Luxury retail has been one of the sectors hardest hit by the global recession, as shoppers increasingly defer new purchases, spend less, or simply trade down to discounts on higher-end brands or fast fashion alternatives. However, amid signs the market is starting to stabilise, retailers are warned the post-recession luxury market will be far different from the one that came before.

Yesterday's announcement by Italian fashion house Versace Group that it is cutting 350 jobs as it struggles to cope with the slowdown in spending on luxury items shows the lengths some firms have to go to just to survive in this sector.

But Versace is just the latest luxury fashion house to be hit by the recession.

Christian Lacroix went into administration in May after filing for protection from creditors.

And German women's wear house Escada was forced to file for bankruptcy protection in August when a last-ditch bid to restructure its finances failed to find favour with shareholders.

Indeed, the stark problems faced by the sector are highlighted in a recent report from consultancy Bain & Company, which predicts this year's luxury apparel sales are set to fall by 11% worldwide.

Not surprisingly, items such as leather, shoes and accessories are proving more durable since they offer a slightly cheaper way for consumers to stay loyal to their favourite luxury brands - with sales projected to drop by just 1% in 2009.

Overall, though, Bain forecasts an 8% drop in worldwide sales for the luxury industry this year, to EUR153bn.

Claudia D'Arpizio, a Bain analyst and global luxury goods industry expert says strong demand for luxury goods from shoppers in China and online will help return the sector to growth in 2010.

But she warns that a full recovery is not likely until 2011, when the industry is likely to grow by 4.2%.

Economy starting to stabilise
While small family-owned companies may be among the hardest hit, some of the larger luxury conglomerates are already noting signs the global economy is starting to stabilise.

LVMH Moët Hennessy Louis Vuitton, the world's largest luxury goods company, last week reported static revenues for the first nine months of 2009 - but said the outlook was brightening after group performance got better as the year progressed.

That said, it warned much of the success in its fashion and leather goods unit - where revenues rose 7% - was due to the success of its luxury powerhouse brands like Louis Vuitton.

Likewise French fashion group PPR, which owns the Gucci brand saw its third-quarter sales drop 8% to EUR4.6bn as retailers cut inventories amid the slowdown in consumer spending, but also pointed to the resilience of its network of directly operated luxury stores.

Market's new realities
However, while firms are steeling themselves for an uptick in luxury goods sales, one sector specialist warns they must also face up to the market's new realities.

"The boom times are over when business came easy; luxury marketers today have to be willing to change direction and find new avenues to growth in the luxury drought that has taken over," says Pam Danziger, president of Unity Marketing, a research firm specialising in the luxury consumer market.

She also warns firms need to find a new strategy for success in the vastly different, more competitive and much smaller luxury market that will be the "new normal" over the next two-to-five years.

Speaking at the Luxury Interactive conference in New York City earlier this year, Danziger said: "Thanks to the recession, affluent consumers are taking time out from their profligate, overspending ways to reassess, re-evaluate and reprioritise their lives.

"This will be bad news for luxury marketers, some of whom maintain the illusion that the current recession is only a temporary downturn in an otherwise rising luxury market."

She added that affluent shoppers are starting to ask questions about the luxury brands they once patronised, and those brands often come up short with compelling and meaningful answers as to why they should buy.

"The new normal in the luxury market is going to be all about delivering new values to the luxury shoppers who control the purse strings - and the fortunes - of every luxury brand today," Danziger explains.

Luxury consumption
Further bad news for luxury firms comes in the form of Unity Marketing's latest Luxury Consumption Index (LCI).

While it concurs that affluent consumers spent more in the third quarter of 2009 than they did in the second quarter, it also notes a dramatic difference in attitude between ultra-affluent consumers and those with a less robust income level. 

"Many affluent consumers released pent-up demand in the third quarter," Danziger says, although she goes on to caution that "such strong spending on luxury may not carry over to subsequent quarters."

"The sharp rise in luxury spending was driven primarily by increased spending and participation in the luxury market by those at the highest-income levels ($250,000 and above).

"Affluent consumers at the lowest-income level ($100,000-$149,999) were reluctant to trade up to the luxury level."

The findings are further confirmation that the coming post-recession luxury market will be far different from the one that came before.