Luxury sector depending on discounts

11 June 2009

NEW YORK: Consumers will continue to look for discounts on luxury brands for the next "two or three years", and have increasingly come to think of high-end products purely as a "commodity", according to Milton Pedraza, ceo of the Luxury Institute, the consultancy.

Writing in Admap last year, Pedraza argued buyers of luxury goods typically take the form of "empty-nester, over-55, baby-boomer" couples worth over $10 million (€7.2m; £6.1m), "married couples in their 30s and 40s" worth over $1m, or "young single professionals" earning $150k a year.

Speaking at Reuters' Global Luxury Summit in New York this week, he predicted it will "take a while for consumers to pay full price for product, or pay a higher price" for these premium goods.

While this is at least partly a consequence of the economic downturn, poor levels of customer service and over-extended brand portfolios have also contributed to this trend.

There are "too many brands participating in luxury handbags, there are too many brands participating in luxury ready-to-wear, luxury watches, luxury jewelry, and the service has been less than optimal, to put it nicely," Pedraza said.

Similarly, the sector has "conditioned consumers to think of luxury as a commodity, even more to expect lower prices and to expect a discount, to be bribed into buying luxury, for the most part, and that's extremely negative for the long term."

As a result, many of the smaller high-end properties may not survive the financial crisis, but "specialist" brands, like Chanel or Hermès, should prove more resistant to current trends.

However, these operators also need to focus on the categories they are "expert" in, rather than those that are "just hobbies", when they often suffer from a "lack of credibility".

Pedraza also suggested that innovation will be essential for major players in the luxury sector, either in the form of offering improved customer service, or through gaining more profound insights into their target audience.

At the same event, Estee Lauder's in-coming ceo, Fabrizio Freda, said Asia is a "big area of interest" for the company, which is also looking to introduce a number of products at "a lower entry price point."

William Lauder, its current ceo, added that "the consumer has some money to spend, she just doesn't have as much, so she'd rather spend a little bit now."

As such, he argued that in "North America as well as in other parts of the world, a value proposition for the consumer is getting her attention in a more meaningful manner than it did in the past." 

More tellingly, he also warned that the "whole concept of 'price is no object' has really gone away."

Data sourced from Reuters; additional content by WARC staff