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Retailing in Recession

Sukhendu Pal  15-10-2014

A cautious outlook from global luxury brands and a profit warning from few in recent weeks underscored growing concerns about the fashion retailing for the luxury sector. To make matter worse, Asian and Middle-Eastern demand for expensive bags, clothes and shoes wanes as geopolitical tensions in the Middle-East, Eastern Europe and elsewhere hurt sales. Chinese and European customers are nervous too, which will hurt full year wholesale revenue with currency movements curbing profits.

Global luxury brands are being brought back down to earth with a bump after years of soaring revenues and profits. There are concerns that stalling demand from Chinese shoppers, due to a slowing domestic economy and a tough anti-corruption campaign, will be exacerbated by recent democracy protests in Hong Kong. Falling demand is also being felt in the UK, a key shopping destination for Chinese and other foreign visitors.

Luxury fashion retaining executives tend to counter economic uncertainty by saying that theircustomers are never short of money. That exceptionalism has come unstuck because signaling one’s wealth is no longer a way to get ahead in China, for example. In fact, it is a way to get into trouble, as the government clamps down on conspicuous consumption. Beyond that, a world containing such perils as killer viruses and civil wars looks like a place to conserve rather than splash one’s cash. In Europe and the USA, while the unemployment is currently declining, the fact remains that many consumers are suffering an extended squeeze on their purchasing power resulting from consumer price inflation running well above earnings growth for a prolonged period.

So, what should luxury retailers do as the economy is still uncertain and growth remains fragile?

First, they need to better differentiate their products and the way they sell them or risk being left behind. Too often, luxury retailing companies adopt a one-size-fits-all approach to design, distribution and communication when the people who buy high-end goods are increasingly diverse.

The luxury retailing industry grew 2% to £179 billion in 2013, the slowest pace since 2009. Since 1995, the number of luxury consumers worldwide has more than tripled to 330 million. The top 5% of consumers account for about half of global luxury consumption annually, each spending an average £4,560 a year on goods. More than 50% of sales are to those aged 45 or older, who outspend 21 to 33 year-olds by about four to one. The luxury consumers aged 34 to 50 are the highest spenders, each splashing out an average of £1,820 a year on luxury items. Shoppers from the Middle East and China shell out the most on luxury, spending annually an average of £1,900 and £1,650 respectively, which compares with an average spend of £500 by North American luxury consumers and £650 by their western European counterparts and together they make up more than half the client base. Chinese shoppers are increasingly diverse having a high degree of sophistication and experience. Sophisticated luxury shoppers are like to shop in multi-brand stores and feel comfortable buying big brands and are very price sensitive. Luxury retailers need an urgent change to their consumer strategies to recognise and react to this growing diversity, otherwise they risk falling behind and make themselves takeover targets.

Second, luxury retailers are struggling to find the right formula for the demanding but sophisticated baby-boomer market. The problem is that few luxury retailers have successfully managed to market to the baby-boomer women – ironic, given that many senior roles in the luxury retailers are occupied by women. The luxury retailers’ success lies in the ability to recognise the differences between selling to twenty-something and to women in their 40s and 50s.

Third, when it comes to luxury consumers, it is not just about the product - the shopping experience matters too. There is little advantage of having shopping assistants in their twenties in the shops with their iPads, but little or no knowledge of what matters most to demanding and sophisticated luxury consumers. Luxury retailers need shop assistants in their shops who are knowledgeable, customer-centric and understand the buying habits of sophisticated customers.

Fourth, luxury retailers blaming poor sales on fragile economy tells only half the story. It takes two sides to make a transaction and at the root of their problems is a supply glut they have created themselves. They have built far more stores than they need. Whatever people are spending, it is being spread too thinly across a crowded landscape of stores. Some luxury retailers try to give their stores a digital gloss by talking up their role as research hubs or pick-up points for online purchases. But this does not change the fact that too many are second rate. In the past four years, the amount of luxury retail space in the US and Europe has increased, rising by 0.5% to 0.7% annually.

So, why aren’t luxury retailers closing more shops? One obstacle is leases, which lock them in for five or 10 years. But most retailers ensure leases are staggered, so in any one year 10-20% of them should expire. More important is a belief among luxury retailers that there is no need to close a store with falling sales and a low return on capital if its cash flow is still positive. This is absurd. Inertia perpetuates the supply-demand imbalance that is slowly eroding the economics of their business models. The real barrier here is psychological. Luxury retailers are led by a generation of CEOs and senior executives that climbed the ranks in a go-go era of expansion. Their definition of success is opening more stores. They have not been trained to rationalise assets. Closing stores is heresy. But this mind-set is obsolete. Bricks-and-mortar luxury retail needs to shrink. There is an easy way for that to happen and a hard way. Almost every luxury retailer needs to close some locations down. Voluntary store closures may sound grim to executives, but a forced liquidation would be far worse. The time for excuses is over.

About the author

Sukhendu Pal is the CEO & Managing Partner of Sirius & Company

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