These Two Luxury Brands Are Most Likely to Weather Downturn

Jennifer Yousfi — Fri, 29 Aug 2008 13:34:56 +0000

Luxury brands are having finding the going tough under the current economic conditions in the U.S., says Jennifer Yousfi in Money Morning. And the slowdown in Europe is putting further pressure on the sector. Here Jennifer recommends two luxury brands that are likely to weather the global downturn…

Luxury jeweler Tiffany & Co. (NYSE:TIF) yesterday followed in the footsteps of other high-end brands when it announced strong fiscal second quarter results.

Tiffany’s net income increased to $80.8 million, or 63 cents per share, in the second quarter, up from $40.5 million, or 29 cents, for the same period a year prior. It was enough to beat mean analyst expectations of 55 cents per share and sent Tiffany shares up 10%.

“Tiffany did a lot better than investors feared,” Schick, an analyst with Stifel Nicolaus & Co. (NYSE:SF), told Bloomberg News in a telephone interview. “Luxury isn’t getting a ton better, but it is hanging in there. People are going to remain concerned about what happens next, given the state of the global economy and the global equity markets.”

And there’s the rub. Luxury brands such as Tiffany, Hermes International SA (PINK: HESAF) and the Gucci Group NV (PINK: GUCG) have managed to grow sales despite a sharp slowdown in U.S. consumer spending. But growing economic troubles in Europe, traditionally the biggest market for luxury goods, are starting to weigh on the minds of high-end retailers.

And while luxury sales growth in emerging markets is on the rise, it may not be enough to offset the slowdown in the maturing markets of the United States, Europe, and Japan.

Some high-end retailers are struggling to come up with new ways of nabbing customers, while others are carefully implementing focused marketing campaigns that build on their core competencies.

Shares of luxury goods makers are no longer a sure thing, but there are still some profitable picks if you know what to look for, and just as importantly, what to avoid.

Selling Luxury

Many high-end retailers were convinced that sales of luxury goods would continue unabated despite slowing global economies. And at first, it seemed they were right. But as the fallout from the global credit crisis unfolds, the luxury market is starting to feel the pinch that its mid-level brethren are already familiar with.

The luxury industry has clocked in five straight years of strong growth that culminated with a 6.5% jump in 2007. At one time, luxury sales were expected to advance at an 8% – 10% clip over the next several years. But growth like that is no longer feasible in today’s tough markets.

Bain & Co. Inc. has ratcheted its forecast down to a 2% rate of growth for the $270 billion luxury market this year.

“I’ve done this for a long time, and this is one of the most volatile times I’ve ever experienced,” Angela Ahrendts, chief executive officer of British brand Burberry Ltd. (PINK: BBRYF), told Fortune.

“The good news is that the sector is still outperforming others over the next two years,” Ahrendts says. “It’s just a matter of getting through the storm by focusing on the right markets, the right suppliers, and the right categories. We’ve got to run a tighter, smarter business.”

Indeed, the future is bright for the luxury sector, particularly as demand picks up in emerging markets where rapid development has resulted in the materialization of a new client base.

Sales of luxury goods in Asia, excluding Japan, jumped 100% over the past ten years, increasing from $14.7 billion (10 billion euro) in 1997 to $29.4 billion (20 billion euro) in 2007. But despite the rapid growth, that region only accounted for 12% of global luxury goods sales in 2007 – only slightly more than 11% in 1997.

For now, even with the impressive growth rates, emerging markets aren’t ready to pick up the slack for the wealthier West.

Stick With What Works

Luxury retailers are doing everything they can to boost flagging sales, but some just can’t get over the hurdle. A June survey by the Italian trade group Altagamma found that operating margins at many brands were flat or falling, Fortune reported. Slowing sales and shrinking margins have led some firms to try to reach out beyond their core customer base.

For many, it’s a costly error.

“The biggest mistake luxury brands make is in not sticking with their core value system and core customer,” Suzanne Hader, principal at 400twin, a New York-based consulting company that focuses on luxury goods, told Forbes.

American handbag maker, Coach Inc. (NYSE:COH) has carved out success for itself by selling $300 handbags. But a recent attempt to go higher-end with its Legacy line, with handbags that retail for $1,100 was not only unpopular, it alienated the company’s core customers.

Japan Makes Way for China Tourist Money

Keith Fitz-Gerald — Thu, 05 Jun 2008 14:24:54 +0000

From my vantage point on my recent visit to both China and Japan, the signs are clear.China is coming. And Japan knows it.

Major department stores like Takashimaya Co. Ltd., Sogo Co. Ltd. and Mitsukoshi Ltd. are gearing up. In places like Tokyo, Osaka and Kyoto, they’re seeing a new wave of power shoppers at their counters – the Chinese.

A few short years ago, this was unthinkable.

Yet, as my wife and I strolled through downtown Kyoto, we saw it too. Most major department stores have added Chinese signage to the usual Japanese and English placards.

We heard it, as well, from Chinese shoppers who were tromping through the Shijo-Kawaramachi shopping district loaded down with bags sporting the latest designer logos. It’s much the same in Tokyo’s uber-rich Ginza district as well where Mitsukoshi has recently hired store-based interpreters fluent in Mandarin.

I can’t say I’m surprised.

According to the Japanese Department of Tourism, a record high of nearly a million Chinese tourists came to Japan last year. China’s Ministry of Public Security estimates that 34.5 million Chinese headed for foreign destinations in 2006 – up from a mere 4.5 million a year earlier. By 2011 that figure is expected to top 80 million with Hong Kong, Macau, Vietnam, South Korea and Japan predicted to account for 85% of all Chinese tourist destinations according to Euromonitor International.

And they’re spending big bucks, too.

CNN reporter, Kyung Lah, interviewed one group of mainland Chinese tourists recently that had spent $50,000 dollars on clothing and makeup alone on a 3-day trip. Not surprisingly, most of that was on designer brands from Prada Group, Gucci Group NV (PINK: GUCG), Christian Dior SA, and Shiseido Co. Ltd. (OTC: SSDOY).

Which jibes with my personal experience as indicated by Chinese and Japanese I’ve spoke with over the years. Whereas most of them used to only dream about traveling, an increasing number are actually doing it. My good friend Jun Hao and his wife have hit most of Europe’s major cities and a good deal of the United States, too.

Getting back to Japan, however, it may surprise you to learn that most Chinese feel very comfortable there. A fact that stands in stark contrast to how relations between the Japanese and Chinese are often portrayed in the Western media.

It’s now a common sight in Tokyo to see Chinese who are shopped out make a beeline for Toyota Motor Corp.’s (ADR: TM) showrooms. Obviously, they’re not buying Toyota’s in Japan, but boy are they anxious to buy Toyota’s in China.

And a visit to the showroom is just what the doctor ordered for young, cosmopolitan Chinese yuppies… or “Chuppies” as they’re called.

Not only do they feel more international for having done so, but Chinese tourists tell me they find Japan quite welcoming. And warm, which is another one of those words than can be translated a variety of ways.

Not one citizen of China or Japan that I’ve recently spoken with believes that the political past between their respective countries would prevent an economic future.

Investors looking to capitalize on the blossoming relations between the two countries and the tourism trade specifically need to look no further than Japanese department stores, Chinese credit card companies and, ironically, Toyota to get in on the action.

Of course, there are obvious choices when it comes to computerized travel providers and airlines.

But the value there may be harder to extract given there’s not a clear value proposition and the industry remains largely fragmented… for now. And that’s part of what makes Money Morning’s growth “because” of China – and Japan – investing strategy the way to go for now.

Source: Japan Makes Way for China Tourist Money

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These Two Luxury Brands Are Most Likely to Weather Downturn

Selling Luxury

Stick With What Works

Japan Makes Way for China Tourist Money