A new wave of instability takes over luxury, worldwide

The recently confirmed slow-down of the German economy, the record double-digit unemployment rates in France and Spain, the collapse of Cyprus’ banking system and the bankrupt economy of Greece and Portugal – are having a domino effect on all the other E.U. economies, irrespective of size but also on E.U. membership aspiring countries such as Serbia, Ukraine and Croatia. Once considered ‘heaveans’ of stability, Switzerland and Norway (non- E.U. member countries) are also facing economic pressures, partly incurred by the E.U. with a growing wave of illegal immigration, unemployment.

Europe’s economic turmoil coupled by a weak U.S. economy and a slow recovering Japanese economy are beginning to show their negative effects on the global luxury industry, which has become hugely reliant on Asia (China, Malaysia, Indonesia), Russia & CIS, Turkey and some of the Middle Eastern countries (UAE, Kuwait and Qatar). The short-term effect has translated into decreased sales in several luxury sectors, especially cars and hospitality and slower growth for fashion, jewellery and watches – compared to previous years.

For the first quarter of 2013, major luxury fashion and accessories brands such as Louis Vuitton and Gucci reported their slowest growth levels in years. Coach, Burberry and Ralph Lauren are highly unlikely to register the booming sales figures of the past years, acquiescing to more modest results. Although Hermes, Prada and Ferragamo are still reporting double digit sales growth, as a precautionary measure, they have frozen their retail expansion plans, worldwide. Even privately owned houses such as Chanel and Armani ,which do not report sales figures, have also put on hold their retail expansion. Chanel, for instance, has been refurbishing or enlarging existing stores, rather than opening new ones.

Armani is also experiencing an over-exposure in China, especially with its affordable luxury line, Emporio Armani. Over 80% of new Armani Group store opening in the past 3 years were Emporio Armani stores. To counter over-exposure and, indirectly, the potential loss of the luxury positioning of the brand, Armani recently opened two new flagship stores, but this time, for its main line, the Giorgio Armani brand (entirely Made in Italy) – Hong Kong and Paris. The Armani Group has also shifted the focus of its communications campaigns on accessories (Giorgio Armani line).

Prada is also likely to witness a ‘wake-up call’, later this year, mainly due to over-expansion, the house almost doubling its number of mono-brand stores in 2012, following the IPO of the company on the Hong Kong stock exchange. With no exception, all the newly opened Prada stores are identical in interior design concept and feature the same merchandise. Nevertheless, silently, Prada seems to have halted its aggressive expansion, earlier this year, there being no new openings since January 2013. Instead, Prada announced the opening, later this year, of its largest store worldwide, a mega-store covering over 5.000 sqm in Milan’s Galleria Vittorio Emmanuele, opposite the first boutique in the history of the company.

The ‘mega-store’ trend has been embraced by Gucci and Bottega Veneta, both companies announcing the opening of their largest stores worldwide, this summer, in Milan. Although its CEO insist the new Milan store is an exception, given the current context, parent company Kering might push for similar store models in other major capital cities around the world. Armani is also reported to have reached an agreement for the lease of a large store within the same Galleria Vittorio Emmanuele in Milan, due to open later this year.

Among the major luxury fashion & accessories players, Louis Vuitton is taking a fast and sensible approach. The house has already given up its obsession with its logo and predictable designs and, in order to counter over-exposure due to the huge number of stores it opened in the past 5 years, Vuitton is focusing on opening the so-called ‘Maisons’, an ’upgraded’ flagship store concept. The Louis Vuitton Maison stores are not only larger than regular stores but they each feature a distinct interior design concept, in most cased inspired by the location. The Maisons also offer products and bespoke services unavailable at regular stores. In the past 6 months, Louis Vuitton opened 4 such Maisons: Rome, Miami, Venice and most recently, Munich.

Although the investment in such Maison stores in at least 3 times higher than in a regular store of similar size, Bernard Arnauld is eventually taking a long term strategic approach. He realized that despite the number of stores the house opened in China, Russia or Brazil, the wealthy Chinese, Russians and Brazilians will continue to shop abroad, not only driven by lower prices, but by the shopping experience which is about authenticity, lifestyle and exclusivity. Arnault’s next move? – an imminent ’re-boot’ of the creative direction at Vuitton, similar to the highly successful one at Dior, with Raf Simons.

However, there are also several luxury fashion brands which are flourishing, especially in the past 2 years. Valentino and Mikael Kors are the best examples, each fine tuning its positioning – Valentino as a top luxury couture brand and Mikael Kors as a trendy, young and affordable luxury brand. In both cases, retail expansion has been perfectly synchronized with the product offering – the creative duo at Valentino redefining Valentino Garavani’s timeless elegance, and Mikael Kors delivering ‘must have’s at affordable prices. Instead of rolling out a huge number of new store openings (which it can well afford, since acquired by Qatar), Valentino has been focusing on restyling and renovating its existing flagship stores, while Mikael Kors has widely expanded, worldwide, both directly and in franchising both in shopping malls (medium and upmarket) and street level stand alone stores.

Luxury watchmakers and jewellers have been, until this year, less affected by the crisis, especially if compared to fashion and accessories. But in the first quarter of 2013, Swiss watch exports to mainland China dropped 26 percent, compared to the same period last year, to 323 million Swiss francs (US$ 343 million), according to data released in the past week by the Swiss Federation of the Watch Industry. Exports to Hong Kong fell 9 percent, to 910 million francs. “The gold rush in China is over,” François-Henry Bennahmias, CEO of Audemars Piguet has recently told The New York Times. Audemars Piguet is closing 6 of its 22 stores in China.

Nick Hayek, the chief executive of Swatch Group, the world’s largest watch company, said that some sort of cooling in the Chinese market was inevitable. “You cannot grow 30 percent in a market every year,” he said. But he drew a distinction between the situation now faced by the most expensive brands and “the real growth opportunities that still exist in the lower- and middle-market segments.”

In comparison with indepedent watchmakers which have been more reliant on local distributors which have been piling up huge stocks, Swatch Group and Richemont Group, the world’s largest watches and jewellery groups, have been taking rapid measures by focusing their retail expansion in major emerging markets (including China) on opening mono-brand stores, most of them, directly operated. This way, they have not only ensured market visibility and awareness but they have also safeguarded themselves from the vulnerable wholesalers.

Understanding the pattern of Chinese shopping abroad, Richemont Group went a step further and opened, earlier this month, a watches and jewellery ‘mega-store’ in the heart of Paris, which is operated by Swiss retailer Bucherer. The new store on Boulevard de Capucines features not only the brands of the Richemont Group but also select brands of its competitors such as Breguet and Rolex.

As for hospitality, the four major international luxury hotel management chains, Four Seasons, Mandarin Oriental, Park Hyatt and St Regis have all slowed down expansion, each opening less than three hotels in 2013. They are also faced with challenges to persuade owners to renovate properties, some of which risk to fall below the standards of the brand, thus creating inconsistency throughout their international chain.

With a strong focus on consistency both in service and facilities, Sofitel and Kempinski have been re-emerging as important luxury hospitality players, with an improved offering and flexibility to hotel owners. In the case of Sofitel, part of French giant Accor, the company downgraded many of its Sofitel properties to lower positioned brands of Accor (Pullmann, M Gallery), thus maintaining the creme de la creme. In Paris, for instance, Sofitel has downsized from 11 properties several years ago to only 3 properties.

Other international five star hotel management companies such as Ritz Carlton, have instead, pushed for an aggressive expansion, in some cases properties being ‘split-managed’ under both Ritz Carlton and JW Marriott brands, creating confusion in their offering and positioning. Another international five star hotelier which is now paying the price of over-expansion and inconsistency is InterContinental Hotels, hardly regarded as luxury hotels nowadays.

Suite at Principe di Savoia Hotel, Milan (Dorchester Collection)

With a growing pressure on rates (both leisure and corporate) and ‘compulsory’ investments in amenities such as SPAs and technology, hotel owners are postponing much needed renovations, with the risk of brand inconsistency for the chain they belong to. The winners could be smaller luxury hotel chains such as Peninsula, Dorchester Collection and Oetker Collection, which own (entirely or partly) and manage at the same time their properties. Over 80% of the properties of these chains have been recently renovate and, in some cases, restored (heritage buildings) with no compromises on the quality of materials, fixtures and finishes. The three chains have also made significant investments in technology, upgrading their properties to the highest standards.

Oliver Petcu

Louis Vuitton Maison, Venice – Italy