A version of this article was originally published by Knowledge at Wharton
For high-end shoppers on Madison and Fifth Avenues in New York, the hottest must-have accessory for 2009 is not the crocodile cuff bracelet, the snakeskin clutch or the python leather purse -- it's the plain paper bag.
"It used to be that you'd buy a pencil just to get the bag" with an up-market label, said Antonia Thompson of Robert Burke Associates, a strategic consultant for luxury vendors such as wedding dress designer Vera Wang, jeweler Fred Leighton and retailer Bergdorf Goodman. But extravagance isn't what it used to be. These days, even the have-a-lots are feeling pangs of recession. Since the economy has soured, consumers of luxury items have scaled back on their spending, and those still shopping are being more discreet.
Sales of luxury goods worldwide could fall by as much as 10 percent this year, global management consulting firm Bain predicted recently. In the U.S., where about a third of all luxury goods are sold, sales are expected to drop by 15 percent.
In a recent study by the New York-based Luxury Institute, 62 percent of wealthy consumers reported that the state of the economy has changed their views on luxury purchases. Some are more budget conscious. Others said that flaunting luxury right now is insensitive, and they would rather help others than spend on themselves.
Finding that even the super-rich are focused on frugality, luxury brands are groping for new ways to stay viable. Some luxury retailers say they have had to cut prices, while others described wooing customers with new, more affordable products. Others shun any type of discounting, arguing that price reductions would permanently sully the brand. Finding it harder to sell glamour, some luxury brands are hyping value and stepping up service.
Price-cutting began last year in some high-end department stores after Saks Fifth Avenue aggressively lowered prices in November, slashing as much as 70 percent off designer fashions that usually don't get marked down until the end of the season. The dramatic move put pressure on rivals to follow suit.
Frank Doroff, senior executive vice president and general merchandise manager at Bloomingdale's, said his store was forced to cut prices. "We had no choice. We had to get rid of the inventory. In October, the whole economy collapsed. All the stores had geared up with big seasons and they were left with all this inventory. ... You don't want to cut prices, but at some point there's a sales drop that you just can't take."
Discounting at luxury department stores made it tough for designers like Bottega Veneta. The Italian leather house, a subsidiary of the Gucci Group, is known for woven leather accessories like shoes, wallets, handbags and luggage. The brand saw its sales drop 8.8 percent in the last quarter of 2008.
Fashion designers are not the only luxury vendors who believe discounting is dangerous. "I am very against cutting prices," said Javier Vivas, general manager of The Box, a burlesque club and dinner theater on New York's Lower East Side, where customers regularly pay more than $1,000 per table for bottle service. The Box is owned by Simon Hammerstein and partially run by celebrities, including Jude Law and Rachel Weisz. "Nobody in the city's nightclub business has dropped prices because, if you do, they will smell weakness. You have to target the (customers) who have money (to) keep the integrity of the product."
Cutting prices could cause long-term problems for a luxury brand, said Andrea Soriani, marketing director for Maserati North America. Automotive News reported in April that sales of Maserati, a division of Turin, Italy-based Fiat, slid about 30 percent in the first quarter of 2009. "If you cut the price, you will never be able to increase the price again," Soriani warned. "You cannot cut the price and add value. ... It's the luxury business. Take it or leave it."
Soriani suggested a better strategy would be to focus on the product's experience and value. "I'm trying to convince my customers that they do need a Maserati. I say, 'It's hand-built. Think about the value of the product.' You are still in the luxury business. You are not downgrading your product. I'm going to hide the guilty factor and go for the inspirational."
Some businesses that cater to the luxury market are modifying their products to make them more affordable. Stephen Starr, the owner of upscale restaurants in Philadelphia, New York, Atlantic City and Ft. Lauderdale, has noticed a change among customers since the economy slowed. Although the flow of diners has not diminished, they are opting for inexpensive wines over cocktails, he said. In response, rather than dropping prices, Starr has added new items to the menu.
In similar fashion, Munich-based luxury automaker BMW has also added a lower-priced item to its menu: a "baby" version of the Rolls-Royce Phantom. Rolls-Royce sales dropped about 5 percent to 174 cars in the first quarter of 2009. The new smaller 200EX Sedan, set to hit the streets in 2010, will come equipped with many of the classic touches of its larger counterpart, but instead of a $400,000 price tag, it will sell for under $300,000.
Aside from trying to bring in new customers, luxury brands are also working harder to please their existing customers with flawless service.
The recovery may happen differently for different types of luxury brands. "I think it's going to come back quickly for the restaurants," said Starr. "Restaurants are a social event. They will come back because people have to be social." But the recovery might be slower for retailers of luxury apparel and accessories.
And the deep discounts at department stores may have permanently changed the public's views about high-end fashion, retailers said. Everyone is questioning how much things should really cost, Doroff noted. "You have intrinsic value and emotional value. A $5,000 Chanel suit could be worth $5,000 because it's Chanel. But is that piece of cloth worth $5,000? ... The discounting has led the customer to (wonder), 'Were those things really worth that much in the first place?"'