Blog: Leonie BarrieLookout on luxury spending

Leonie Barrie | 28 January 2008

Slowing US retail sales at two luxury goods makers are seen as further evidence that high-end consumers – once thought to be buffered from economic uncertainty – are also starting to tighten their belts as a weak housing market, credit problems and high food and gas prices start to take their toll.

Luxury handbag and accessory maker Coach last week said that second-quarter profit rose 11%, as sales at its factory stores offset weakness at retail locations, but cautioned it is facing a difficult consumer environment. Same-store sales at full-price stores fell 1%, but rose 18% at factory outlets the company said.

The results show consumers are trading down to lower-price items, and New York based Coach now plans to introduce a lower-priced $200 handbag to its line in the future to entice even the budget-conscious.

Meanwhile, PPR SA, the French owner of the Gucci luxury-goods brand, said revenue growth slowed in its fourth quarter as US and European consumers trimmed spending on designer handbags. Sales rose 15% in the quarter, but this fell behind the 22% increase reported in the third quarter.

However, both companies believe they will be able to weather the economic storm, with Coach backing its profit outlook for the year and PPR promising higher results for its full year.

Their results, though, are in line with Unity Marketing's Luxury Consumption Index, which shows luxury consumer confidence at the beginning of 2008 has never been lower, and that spending on luxury goods and services is down more than 20% from the first half of 2007 to the second.

“Affluent consumers, just like everybody else, feel the pain this time around,” says Pam Danziger, president of Unity Marketing, and author of a white paper on predictions for the luxury market in 2008.

Ominously, she also adds that “luxury consumers have never expressed such a dismal view of their financial status, their feelings about the direction of the country as a whole and their plans for future spending.”

The light, if any, at the end of the tunnel, could be the recent moves by the Federal Reserve to lower interest rates. Should inflation occur due to the relaxing of the money supply, consumers may look at certain luxury items, like jewellery, as 'investments,' or hedges against inflation.


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