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By Dana Thomas
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When Clarins announced earlier this month that it was shutting down Thierry Mugler's couture house, fellow members of the luxury industry were hardly surprised. After a decade of astounding double-digit growth, luxury is experiencing a bona fide slump. In December, Gucci Group cut its full-year profit forecast, saying its third-quarter earnings had dropped 14 percent. Armani announced last week that it grew a meager 2.3 percent in 2002, down from 23 percent in 2001. And for the first time, Versace canceled its runway presentation during the couture shows--happening in Paris this week--citing cost cuts. "Almost all the luxury brands have been hurt by the economic downturn," says Dana Telsey, luxury goods analyst for Bear, Stearns & Co. "It's not a good time."
What happened? To be sure, luxury was hit by several outside forces it didn't foresee: the September 11 attacks, which curbed luxury travel and tourism; the economic downturn, which ate away at disposable income, and the looming war with Iraq, which has made consumers--particularly in the United States--nervous about spending. But the biggest problem has been created by the CEOs themselves: the democratization of luxury. For centuries, luxury companies were family-owned affairs that catered to the extremely wealthy and therefore immune to economic cycles. But in the past decade, most of those family companies were gobbled up by tycoons to form "luxury groups," like LVMH Moet Hennessy-Louis Vuitton. To help meet shareholder expectations for growth, many began offering cheaper versions of their products. "There are only so many crocodile handbags you can sell at $10,000," says one European investment banker. "But if you turn out a canvas bag at $600 with the same luxury label, you sell a lot more to many more people."
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That strategy worked--for a while. When companies like Gucci, Fendi and Hermes began offering more affordable items, their sales exploded, particularly among the newly flush middle class. Annual revenue for designer companies like Prada, Versace and Armani soared from $300 million in the early 1990s to $1 billion or more by 2000. Then came the global recession. Luxury goods became an unnecessary expense for those new consumers.
At the same time, the sector hit its saturation point. In the past two years, luxury's top 10 brands combined have opened 1,400 new stores around the world. To better control image and quality, luxury companies have homogenized both boutique and design product, which has turned customers off. "The whole concept has become formulaic," says Paul Smith, the British designer who has declined several offers from luxury barons to buy his small, privately held company. "It's time for the luxury industry to rethink its strategy."
Some companies are seeking to return to their elite roots. Gucci is turning out a limited edition of made-to-order handbags and shoes. Cartier shut down its lower-priced Les Must line. Last year Prada opened a $40 million, one-of-a-kind store designed by Rem Koolhaas in downtown Manhattan. Will it work? Not as long as luxury continues to cater to a more democratic demographic. As Michael Zaoui, head of European mergers and acquisitions for Morgan Stanley, says, paraphrasing Bill Clinton's famous campaign mantra: "It's the consumer, stupid."
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