NEW YORK — The luxury engine just keeps purring.
Industry executives and analysts haven’t been this upbeat about the luxury market since the Nineties. Their comments about the remainder of the year are becoming a refrain of bullishness, echoed by everyone from Bernard Arnault of LVMH Moët Hennessy Louis Vuitton to Johann Rupert of Compagnie Financière Richemont SA, Burt Tansky of Neiman Marcus Group to Diego Della Valle of Tod’s.
This is despite a plethora of potential road bumps that in the past would have created more caution among executives — higher fuel prices, inflation, the weaker dollar, the threat of terrorist attacks and Hurricanes Katrina and Rita — not to mention the lowest level of consumer confidence in the U.S. since October 2003 (for more on confidence, see page 16).
Why the optimism? Point to the booming stock market and the phenomenon of “trading up.”
“The effects of the [bull] stock markets on consumers are immediate,” said Michele Norsa, chief executive officer of Valentino Fashion Group. “Tourism has picked up, new markets are opening up and there is a lot of cash around. All markets are growing for the first time in years: Asia is showing a growth rate between 5 and 10 percent, the U.S. growth is 4 percent, Japan is growing and the election victory of [Japan’s prime minister], Junichiro Koizumi, is surely a positive event that promises even more growth. Japan has always grown slowly and consistently, but we’ve seen a 20 percent growth in our stores since Sept. 1.”
Norsa said August, which is usually a slow month, “was much stronger for us this year and we registered a 37 percent growth in our stores around the world.”
Luxury brands plan to open more of their own stores over the next few years, especially in the U.S., the Middle East and Asia. But department and specialty stores are benefiting from the boom as well.
“The luxury market is the place to be,” said Howard Socol, chairman, president and ceo of Barneys New York. “It just continues to see double-digit increases, and it’s been double digits for two-and-a-half years. Gas prices will affect the lower tier, not luxury. What really affects luxury stores is the stock market. If the market is anywhere from flat to increasing, luxury will be strong. Without any dips, there will be a nice Christmas.”
This story first appeared in the September 28, 2005 issue of WWD. Subscribe Today.
Socol said accessories and shoes have been particularly strong, though men’s and women’s are good, too, and there’s a better balance in the Barneys business overall.
“The other thing is that the designers are really showing fashion that’s fashion right,” said Socol, adding that there’s a willingness to spend more. He said shoppers who used to spend $100 on jeans are now willing to pay $200, while handbag customers who spent $500 to $750 are now willing to pay $1,000 to $1,500 for a bag.
Reed Krakoff, Coach’s president and executive creative director, said “people continue to be needing things that are unique and exciting. And the reason that luxury continues to be successful is because there is good product out there right now that is generating that excitement.”
Sidney Toledano, president and ceo of Christian Dior, which saw July and August sales vault 16 percent, said robust sales continued across all categories in early September as consumers went for more expensive items, such as its diamond-studded Christal watches. Most of the gains for the second half will be within Dior’s network of some 184 stores, but Toledano said plans call for more locations in fast-growing America and the first India location, in New Delhi, before the end of the year.
Severin Wunderman, owner of Corum watches, said this has been one of his best years ever, as business in the first half grew 40 percent over last year. “It’s from sales of much more expensive pieces, not in units, but in price, with a lot of gold,” he said, adding the Middle East and Russia were driving sales.
“In the Middle East, the price of oil is high and they are recycling the money by buying luxury,” Wunderman said. “Russians — the world’s nouveau riche — are really spending. They have become the best clients for watches.”
Françoise Montenay, president of Chanel SA, used the term “booming” to describe the company’s business in China and the U.S., where ready-to-wear sales are up 18 percent for the first eight months of the year.
“Our fabrics are very light. We have worked very, very hard on getting lightweight tweeds and they are very successful,” she said. “We are also selling a lot of eveningwear. When the economy is booming, people are going out more and there are more parties.”
Other “booming” categories at Chanel include watches, up 42 percent this year, as well as handbags, perfume and skin care, like its new antiaging “Micro Solutions” range, Montenay said.
There are concerns down the road, however. Higher fuel prices will eventually feed into shipping costs, heating bills and raw material costs, threatening inflation. But this is at least two years away, executives said, and spending is expected to remain strong in the meantime.
Bernard Fornas, Cartier president and ceo, said he was “confident and prudent at the same time” because there is so much “potential volatility.”
“We don’t know about what will happen with the dollar; we don’t know about terrorism; we don’t know about natural disasters,” he said. “Volatility today is the name of the game.
“Most markets are performing,” he continued. “The U.S. is good, Japan is recovering, and Europe is resisting.” Fornas reported brisk sales across all categories, with watch sales a standout. “There is a lot of cash around the world right now, and it’s not only cash from mature countries, but emerging ones, too.”
The global cash glut is helping drive increased tourism worldwide, despite the terrorist attacks this summer in London.
“Arguably, the sector is quite sensitive to currency fluctuations as they have a large impact on travel flows,” said Jacques-Franck Dossin, luxury analyst at Goldman Sachs in London. “We estimate that travel purchase account for close to 40 percent of sales in the luxury goods sector.”
Dossin said he expects the strongest growth will continue to come from Asia, followed by America.
“The good news since December last year has been the recovery in local demand in Japan,” Dossin said. “We expect high single-digit sales growth this year in Japan. After very sluggish trends in the last few years, demand in Europe seems to be picking up at last, be it at a moderate low single-digit pace.”
Antoine Belge, luxury analyst at HSBC in Paris, said “luxury firms are finding pockets of wealth to tap into,” such as Las Vegas and Florida, he added.
But regarding the longer term outlook for the high-end department stores, the picture is murky. In reviewing Neiman Marcus’ second-quarter results earlier this month, Citigroup analyst Deborah Weinswig said the retailer’s exposure to the “high-end customer and high concentration of sales are a risk.”
“The average Neiman Marcus customer generates an average household income of approximately $200,000 to $300,000 and sales are highly concentrated among its top InCircle customers,” Weinswig said. “InCircle customers represent only about 10 percent of the customer base, but generate approximately 50 percent of total company sales. We view this heavy concentration of sales as a risk, particularly if Neiman Marcus’ core customer pares back on spending.”
For the moment, though, that doesn’t appear to lie ahead. David Yurman, ceo and designer of the eponymous named jewelry company, believes the luxury boom just won’t quit. “The luxury market will continue to grow at a strong pace.”
Fred Wilson, chairman and ceo of Saks Fifth Avenue, agreed. “There will be downturns, and there are certainly glitches in any business trend, but over the long haul, we think there will be consistent growth,” he said.