entire country of Egypt. You can bet Michael Burke, chief executive of Fendi (part of LVMH) is seeing the sunny side of Egypt’s unrest. In fact, Burke estimates that every dictator currently in rule represents a loss of one million customers. Imagine the new streams of revenue just waiting to be accessed! However, at this point all brands have is hope. Only time will tell how much new-founded political stability and market access will help luxury brands’ bottom line.
Following the thread, if instability is the key to poor performance, it seems unlikely that Japan’s recent natural disaster will hold a long term negative impact on luxury sales globally, or even nationally. This is especially true given the fact that the earthquake and tsunami occurred in the northeast region, not known as a hub for high end retail stores but rather for manufacturing plants (click here to read previous post on Japan’s affect on overall retailing). However, what is most likely to determine how quickly luxury retail bounces back is how the devastation will affect the mood of the Japanese people and their taste for luxury goods.
And what an appetite it is. Japan accounts for 23% of world sales for hard and soft luxury goods (50% of Japanese women own a Louis Vuitton bag. On a side note, I am moving to Japan, who is with me?!). However, this number becomes less significant when you consider that 18% of those sales are made to visiting Chinese tourists who are likely to continue similar purchasing habits by simply shifting tours and vacations to alternate cities (expect a spike in luxury sales in Singapore for the second quarter of 2011).
If the Japanese government is able to neutralize the nuclear radiation issue, return food and energy flow to the ravaged areas, and most importantly, restore the confidence of its people and the international community of its ability to maintain economic levels while simultaneously rebuilding; luxury brands should not experience a significant drop in sales. This coupled with the fact that any dip will likely be coupled with a ticked increase from other developing countries with significant wealth creation (Brazil had the largest increase of billionaires in 2010), the luxury market should continue strong and prepare itself to strategically pursue potential new markets.