Will luxury retail ever recover?

Retail analysts say this recession has fundamentally changed consumers' approach toward spending. While predictions that retail will not return to 2007 levels before the year 2012 are fairly common, some analysts go further to say this economy will change consumer and retail forever, and that luxury retail in particular has suffered a permanent blow. Could they be right?

With the Reuters 2009 Global Retail and Luxury Retail Summit underway in London, there's no better time than to examine the issue. Howard Davidowitz, retail consultant and Chairman of investment banking firm Davidowitz & Associates, seems to be the retail's industry own Mr. Doom. He says that "living standards will never ever be the same," changing consumer behavior forever. The overspaced, overstored, overstocked retail sector will shrink significantly and the luxury sector is not going to survive. Already, 20 percent of the stores on Madison Ave have closed.
He makes some good points about the changing consumer behavior:
  • Americans are saving now for the first time in a long while and spend money on cheap necessities.
  • Indeed, research firm Retail Forward found that three out of four shoppers drastically changed their behaviour. They're cutting back, seeking deals and trading down. And a third of Americans say their changing habits are the new normal.
  • The days of the leverage are over -- across the economy -- further dampening retail spending.
  • As for luxury, not only are there less luxury customers, the rest don't have that sense of entitlement any longer.
Luxury retail consultant and president of Unity Marketing, Pam Danziger adds:
  • The affluent consumer was spending their perceived wealth, but now that that's shrunk, they're spending their income, and they don't have a lot of leftover -- Beverly Hills focus group found consumers buying what they need, not what they want.
  • The longer the recession, the bigger the changes will be and the luxury market is not going to return to the way it was before
While all these points are definitely valid, there are a few other points that maybe were not considered. As my father used to say, "we're too poor to buy cheap," many have adopted this attitude recently, assuming that quality, long-lasting items provide a better bang for their buck overcheap ones. Indeed, as Angela Ahrendts CEO of British luxury brand Burberry put it: "There's two parts to consumer sentiment (at the moment). One is price, but the other is a return to things that are timeless and lasting and where there's a return -- a long return -- on the investment you're making."

I'm also not sure that aspirational buyers, those seeking that "it" product, have changed their behavior forever and will not come back once the economy improves. As long as marketers are at work, the longing to be part of that luxury market and the sense of entitlement might still return. It may have just been put on hold for now.

While it's certainly telling that sales of luxury goods in Dubai have dropped about 45 percent, or that Tiffany (TIF) posted a worse-than-expected 62 percent drop in its latest quarterly earnings, others started noticing stabilization of the declines and even resumption of buying habits. Writing a luxury retail epitaph seems too far fetched for now.
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