Downturn Goes Upscale

http://www.washingtonpost.com/wp-dyn/content/article/2008/10/17/AR2008101703113.html

Saturday, October 18, 2008

Downturn Goes Upscale

Luxury Stores, Thought Recession-Proof by Some, Feel the Pinch

By Ylan Q. Mui

Washington Post Staff Writer

The low point came last week at Carol Mitchell's high-end boutique in Tysons Galleria.

For most of this year, sales of her Prada belts, Gucci shoes and Lanvin dresses had tracked last year's performance. Then the Dow industrials suffered their biggest decline in history, and her wealthy client base felt the pain. So did sales.

"The floor fell out of the place," Mitchell said. This week, on mixed news in the markets, some cautious shoppers returned.

Mitchell used to believe the conventional wisdom that luxury stores and their well-heeled shoppers were impervious to economic downturns. But as financial whiplash continues on Wall Street, sales at some of the nation's toniest retailers are plummeting. Many shoppers are cutting back and trading down, turning purchases such as designer stilettos from fashionable to frivolous, according to retail experts.

"Contrary to some popular predictions, high-end retail is not recession-proof," said Darrell Rigby, head of global retail for the consulting firm Bain & Co. "There's not a retailer in the country that isn't taking this downturn seriously."

Luxury sales had boomed in recent years as pricey labels such as Manolo Blahnik and Michael Kors became household names. In 2004, same-store sales -- a key measure of retail health -- grew an average of 9.6 percent a month at luxury chain stores, according to the International Council of Shopping Centers, a trade group. The segment continued to post some of the strongest growth in the industry through last year.

This year, retailers and industry experts say some wealthy consumers are shopping down-market while others are limiting the quantity of their purchases rather than the quality -- say, buying one Louis Vuitton handbag instead of two. Luxury same-store sales have dropped by a monthly average of 3.4 percent. In September, same-store sales plunged 10.9 percent. Budget-friendly wholesale clubs, on the other hand, were up an average of 8.1 percent this year and 7.4 percent last month.

"Before, when you had recessions, you didn't necessarily have this crisis on Wall Street," said Milton Pedraza, chief executive of the Luxury Institute, a market research firm. "A lot of wealthy people depend on financial systems."

Over the past month alone, U.S. stocks have lost $3.4 trillion, or 24 percent of their value. In a report released this week by Unity Marketing, which studies affluent shoppers, 44 percent of "ultra-affluent" households, with incomes of $250,000 or more, say their investments have lost a quarter of their value, while 31 percent said the prices of their homes have dropped 25 percent. They have reduced spending by nearly 18 percent so far this year compared with last year, a higher percentage than the less-well-off "super-affluents" and "comfortable affluents" combined.

"We're talking about changes of seismic proportion in terms of the way that they're spending and the way that they're buying," said Pam Danziger, founder of Unity Marketing.

Wealthy households, with incomes of $70,000 or more -- the highest bracket tracked by the Bureau of Labor Statistics in its spending survey -- make up only 30 percent of consumers. But they account for more than half of the country's consumer expenditures, according to government statistics, making any pullback in their spending painful for all retailers.

Leading the retreat are consumers like Shannon Haley, who has watched in dismay as the nation's economic meltdown seeps into her closet. The 31-year-old District resident used to make a big-ticket purchase every season, like her black pebble leather Prada bag or the python-and-patent-leather Stuart Weitzman heels she got in the spring. This season, all she bought was makeup.

"With all the news that the economy is going down, it's like, do I really need to be spending my money on shoes, or should I be saving?" said Haley, who works at a consulting firm.

The market research firm BigResearch asked shoppers over the summer what they were willing to splurge on and where they were scaling back. Nearly a quarter of affluent consumers, with household income of more than $75,000, reported trading down on food and groceries. About 22 percent said they were willing to pay more for better brands.

"They may want to buy the brands," said Phil Rist, vice president of BigResearch. "They may just not be able to afford it."

At Neiman Marcus, same-store sales have declined every month since February. Bloomingdale's chief executive Michael Gould called the current environment "challenging." Nordstrom cut its quarterly forecast this month after September sales came in under plan.

At Saks, where sales have fallen by double-digit percentages in recent months, executives have acknowledged greater weakness among aspirational consumers. The retailer's buyers have been directed "to make the hard decisions" and drop or reduce brands that are not selling.

And in Saks's iconic holiday catalog, released this week, the extravagant $20,000 gifts are exclusive meetings with top designers, rather than merchandise, said Kimberly Grabel, senior vice president of marketing. Half the price of each gift will be donated to charity, a nod to the tough economic climate, she said.

"The strategy really is an overall sensitivity to what customers are dealing with and what they're comfortable buying," Grabel said.

Even the cream of the luxury retailing crop is beginning to see some softening. Cie Financière Richemont, which owns prestigious brands such as Cartier and Montblanc, said during the company's annual meeting in Geneva last month that sales in the American market were slowing, particularly for entry- and mid-priced items. Luxury conglomerate LVMH said this month that its third-quarter growth slowed as consumers in the United States and China popped fewer bottles of champagne and sipped less cognac.

Carol Mitchell reduced her budget for new inventory by 20 percent during her recent buying trip to Europe. She took photos of every article of clothing and returned to the store to confer with her salespeople before placing the orders with one thought in mind: Do you think we can sell this?

"I don't love that," Mitchell said recently in her store, called Carol Mitchell, motioning toward a rack of items on sale that included a black Dolce & Gabbana suit. "I don't want to have this here, but we keep selling from it."

J.C. Folse of the District took a break from his job at AIG at a happy hour at Clyde's in Reston Town Center on a recent evening. He has traded down from Restoration Hardware to Pottery Barn and cut his trips to Ralph Lauren from every weekend to once a month.

And those $500 Louis Vuitton cufflinks? Three months ago, he would have bought them without batting an eye. Now, he opted for the $250 ones.

"Now you're really seeing your portfolio taking hits," he said. "I'm not doing whatever I want."

According to BigResearch, about 4 percent of wealthy consumers say they have delayed plans for cosmetic surgery. Fifteen percent have put off manicures and pedicures, and more than 34 percent have delayed their haircut or coloring appointments.

Daniel Levy noticed that clients at his Glover Park hair salon, Hair Lounge, were stretching their appointments from four weeks to five weeks as the economy began to sour. So this month, he launched a promotion called Blondes on a Budget that gives loyal customers discounts for their regular visits.

"It's important for people to look good, especially in hard times like today," Levy said. "Let's boost the economy back up."

Jason Binn, chief executive of Niche Media, a collection of luxury magazines, said the economic climate presents a conundrum for high-end retailers.

"You need to keep connected to the established individual with financial security who's not going to slow down his purchases, but you don't want to lose sight of that upwardly mobile aspirational person."

But Rigby said there is at least one question that the financial crisis seems to have solved for high-end retailers.

"It wasn't long ago that everyone was asking, 'How much higher can luxury prices go?' " he said. "I think we found the answer."