While there's no arguing that it has been a very bad year for luxury marketers, there's plenty of evidence that the luxe life is looking brighter. Although high-end retailers are still posting double-digit declines in monthly sales, LVMH, for example, says its global sales slipped just 0.6% in the third quarter, and the company reports that it's seeing new signs of stability.
Consultant Bain & Co., which had previously forecast a 10% drop in the sale of luxury goods this year, now says it expects those sales to be down just 8%, thanks to gangbuster gains in China. And a new study from Unity Marketing reports that in the third quarter, affluent shoppers in the U.S. spent 24.9% more on luxury goods and services than they did in the same quarter a year ago.
But some experts, including Patricia Pao, CEO and founder of the Pao Principle, a strategic consultancy in New York, believes the recession permanently changed what these affluent consumers are looking for. Marketing Daily checked in with her for an update.
Q: What's the biggest recession-related change among affluent shoppers?
A: They're hooked on discounts. When Lehman fell last year, they snapped their purses shut. Sure, people spent money on food -- but even if you were wealthy, it was seen as crass to buy things. There were times when I was shopping in luxury stores and heard people ask for their purchases in plain bags; they didn't want others to know where they were shopping.
That pullback meant those stores were drowning in inventory, so the only solution was massive markdowns. Department stores had always trained us to buy on sale, but now they were training us to buy on sale at very deep discounts, like 60 and 70%. People expect that now.
Q: You mean they look for sales?
A: No. I mean they actually ask salespeople for discounts even if things aren't on sale. I was at a high-end store the other day and asked them to take 40% off a dress; similar dresses by the same designer were already on sale. The salesclerk made a phone call, and then said, "Absolutely." And while high-end stores and designers have always offered courtesy discounts to their best clientele, this is different; this is a discount for people like you and me. People are routinely asking for, and getting, 20% discounts.
Q: Can brands protect themselves?
A: Louis Vuitton is handling this differently. Instead of offering a discount, they are offering special gifts to preferred customers. Last March, they sent preferred customers customized Louis Vuitton snow globes and candles.
Q: How else is markdown madness affecting retailers?
A: As the situation got worse, you had stores turning away shipments. Those high-quality goods wound up dumped on "deal" Web sites, like Gilt Groupe and Ideeli. This is current merchandise, now competing with the exact same current merchandise sold in stores.
Let's say you're looking for leather pants for Gucci, which have a very intense cult following. And you find out you can get them for hundreds of dollars less online than if you shopped in a department store -- the same exact pants. Who wouldn't love that? It's almost like feeding shoppers heroin, and I do worry how stores will survive.
Q: So these very affluent shoppers are that bargain-crazed?
A: Yes. I call it the art of the deal; it's a new passion. It will never be cool again to own a handbag worth tens of thousands of dollars, unless you can say to your friends, "and I got it for half off!" Rich people want to have an entirely different conversation about their things now.
Q: How will this shape companies going forward?
A: In this new economy, luxury goods will go back to where they were in the 1960s and 1970s, where they appealed to the very top end of the population. Luxury-goods companies are going to have to adjust to that idea that they're precious, and very special [and] not for the masses.
Q: Will that be hard?
A: For many of them, yes -- because with the democratization of luxury, they got used to plopping their name on anything, and it sold.
Q: Who will do well?
A: Companies that are doing well now, like Hermes and Vuitton. They've done a good job of educating people about value. People are willing to pay $8,000 for a Birkin bag because they believe in its worth, and Hermes has spent a lot of time educating them.