Luxury Goods Price Cuts
A Wall Street Journal article reported today, “For the first time in recent memory, luxury goods makers are cutting prices on designer apparel, shoes and handbags in the U.S. market.”[1] Just a few weeks ago, I felt so sure that luxury brands would hold prices despite weakness in the global economy. After all, isn’t price the primary indicator of premium brand positioning? But it seems times are a-changing certainly in terms of how European luxury companies operate in the US.
Upscale retailers Neiman Marcus and Saks Fifth Avenue have reported significant drops in same store sales as the big spenders are “starting to scrimp”. Last month, Chanel led with price cuts of 7-10% on most items and others, Dolce & Gabana, Versace and Chloé followed quickly. Its worth noting that European brands stand to make record profits with increased sales even with reduced prices given the recent strengthening of the dollar against the euro. The Chief Executive of Chloé says, “This is an unusual time. You have to be creative at this moment”. The managing director of finance and analysis at Hermés says they will decide in January whether to raise or lower prices in the U.S. and Japan. These statements are in stark contrast to the long held belief that luxury brands don’t ever go down in price.
Kurt Salmon, former CEO of Saks Fifth Avenue described the situation as a “pyrrhic victory” for retailers. One hopes he is right. A 7 percent drop for a $8000 suit or a $1665 pair of shoes is not loose change but is it enough to sway the purchase decision for most affluent people? If the dollar weakens, should the luxury companies worry about gray market that will seep profits from non-US markets? Logically, luxury companies could affect pricing in specific product lines much like the white goods companies, say, based on the customer’s need for exclusivity. Perhaps, that is why Chanel did not reduce prices for all its products. The financial results in coming months will show if these companies can execute the price drop carefully enough to be able to protect the the integrity and exclusivity of their brands.
[1] Rachel Dodes and Christina Passariello, “In Rare Move, Luxury-Goods Makers Trim Their Prices in U.S.”, The Wall Street Journal Nov 14, 2008, B1
Six Sigma Pricing