ROME — It may not be “la dolce vita,” but it’s looking better.
During a conference here Friday, executives from Italian luxury goods companies said they saw a strong pickup in June sales after a brutal first quarter, while high-end American retailers outlined sales strategies for a challenging economy.
This story first appeared in the July 14, 2003 issue of WWD. Subscribe Today.
Chief executives from Gucci Group, Bulgari, Ermenigildo Zegna, Ferragamo and Brioni attending the Altagamma luxury- goods conference said external factors such as SARS and the war in Iraq, which critically cut into March and April numbers, have started to subside.
“The luxury market is resilient and it seems in June that business was returning to normal,” Bulgari chief executive Francesco Trapani said, adding that Bulgari’s new jewelry collection, Allegra, was performing particularly well.
Gucci’s chief executive Domenico De Sole echoed the sentiment. “There’s been a great improvement in May, June and early July,” said De Sole, who admitted that stores in cities highly dependent on tourism were still going through a rough period. De Sole was particularly pleased with business in Japan, which he said was “moving forward.”
De Sole’s comments came only slightly more than a week after Gucci reported a drop in net profits of 96.6 percent to only $1.4 million on a 6.7 percent decline in sales to $655.9 million in the first quarter ending April 30. He said the dismal business conditions in the first quarter resulted from “the perfect storm.”
Held at a restored Roman temple, the conference sought to not only analyze past market data but to offer guidance for the short- and long-term future of the luxury industry. Altagamma, Italy’s luxury goods association, organized roundtable discussions between U.S. retailers and Italian manufacturers, as well as honored luxury goods players for the first time in its 11-year history.
While no one denied the difficulty of the past 18 months, retailers and Italian executives attending the conference were guardedly optimistic for 2004.
“Luxury is not dead, it’s actually very much alive,” said Burt Tansky, president and chief executive officer of Neiman Marcus Group. “There is no evidence that customers are trading down — once you are accustomed to quality, you demand more of it.”
While Tansky acknowledged that spending was down, he said there was “no need to panic.”
It may not be a time to panic, but everyone agreed that the approach to attracting luxury consumers has changed over the past three years and that the true buying impetus must be emotional.
“[Luxury consumers] have the money, but they are holding back,” said Brioni chief Umberto Angeloni. “It’s a psychological phenomenon: We are selling the concept of pleasure, how long can people cut back on their own desires?”
The true challenge, panelists agreed, was bringing customers out of their communal depression.
“We can’t deal with what’s outside, but we can make our stores an outlet for joy,” said Ron Frasch, chief executive officer of Bergdorf Goodman.
Frasch, like others, said providing complete customer satisfaction while at the same time better understanding the consumer were top priorities. For Italians selling to the U.S., quality and innovation remain the undisputed building blocks, but retailers also urged them to increase the number of flash collections, decrease delivery time and personally visit the stores to better understand U.S. clients.
“Italians are the best in product innovation but they have to improve their ability to bring it to the market faster and deliver the merchandise more frequently,” said Christina Johnson, chief executive of Saks Fifth Avenue, who mentioned that 80 percent of Saks’ clients are women and the top tier of those clients visit the store on average twice a month. “If Italians were able to do that, our business would dramatically increase and so would theirs,” said Johnson.
Increases, however, will probably never be as robust as they were in the boom years of 1999 and 2000, according to research by Bain & Co. “There has to be acceptance of this shift from hectic growth to organic growth,” said Giovanni Cagnoli, chief executive of Bain & Co. Italy, forecasting that long-term profitability for luxury companies should average between 10 percent and 20 percent versus the 30-plus percent of years past.
“We overplayed both the positive figures from those years and the recent negative figures. Compared to other industries, such as autos, luxury goods is in good shape,” said Cagnoli.
Cagnoli also noted that the transformations of the market should not be underestimated and pointed to a series of core changes that have shifted focus from expansion to consolidation, from global dominance to local attention.
He challenged general market assumptions such as: customers gravitate towards larger, strong brands; product diversification is a surefire route to increased sales, and that store openings continue to be the right strategy.
“Less walls, more knowledge,” Cagnoli said. “It’s now more important to know your customers better.”
Kristine Miller, director of Bain & Co. San Francisco, agreed that there was an abundance of square footage that the market could not absorb. She said sales per square foot dropped to $400 in 2001 from $734 in 1971.
If companies can’t rely on store expansion to fuel growth, then they must rely on building customer loyalty and targeting the local clientele. Despite increasing pressures from a weak dollar, retailers were convinced that consumers were willing to pay top price if the product was there.
“We have to work harder to create demand and to produce products that consumers want,” Tansky said. “The affluent customer is set to make a substantial move forward.”