What bust means for luxe

06/01/2009 

HAVE you ever polished the back of your watchstrap? If a watch came to you with the inside of its strap unpolished, would you even notice, let alone care? Luxury goods producer Bulgari must be hoping you would not.

As the recession kicks in, and companies look for any means possible to cut costs, one of Bulgari’s solutions is to cease polishing the underside of the bands of some of its exclusive timepieces, as well as using lower-cost packaging for its perfume line.

DRASTIC ACTION

Bulgari’s economising strategy might be a small one, but other luxury brands are being forced into more drastic action. Fashion house Chanel announced last week that it is to axe 200 staff and to dispense with a major touring exhibition, with a pavilion designed by leading architect Zaha Hadid, that was set to be in London over the coming months.

This followed the decision last month of the world’s largest luxury goods company, LVMH, to cancel the opening of a Louis Vuitton store in Tokyo. The suffering goes across the luxury board. British fashion group Burberry’s share price was 500p in June, and reached a low of 160p in November.

Swiss group Richemont, which owns Cartier and Dunhill, saw its share price fall from 69CHF high to a low of 16CHF near the end of last year. Obviously, luxury brands won’t all go bust. Their fortunes are cyclical, and they will always do better in a boom than a downturn, when consumers have less money and splashing the cash is seen as vulgar.

Longevity is central to their appeal (Bulgari is 125 this year): through sheer quality they have ridden out previous crashes and will do so again.

This time, though, some of them might really be in trouble, because of the unique nature of the boom we have just seen, and the way that many of them reacted to it. For most people, £2,000 shoes are never an option, no matter how healthy the economy.

But in recent years the brands capitalised on their names by launching cheaper ranges that were accessible to high street shoppers, who suddenly found themselves awash with cheap credit. Dolce & Gabbana’s D&G line, Armani’s Armani Exchange and See by Chloe are examples of the ways in which high-fashion brands have chased younger, hipper audiences.

Mont Blanc, the French company known for its exclusive fountain pens, moved into items such as watches and jewellery, turning itself into a lifestyle brand. The industry phrase for this has been “massclusivity” – a buzzword that may seem an increasingly curious reference from a different age as the recession wears on.

NEW ECONOMIC REALITY

In the new economic reality, the yearning to extend the customer base might prove to have been foolish. According to consultancy Interbrand’s analysis of the luxury goods industry, The Leading Luxury Brands 2008, brands have sacrificed long-term value for short-term gain.

Now that the mass market – which was reliant on cheap credit card money – has dried up, some chickens could come home to roost. “It’s the markets that the brands have extended into that create their economic vulnerability,” says Interbrand’s Graham Hales. “As the markets became buoyant and people got wealthier, more people had access and the desire for this stuff, so it made sense to make these brands accessible. But it dilutes the brand – as soon as something becomes ubiquitous the brand value’s gone.”

The exclusivity that was the brands’ raison d’etre has been eroded. The result of Mont Blanc’s move is arguably that its pens seem less special, while its watches and jewellery have not gained the same standing as Cartier or Rolex.

CRAFT AND QUALITY

Most luxury brands were founded by artisans and still derive their value from historical associations with craftsmanship and quality. But they are not invincible. When the “wrong” kind of audience cottons on, the brand can collapse – just look at how hard Burberry had to work to resurrect its name after its famous check pattern became synonymous with chavs and dodgy soap-stars earlier this decade.

Now brands that, via their diffusion lines, are as everpresent on the highstreet as McDonalds, have the dual problem of losing cachet with their high-end customers while the affordable market dries up. “Everyone’s cutting costs at the moment but that’s not going to be enough,” says Hales.

The result will be that the broader business will suffer, he says, while “those with a purity within the business and the brand have a better chance of survival.” He calls this “brand clarity”.

Reports of brands’ demise are undoubtedly exaggerated, but they will certainly have to make changes. In uncertain times, analysts often talk about a “flight to quality”. If brands want to undo some of the damage done to their images, they might be better advised to make a flight to clarity.

Timothy Barber