For richer or for poorer?

After Rolls Royce sold just one car in January, the signs are that luxury goods brands are feeling the pinch. Many remain upbeat, believing it is a short-term blip, but with City redundancies chipping away at the high-end retailers’ customer base, the problem could be more deep-seated. David Benady reports

While British Airways admitted last week that Concorde bookings had been hit by a downturn in demand, one of London’s classiest shopping malls was being described as a “ghost town”. Meanwhile, it emerged that Rolls Royce sold just one car in the UK in January.

Signs that the luxury products sector is suffering a fall in spending by wealthy customers are increasing by the week. Marketers in these upmarket areas are having to work harder to sell their products and many are increasing the amount of advertising they buy in a concerted effort to move their goods.

As the rest of us prepare for a depressing 2003 of war and economic crises, it seems even the rich are drawing in their diamond-encrusted belts. However, observers say that those at the very top of the economic pile have barely been affected by the global downturn. It is people on the second rung of the ladder of wealth who are suffering – many of them fat cat City traders made redundant as equity prices halved in three years.

Concorde nose-dives

BA’s claim last week that Concorde bookings have been hit by a general decline in demand for luxury services bodes ill for the Anglo-French aircraft, and could speed the day when it breaks its final sound barrier.

Some doubt it will survive beyond the end of this year. A BA spokeswoman refuses to give any figures on the downturn in Concorde passengers, but says: “It is no secret that premium brands in general are under pressure.”

Air travel is of course affected by fears over war, but one source adds that top company directors may be reining in their own spending for appearances’ sake after making rounds of redundancies. Another source believes BA is exploiting the luxury downturn to disguise the fact that passengers are deserting Concorde because of safety fears. The aircraft is, after all, approaching its “fly by” date and is due to be grounded soon.

Last week a piece of rudder on an Air France Concorde fell off mid-Atlantic. BA insists there are no questions whatsoever over the safety of Concorde.

Wheels fall off car sales

Still, other purveyors of luxury goods have also complained that times are getting tough, and marketers say they are having to work harder in this environment. The luxury saloon sector of the car market slumped in January and Rolls Royce, in its first month under new owner BMW, registered just one car as being sold, compared with the nine registered in January 2002, according to figures from the Society of Motor Manufacturers and Traders. Meanwhile, Bentley registered 24 cars compared with 45 in January last year, and a spokesman says: “In general, the industry is in a downturn, which partially explains the fall in sales.” Mercedes-Benz registrations slid to 6,131 from 7,002 and BMW’s fell nearly a fifth to 5,404. However, Porsche registered 631 cars, up 20 per cent on last year.

While there are fewer fat-walleted customers making commitments in luxury car showrooms, the well-heeled are also staying away in their droves from upmarket jewellery stores. Boodle & Dunthorne’s sales have tailed off recently, though managing director Michael Wainwright believes there is a silver lining to the bad news. “Footfall is unquestionably down, but we are more than compensating for that with a lot more high-value sales – from £25,000 to £150,000,” he says. “I think people have less patience with the stock market. There are still a lot of people out there spending money, particularly on higher-ticket items.” As equity prices fall, the richest individuals are spending their money on high-priced jewellery as an investment, he believes.

Gold as a commodity for investment is rising in value as people move out of equities and seek safe havens for their money. But as a fashion item, gold has been hit by the “Ali G” image, and is increasingly viewed as flashy and lacking in style. Wainwright says platinum is much more fashionable as it is seen as “minimal”.

A spokesman for watchmaker Rolex says the perception that there are tough times ahead can actually benefit quality brands. “When times are tough, people go to a brand with a reputation or quality,” says Rolex UK head of communications David Cutler. “People think a bit more about what they want to spend money on and are more inclined to go for brands that are well-established,” he adds, and claims that Rolex sales have held up well.

Some luxury retailers are not so confident that sales will continue to hold up, and see innovation and new product launches as a way of stimulating spending. Classy giftware company Links Of London has stores in the UK, Far East and New York that attract celebrities such as Sarah Jessica Parker and Elle McPherson.

Weakest Links

The 34-strong international chain had a good Christmas but a tough January and February according to chairman John Ayton, who adds: “We are ahead of last year, but we are having to work harder to achieve those results. The environment is not that easy and we are not that optimistic going forward.” He says the decline in advertising over the past year means the company can get more ads for the same amount of money, which is essential in the current climate when it is more difficult to attract wealthy people into stores. The chain also launched a collection of silver watches last year, which pushed up the average spend of its customers.

Ayton says that while shops in the West End have done reasonably well of late – though some complain that the recently introduced congestion charge has hit shopper numbers – those in the City have suffered a downturn in footfall. He describes the Square Mile’s upmarket shopping centre The Royal Exchange as a “ghost town” and believes it has suffered from the raft of redundancies in the City, and slashed bonuses. “A lot of people are staying at their desks and there is less traffic in the stores. If 20 per cent of the dealing floor has been made redundant, you are going to stay at your desk at lunchtime,” he says.

Wainwright, from Boodle & Dunthorne, which has a store in The Royal Exchange, says this is an exaggeration, though he accepts that shopper numbers have fallen. He believes a new Conran restaurant opening in May will boost footfall.

There have been mixed signs from the fortunes of luxury fashion goods owners. Louis Vuitton Moët et Chandon’s revenues from Louis Vuitton, for example, jumped 23 per cent in the fourth quarter of last year, while Gucci was forced to put out a profits warning. The luxury goods sector is estimated to be worth $82bn (£52bn) worldwide by industry magazine Luxury Briefing.

For these brands, the trick has always been to maintain an aura of exclusivity around them while reaping revenues from the sales of more mass-market goods such as accessories and perfumes. And there has been a move in recent times for the big brands to rein in their licensing and distribution and take control over every aspect of their brands. According to Interbrand brand consultant Rita Clifton, Gucci has been particularly successful at doing this under the brand guardianship of Tom Ford, whom she sees as something of a marketing genius.

Too little of a good thing

Clifton says BA is facing a problem common to all that leverage the values of a premium product or service to project an upmarket image across their whole brand. BA uses Concorde to give a classy image to the rest of its brand, but there is a delicate balancing act between maintaining that image and reaping the benefits. “When you have a shop window, it is marvellous when it makes money. But when it stops making money, you have got to work out whether it is valuable enough to justify the huge amounts of money needed to maintain it,” says Clifton.

She sees upmarket fashion brands facing similar decisions with their couture shows. Fashion houses, such as Chanel and Versace, have traditionally used them to build the value of their brands so that the mass-market and highly lucrative products, such as fragrances, can benefit from the “glow” of the upmarket brand. But in the current economy, justifying this type of expenditure becomes increasingly difficult. These top-class catwalk shows cost huge amounts of money, and Versace last year scrapped its show.

According to Clifton, fashion houses are moving away from high couture shows to dressing celebrities – using the mass media as their catwalk. The only problem with that is finding enough stars with sufficient class to keep the exclusive image alive. This may be a cheaper option, but it threatens to wipe out much of the exclusive imagery the companies have built up over many years.

High-end fashion brands respond to temporary downturns by cost cutting at their peril. The trick is surely to ignore these economic trends, though this, of course, is difficult when faced with the demands of hard-pressed shareholders.

But, like most other sectors, luxury goods obey the “Pareto Principle” which states that 80 per cent of profits and sales come from the highest spending 20 per cent of customers. This is a saving grace for luxury goods, since it is the top fifth of the rich who are the least affected by swings in the wider economy – the core high-spending customers will always be willing to splash out. The super-rich, it seems, like the poor, will always be with us.

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Tom Fishburne is founder of Marketoon Studios. Follow his work at marketoonist.com or on Twitter @tomfishburne See more of the Marketoonist here

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