Headline

Luxury retail hits the wall

MK Website Images

For a long time the conventional wisdom has been that the luxury market was largely impervious to the ups and down of the economy. Yet recent results suggest otherwise and even with an improving macro-economic picture and booming stock market, most US-based luxury retail brands continue to struggle.

Last week reports surfaced that Neiman Marcus was looking to restructure its debt after a series of disappointing quarters. HBC’s Saks Fifth Avenue division revenues have stalled during the past year. Nordstrom, which was once a shining star in the retail pantheon, has seen five straight quarters of declines in its full-line stores. Tiffany and Kors are among other brands facing similar declines. So what’s going on here?

The most common explanations for faltering performance have been the strong dollar’s impact on foreign tourism and a weak oil market. To be sure, these factors have not been helpful. But the problems in the luxury market go deeper, particularly among the department store players. Here is why:

  • Little new customer growth. With e-commerce maturing–and most recent reported gains merely channel shift–unfavorable demographics (see below) and very few new store openings, luxury brands are struggling to replace the customers they are losing.
  • Little or no transaction growth. While not widely appreciated, most of the comparable store growth in luxury retail has come through prices increases, not growth in transactions.

SEE ALSO: Michael Kors miss on sales: a witness of the industry issues?

  • Unfavorable demographics. Affluent Baby Boomers have propped up the sector for more than a decade but as customers get older they tend to spend quite a bit less on luxury in particular. Most studies suggest Millennials will be more price sensitive and less status conscious then then the cohorts ahead of them.
  • Growing competition. Strict control over distribution largely insulates the luxury market from intense price competition and having to go head-to-head with Amazon. Luxury websites like Net-a-Porter are gaining share of a no longer expanding pie.
  • Shifts in spending. Affluent consumers continue to value experiences and services over things–and are allocating their spending accordingly.
  • The omni-channel migration dilemma. Luxury retailers are spending mightily on all things omni-channel, as they must to remain competitive. But it’s incredibly expensive to create a more integrated customer experience.
  • Looming over-capacity. While the luxury sector does not face the pressure to close stores that the broader market does, stagnant sales and a continued shift to digital channels will start to put more and more pressure on full-line store economics.

 

(Source: Forbes)

Follow Retail in Asia on Facebook, Twitter and LinkedIn.

Get our top stories delivered to your inbox: