With profits falling, Williams Sonoma redraws the line on luxury

Anyone who wanted to understand the changes in American society over the past year need look no further than Williams Sonoma (WSM). The premium kitchenware company recently reported a 90 percent drop in fourth-quarter profits and, as revenues continue to fall, is severely adjusting its market position.

Williams Sonoma's rise to retail prominence mirrored the massive increase in discretionary spending over the past 20 years. In the 1980s, most malls had one or two mid-market kitchen stores, where customers could buy reasonably priced, reasonably well-made cooking implements. Williams Sonoma differentiated itself from the Kitchen Bazaars and Lechters by offering very expensive, very well made tools. While its French porcelain ramekins and Italian copper pots often cost three or four times the price of comparable American-made items, the store could also claim that every one of its tools represented the best that the market had to offer.

In the 1990s, I worked at a Williams Sonoma outside Washington, DC. At the time, DC was experiencing an economic boom, and Williams Sonoma was one of the beneficiaries. While the $4,000 Viking ranges rarely sold, $500 tin-lined copper cookware sets were popular, as were $200 coffeemakers, $10 jars of salsa, and hundreds of other premium items. While Williams Sonoma was more expensive, its liberal return policy, strong reputation, and aggressive branding made the competition look chintzy by comparison.

In those days, there were several Williams Sonoma stores in the area, some located within 15 miles of each other. Luckily, the store's expansion was aided by a similarly exploding customer base. While some Williams Sonoma patrons were professional chefs and caterers, most were newly-affluent people who were trying to fill out the gargantuan kitchens in their 4,000-square-foot homes. Insecure (as all consumers are) and eager to spend money, they quickly convinced themselves of the need for grape drainers and berry spoons, high carbon kitchen knives and premium hot fudge sauce.

In time, of course, Williams Sonoma found itself outplayed at its own game as companies like Sur La Table offered equivalent or superior merchandise. Still, few of its competitors were able to achieve its level of brand awareness and the company continued to do well. However, just as comparable specialty stores like Sharper Image and Circuit City have found their customer base drying up, Williams Sonoma discovered that its prior branding as a luxury retailer is a liability, as luxury purchases have been stricken from many customers' budgets.

As the recession has sharpened its teeth over the past year, Williams Sonoma has fought back by lowering prices. However, the company is not designed to be a bargain retailer, and the cuts have shredded its profit margin. Its astounding fourth-quarter profit loss makes it clear that the retailer must retrench, either with far fewer outlets or with far cheaper merchandise. Given its reputation and its current move to close underperforming stores, it appears that Williams Sonoma is going with the first choice.

As Williams Sonoma pulls itself out of depressed markets, it seems likely that it will soon be joined by numerous other niche retailers. Luxury purchases are once again becoming luxuries, not necessities.

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