Luxury feels the pinch

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Luxury goods brands have so far managed to stave off the effects of the global economic turmoil - but there are signs that they are starting to suffer alongside more down-to-earth names.

Cracks are appearing in the high-end spending boom as the effects of the credit crunch spread through the world economy.

And the likes of Christian Dior, Burberry and Perry Ellis have seen their stock prices plummet. Shares in Christian Dior Group, which partly owns luxury brand giant LVMH plus the Christian Dior Couture business, have fallen 43 per cent since May on the Paris Stock Exchange. British luxury fashion house Burberry, which is listed on the London Stock Exchange, has seen its share price drop 51 per cent in the past six months.

And US-based Perry Ellis International's shares on Nasdaq have plunged 74.5 per cent over the same period.

German carmaker BMW's stock has also fallen in value by more than a third in the six months to November.

The mature markets of Europe and the US account for nearly 80 per cent of worldwide luxury sales, and experts say global high-end brands are being hit by the economic turmoil as so-called soft spending in these regions takes its toll.

Philippe Dauba-Pantanacce, a senior economist at Standard Chartered in Dubai, said luxury brands were much more likely to suffer from the irrational behaviour that occurred frequently in the stock markets.

However he said the direction of share prices was not necessarily an indication of how a business was performing. Brands such as Tiffany, Burberry, Hermes International and the Gucci Group have managed to grow sales despite a sharp slowdown in US consumer spending.

"On average they will be suffering from the downturn in the mature markets, but they can hope to find some resilience in markets such as the GCC," he said.

Luxury brands looking for ways to diversify their positions and sources of revenues are increasingly turning to emerging markets such as Asia and the Middle East.

Mac McClelland, CEO of the invitation-only Luxury Marketing Council in Dubai, said members were bracing themselves for an anticipated decrease in business, but companies were seeking other markets.

"The short-term will hurt, but the long-term will help stabilise and increase the markets for these companies," he said. "The distribution of these luxury companies is not even, so they're going to continue their expansion programmes to open up new markets."

A study of the worldwide luxury goods market released last week said the projected surge in luxury spending over the next five years in new markets such as China, India and the Middle East was fuelling optimism for the long-term outlook of the sector. This was despite the fact that a substantial slowdown was expected by the end of the year and a recession in the industry was likely next year.

New York-based consultancy Bain & Company said the results of its research suggested the growth of global luxury goods sales would slow sharply from nine per cent in 2006 to three per cent this year. Total sales in 2008 were expected to reach $175 billion (Dh642bn).

"Turning to 2009, luxury faces its first recession in six years as exchange rate fluctuations and economic turbulence eat into the confidence of many luxury consumers in mature markets," said the company.

The study's lead author, Milan-based Bain partner Claudia D'Arpizio, said companies with strong international and diversified brands would be most resilient to the impact of the financial crisis. And Dauba-Pantanacce said the Gulf was a new source of revenue for global luxury brands, adding: "This is where they're trying to tap into revenues that are here and that will not be [found right now] in the rest of the world.

"The Dubai MallDubai Mall has now opened and there is a whole chunk of the mall that's just about luxury brands." EmaarEmaar's giant mall threw open its doors on November 4. Nearly a third of The Dubai MallDubai Mall's floor space will be taken over by stores new to the region, including the UK's upmarket Waitrose supermarket and New York department store Bloomingdale's first foray outside the United States.

Other luxury outlets that will be on offer include Paris's Galeries Lafayette and a fashion avenue will host the region's largest collection of haute couture, including Versace, D&G and Ralph Lauren.

McClelland said openings like The Dubai MallDubai Mall illustrated the UAE's strength in the luxury market at a time of tightening global consumer spending. Dauba-Pantanacce added that despite a forecast slowdown in growth due to the global economic downturn the region would outperform the rest of the world. And though it was a small market its impact was expected to be significant.

"The GCC will not completely offset the global outlook [of these brands] but it will help them to offset some of the economic hit they will take."

Polo Ralph Lauren and Tiffany & Co are other luxury retailers that have witnessed falling share prices over the past few months. And while Tiffany's second-quarter profit doubled due to sales in Asia and Europe, it has reportedly warned of softness in the US in sales of items priced above $50,000.

Despite the major drops in recent months, share prices for companies offering luxury goods regained some composure towards the end

of October. Experts said the jump could be attributed to a variety of factors, including the US Federal Reserve's interest rate cut on October 29 and the herd behaviour seen in the marketplace where if one brand picked up others quickly followed.

"Because of these cycles luxury brands tend to take big hits," said Dauba-Pantanacce. "But if there are good times coming in the market they should rise again quicker than anybody else because the movements are disconnected from the fundamentals."

Developed markets
Soft spending in mature markets is already taking its toll in a number of regions.

Japan: The country's luxury goods market, which accounts for 12 per cent of the world total, is already in recession, with sales falling by two per cent in 2007 and by seven per cent this year.

Europe: Still the first market of luxury, the continent represents 38 per cent of global sales and turned in record growth of $6 billion (Dh22bn) growth, up 10 per cent, last year. However the region can expect growth to slow by half in 2008.

Americas: Growth in luxury sales will be flat year-on-year following four per cent growth in 2007. It will be the first year of stagnation since spending retreated after 9/11.

By Safura Rahimi

© Emirates Business 24/7 2008