Luxury Goods Biz Faces Uncertain Market

Decided to hold off buying that $1,200 Tiffany necklace or those $375 Gucci loafers until your stocks rebound? You're not alone.

At least, that's the impression being given so far in 2001 by earnings news from luxury goods companies. With the condition of the U.S. economy uncertain, the bottom-line numbers are, for the most part, not sparkling.

Last month, for instance, Tiffany & Co., the jeweler, projected first-quarter earnings would be no better than last year's, and tied potential sales growth in 2001 to a rebound in consumer confidence.

But that's no sure thing: An ABCNEWS/Money poll released Wednesday shows consumers rating the buying climate as the worst in four years.

And although the floor of the famous Tiffany's shop on Fifth Avenue in Manhattan continues to bustle with shoppers, actual sales in the company's flagship store were down 5 percent in the fourth quarter of 2000, a sign that people are window-shopping rather than buying.

Luxury Goods Slideshow

"Certainly one expects sales of luxury goods to slow when the economy slows," notes Dorothy Lakner, a retail analyst for CIBC Oppenheimer in New York who covers Tiffany's and Gucci, among other companies.

Finding the Right Balance

That could pose a challenge to luxury goods executives accustomed to living the good life, business-wise: running companies with healthy profit margins and plenty of respect on Wall Street.

Indeed, the economic slowdown represents a paradox of sorts for companies that have profited by reaching out to wider groups of consumers in the 1990s. But now, the industry's biggest names may have to tighten their fine leather belts — or, at a minimum, find the right balance between broadening business and ensuring that their most prominent brands remain healthy.

Gucci, for instance, restored cachet to its name and climbed out of a late-1980s slump partly by trimming its once-ubiquitous licensing agreements — the brand had been appearing on key chains — and concentrating instead on its best-known products: ready-to-wear fashions, shoes, bags and other accessories.

"For a company such as Gucci, which is really fashion-oriented, what's important there is that they maintain the integrity of the brand," says Lakner. Placing a prominent label on a diversity of products, she claims," diffuses the brand, and cheapens the brand."

The LVMH Effect

But with Gucci stating in March that sales are growing faster so far this year than they did in 2000, the company is still wheeling and dealing. This week, Gucci announced it will give financial backing to a new label run by design star Stella McCartney — yes, Paul's daughter — as it continues to build its roster of prominent brand names.

In so doing, Gucci is attempting to keep pace with LVMH Moet Hennessy Louis Vuitton, the world's biggest luxury goods company, which has snapped up well-known brand names in the last few years like a Madison Avenue shopper with no credit limit. Earlier this month, LVMH formally announced the purchase of noted fashion house Donna Karan International Inc., for $243 million.

It's just the latest in a string of acquisitions that has seen LVMH take control of the Phillips auction house, Ebel and TAG Heuer watches, Dom Perignon champagne, and a catwalk full of clothing lines: Christian Dior, Christian LaCroix, Emilio Pucci, Fendi, Givenchy and Marc Jacobs.

But observers have wondered if LVMH has overextended itself with all its deals, and questioned why the company would want to purchase Donna Karan at a time when the once-hot fashion line has struggled.

Additionally, last month, LVMH announced its own sales growth had eased up for the first part of 2001.

"It's not that these companies should not pursue and expand," says Lakner. "It's just an issue of whether given the many, many brands LVMH has in its fashion portfolio, can it improve the performance of each one?"

Retailing Basics Still Apply

Compared to LVMH, other luxury goods companies seem restrained. Crystal and ceramics maker Waterford-Wedgwood, for one, has been linked with acquisitions of leather or luggage companies numerous times in the last year without pulling the trigger on a deal.

Peter Goulandris, deputy chairman of Waterford-Wedgwood, confirms that his company is still looking for an acquisition "in a field other than crystal or tableware," but claims his company's core product lines, above all, can keep it immunized from an ailing economy.

"The advantage we have is that our brands are very dominant," says Goulandris, referring to the company's 50 percent-plus U.S. market share in crystal. "It's really a segment that we own."

And Goulandris, when listing factors that may help Waterford-Wedgwood in this year's uncertain market, emphasizes "getting the volume right" among other retail basics not always associated with luxury goods companies.

It's a problem these top-of-the-line companies have not necessarily had to face in recent years — and cannot always be prepared for. At Tiffany's, the biggest drop in sales has come among items costing $10,000 or more.

Still, Lakner suggests that whatever dropoff is occurring at the moment may be gained back later, and that an increase in foot traffic, if nothing else, can have long-term benefits. According to this theory, people who are buying less or merely window-shopping in 2001 may actually be loyal customers who will return in the future.

"Tiffany's is offering those customers something to aspire to," Lakner says. "They may buy silver now, but one day they will want gold."