Impact of the economic and financial crisis
on the luxury sector
Introduction
What is luxury today? A world of privilege and extravagance
associated to wealth. Luxury comes from the Latin word luxus which
means `excess'. Luxury represents what is totally superfluous. It is
unnecessary but belongs to the world of dreams and pleasure. It is the contrary
of vulgarity, what is exceptional, of excellent quality, an atmosphere...
Nearly unique products, luxury also rhymes with rarity. For that reasons, the
luxury goods industry is fascinating and subject to numerous studies.
Luxury goods consumption can be very interesting and
contradictory. Consumers are attracted by the possibility to differentiate
themselves from others by means of rare and top-quality products. The prestige
and status conveyed by these goods express a sort of belonging to a specific
small group of people who can afford them. Indeed, luxury goods consumption can
be contradictory in the sense that cultural differences arise: the Americans
generally buy luxury products for `ostentation' and social status whereas the
French are more in search of pleasure, way of life and emotion.
To give some figures, this industry is significant in terms of
sales and prestige for example for France which is the world leader with a 34%
market share, far before Italy: 20% and the USA: 14% (French government, 2009).
It is the second exporting industry after aeronautics, without any subsidies.
Top luxury global brands include LVMH (Moët Hennessy - Louis Vuitton) with
a brand value of $21,860 million, Gucci with $8,346 million, Hermès
with $4,782 million or Tiffany & Co. with $4,127 million
(Interbrand best global brands ranking, 2010).
The recent US sub-prime mortgage crisis in 2007 that provoked
a slowdown in the American economy and billions in losses by their banks, has
quickly affected the entire world. The American economy is currently
experimenting a crisis and global growth still depends a lot on American
growth. The American sub-prime mortgage crisis turned into a global credit and
then liquidity crisis. The financial crisis started from real-estate and
banking up until reaching the stock market.
According to the IMF, all zones of the globe and all sectors
were affected in a different way. Developed countries (USA, Europe and Japan)
have been hit more violently than emerging countries (China, Brazil) and the
industrial sector (automotive) and real-estate have been most affected.
Regarding the luxury sector, it is of great interest to analyze whether big
brands suffered from the crisis or if consumers simply continued buying luxury
products to keep the status they convey. Sales at half-mast, price stagnation,
stores opening delayed... the luxury sector, haven of prosperity for a long
time, started in turn to suffer from the crisis, even if companies forecast
significant margins for the months to come.
In order to analyze the impact of this crisis on the luxury
sector, we will in a first part focus on companies which did suffer from the
crisis and in a second part we will see that this impact was quite superficial
on some other companies. Finally, attention will be paid to how companies faced
this crisis from a strategic perspective and responded to it.
I. Luxury sector hit hard by the crisis
Historically the luxury business has always been immune to
uncertainties and crises. It is of great interest to see how it reacts in a
financial crisis. The first six months of 2008 gave the impression that the
luxury industry would only be slightly affected by the economic slowdown. But
the crisis did not spare anyone, not even luxury. One could have thought that
the sector would be protected, considering its margins and specificities, but
most groups lost 40% of their stock value according to the World Luxury
Index.
To better understand the consequences of the economic and
financial crisis on the sector, we will first state some figures of this slump
before studying a precise example of one company in this turmoil. Finally we
will analyze the difference in consequences between locations.
1. Most serious crisis in the sector for decades
Fall in sales, lower recruitment, job cuts, delayed store
openings... After four euphoric years with more than 10% growth per year, the
luxury sector witnessed a 4% decrease in sales in 2009, according to the
American financial services firm J.P. Morgan. The German Deutsche Bank even
counted on a fall from 10 to 15% for some brands. This is the first recession
experienced by the sector for decades. In order to protect themselves, luxury
goods companies reduced store-opening plans, froze recruitment, closed certain
shops and focused on their core profession: most of the attention is paid to
their flagship products and effective marketing.
Big names were not spared: the growth of the world leader LVMH
was reduced by half in the third quarter of 2008 compared to the beginning of
the year. Champagne producers announced a 6% drop in sales during the first
eleven months of 2008, the jeweller Cartier (Richemont Group) three months
short-time working for 180 employees, and Chanel
the termination of 200 fixed-term and temporary contracts.
British luxury brand Burberry cut 540 jobs as well as the big American stores
Saks with 1,100 jobs. Even the British Bentley, which cars can cost up until
260 000 Euros, interrupted its production for seven weeks. Its colleague Aston
Martin, which had already announced 600 job cuts in December, implemented the
three day working week in its plants in Gaydon (central England).
From the watch-making to the motor car industry, through
jewellery, fashion and arts, the collapse of the financial market affected the
entire luxury economy. According to Pictet Funds, growth in the luxury sector
was meant to be close to zero in 2009 in the USA and in Europe. In fact, it
occurred to be even worse since the sector entered in recession with a growth
rate of -5,9% that year (Eurostat, 2010). In comparison, previous years had
registered record rises of about 20%.
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