Luxury Sellers Feel Bullish

July 15, 2003

Luxury Sellers Feel Bullish

Executives and retailers serving the luxury market in Italy and the U.S, met at a conference in Rome last week and announced business was improving for luxury purveyors, reported Women's Wear Daily July 14. Executives from companies such as Gucci and Bulgari said they saw a strong pick-up in second-quarter sales.

"The luxury market is resilient and it seems in June that business was returning to normal," Bulgari CEO Francesco Trapani said, adding that Bulgari's new jewelry collection, Allegra, was performing particularly well. Gucci's CEO Domenico De Sole said the one exception was stores in high-tourism cities, which are still hurting. De Sole said business in Japan was perking up, however. De Sole's comments came slightly more than a week after Gucci reported a drop in net profits of 96.6% to $1.4 million on a 6.7% decline in sales to $655.9 million in the first quarter ending April 30.

The conference analyzed past market data and offer guidance for the short- and long-term future of the luxury market. Retailers and Italian executives were guardedly optimistic for 2004. Everyone agreed the approach to attracting luxury consumers has changed and the buying impetus must be emotional. "[Luxury consumers] have the money, but they are holding back," said Brioni chief Umberto Angeloni. "It's a psychological phenomenon: We are selling the concept of pleasure, how long can people cut back on their own desires?" The true challenge, panelists agreed, was bringing customers out of their communal depression. "We can't deal with what's outside, but we can make our stores an outlet for joy," said Ron Frasch, CEO of Bergdorf Goodman. Frasch, like others, said providing complete customer satisfaction while better understanding the consumer were top priorities.

Increases will probably never be as robust as they were in the boom years of 1999 and 2000, according to research by Bain & Co. "There has to be acceptance of this shift from hectic growth to organic growth," said Giovanni Cagnoli, CEO of Bain & Co. Italy, forecasting that long-term profitability for luxury companies should average 10-20% versus the 30% and more of years past. "We overplayed both the positive figures from those years and the recent negative figures. Compared to other industries, such as autos, luxury goods is in good shape," said Cagnoli.

Cagnoli said the transformations of the market should not be underestimated and pointed to a series of core changes that shifted focus from expansion to consolidation, from global dominance to local attention. He challenged general market assumptions such as customers gravitate towards larger strong brands; product diversification is a sure-fire route to increased sales and that store openings continue to be the right strategy. "It's now more important to know your customers better," Cagnoli said.

Kristine Miller, director of Bain & Co. San Francisco, agreed there was an abundance of square footage the market could not absorb. She said sales per-square-foot dropped to $400 in 2001 from $734 in 1971. If companies can't rely on store expansion to fuel growth, they must rely on building customer loyalty and local clientele. Despite increasing pressures from a weak dollar, retailers were convinced consumers are willing to pay top price if the merchandis is there. "We have to work harder to create demand and to produce products that consumers want," said Burt Tansky, president and CEO of Neiman Marcus Group. "The affluent customer is set to make a substantial move forward."

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