Luxury Brands Cut Prices to Stay Afloat, but Risk Losing Cachet
In mid-November, Saks Fifth Avenue took a more aggressive stance than its typical 40%-off promotion, cutting prices as much as 70% on luxury goods and apparel items--and the deep cuts threatened the longstanding unwritten pact between retailers and designers,
writes the Wall Street Journal (sub. req'd).
Retailers usually leave goods at full price for at least two months and don't mark them down until the very end of the season. But now, feeling pressure from Saks's move, rivals slashed prices, too.
Such changes are bankrupting some firms, toppling longstanding agreements on pricing and distribution, and destroying the very air of exclusivity that designers are trying to sell.
But the problem Saks faced in November--that is, high inventories of high-fashion goods that can go out of style in just months--is plaguing many luxury retailers, pushing them to place extreme discounts on goods.
Such risky moves, however, can erase profit margins by more than 50% and leave loyal customers feeling duped for paying full price, making them question the entire premise of luxury goods: Why pay top dollar today if big markdowns could be coming tomorrow?
Unsurprisingly, designers hate the idea. But part of the problem is that designers do not do a good job of marketing their own brands. Some, like Gucci and Hermes, set up shops in in airports or malls, undermining the image of exclusivity.
Shoppers are noticing: About half of high-net-worth consumers think luxury brands are becoming commoditized, according to a January survey by the Luxury Institute.
And, in Saks’s case, aggressive measures may be necessary to help the company survive. Saks
laid off more 1,100 people in January and said it may have to close some stores.
To keep inventory at low levels, Saks is spending about 20% less on merchandise--though that number is only a guess, admitted Ron Frasch, chief merchandising officer. The luxury goods business is "absolutely flying blind," he told the Journal.
