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For the first time in recent memory, luxury-goods makers are cutting prices on designer apparel, shoes and handbags in the U.S. market.
With even the biggest spenders starting to scrimp, luxury companies from Chanel S.A. to Versace SpA, Christian Louboutin and Chloé are reversing the industry's maxim that luxury prices only move up. The cuts range from 8% to 10% on most products sold in the U.S.
But the move isn't likely to dent the profit margins of most European fashion houses because the value of the dollar has increased 28% against the euro since April. Luxury-goods companies don't disclose margins for their individual brands, but Louis Vuitton, one of the world's most profitable labels, is estimated to have a margin of 45 cents on every dollar.
Louboutin's Carnaval for spring 2009 will sell for $1,665 in U.S.
In addition, brands such as Hermès, Chanel, Vuitton and Versace make most of their products in Europe, paying for their materials and labor in euros. The strengthening of the dollar means luxury-goods companies are earning more than they had budgeted on every handbag or piece of clothing sold in dollars.
Luxury-goods executives must walk a fine line when cutting prices. While $2,000 handbags and $700 stiletto heels are still expensive for most people, if prices drop precipitously, the perception of a label's value may also drop. "Never before have we done this," says Ralph Toledano, chief executive of Chloé, a division of Compagnie Financière Richemont SA, which recently lowered wholesale prices 10% on many items in its cruise and summer collections shipping to U.S. stores now. "This is an unusual time. You have to be creative at this moment."
Luxury-goods companies have been feeling the pinch as sales of high-end trinkets have slowed. Third-quarter sales at LVMH Moët Hennessy Louis Vuitton SA, which includes the Vuitton and Fendi brands, rose 3.1%, decelerating from 5% growth in the first half. Italian jeweler Bulgari SpA on Thursday posted a 44% drop in third-quarter profit and said 2008 revenue growth would be lower than previously expected.
During the recent boom years, luxury companies often assumed that money was no object for their avid fans. French fashion house Louis Vuitton, which will hold prices steady for now, proved that consumers would buy its goods despite price increases. This year alone, the company has raised sticker prices in dollars twice for an average increase of 10% and sales have still continued to rise.
But other luxury makers have acknowledged that a ceiling exists even for exclusive goods. When French luxury-house Hermès raised yen-denominated sticker prices 50% over three years between 2004 and 2007, sales began slipping, and the brand has hardly dared to raise prices since. "We must take the market's capacity to absorb the price hikes into account," says Mireille Maury, Hermès's managing director for finance and administration. Hermès's commercial teams will decide by January whether to raise or lower prices in the U.S. and Japan, she says.
The move to cut prices began with Chanel last month. The French fashion house, known for tweed suits that can cost $8,000, decided to trim its prices by 7% to 10% on most items that are hitting U.S. stores now. "The dollar's recent strength has allowed us to pass on greater value to our customers," says John Galantic, the company's U.S. president.
Chanel's move emboldened retailers to persuade other design firms such as Dolce & Gabbana, Versace and Chloé to lower their prices as well.
Arnold Aronson, managing director of retail strategies at consultancy Kurt Salmon Associates and a former CEO of Saks Fifth Avenue, describes the situation as "a Pyrrhic victory" for retailers because it illustrates how challenging the economic environment has become. Just last week, luxury purveyor Neiman Marcus reported its same-store sales in October dropped 27% to $281 million, while sales at Saks Fifth Avenue fell 16.6% to $219 million.
From The Wall Stree Journal By RACHEL DODES and CHRISTINA PASSARIELLO
With even the biggest spenders starting to scrimp, luxury companies from Chanel S.A. to Versace SpA, Christian Louboutin and Chloé are reversing the industry's maxim that luxury prices only move up. The cuts range from 8% to 10% on most products sold in the U.S.
But the move isn't likely to dent the profit margins of most European fashion houses because the value of the dollar has increased 28% against the euro since April. Luxury-goods companies don't disclose margins for their individual brands, but Louis Vuitton, one of the world's most profitable labels, is estimated to have a margin of 45 cents on every dollar.
Louboutin's Carnaval for spring 2009 will sell for $1,665 in U.S.
In addition, brands such as Hermès, Chanel, Vuitton and Versace make most of their products in Europe, paying for their materials and labor in euros. The strengthening of the dollar means luxury-goods companies are earning more than they had budgeted on every handbag or piece of clothing sold in dollars.
Luxury-goods executives must walk a fine line when cutting prices. While $2,000 handbags and $700 stiletto heels are still expensive for most people, if prices drop precipitously, the perception of a label's value may also drop. "Never before have we done this," says Ralph Toledano, chief executive of Chloé, a division of Compagnie Financière Richemont SA, which recently lowered wholesale prices 10% on many items in its cruise and summer collections shipping to U.S. stores now. "This is an unusual time. You have to be creative at this moment."
Luxury-goods companies have been feeling the pinch as sales of high-end trinkets have slowed. Third-quarter sales at LVMH Moët Hennessy Louis Vuitton SA, which includes the Vuitton and Fendi brands, rose 3.1%, decelerating from 5% growth in the first half. Italian jeweler Bulgari SpA on Thursday posted a 44% drop in third-quarter profit and said 2008 revenue growth would be lower than previously expected.
During the recent boom years, luxury companies often assumed that money was no object for their avid fans. French fashion house Louis Vuitton, which will hold prices steady for now, proved that consumers would buy its goods despite price increases. This year alone, the company has raised sticker prices in dollars twice for an average increase of 10% and sales have still continued to rise.
But other luxury makers have acknowledged that a ceiling exists even for exclusive goods. When French luxury-house Hermès raised yen-denominated sticker prices 50% over three years between 2004 and 2007, sales began slipping, and the brand has hardly dared to raise prices since. "We must take the market's capacity to absorb the price hikes into account," says Mireille Maury, Hermès's managing director for finance and administration. Hermès's commercial teams will decide by January whether to raise or lower prices in the U.S. and Japan, she says.
The move to cut prices began with Chanel last month. The French fashion house, known for tweed suits that can cost $8,000, decided to trim its prices by 7% to 10% on most items that are hitting U.S. stores now. "The dollar's recent strength has allowed us to pass on greater value to our customers," says John Galantic, the company's U.S. president.
Chanel's move emboldened retailers to persuade other design firms such as Dolce & Gabbana, Versace and Chloé to lower their prices as well.
Arnold Aronson, managing director of retail strategies at consultancy Kurt Salmon Associates and a former CEO of Saks Fifth Avenue, describes the situation as "a Pyrrhic victory" for retailers because it illustrates how challenging the economic environment has become. Just last week, luxury purveyor Neiman Marcus reported its same-store sales in October dropped 27% to $281 million, while sales at Saks Fifth Avenue fell 16.6% to $219 million.
From The Wall Stree Journal By RACHEL DODES and CHRISTINA PASSARIELLO
