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Income Gap Leads to a Luxury Gap

Wednesday, 30 May 2012 | 11:34 AM ET
Prada Shopper
Prada Shopper

When the recession hit in 2008, the luxury market, which had been soaring, broke like a rocket into three segments.

First to fall away were the group the marketing types call “aspirational”—those with good jobs but little financial bedrock; they had been buying nice things on the strength of their now quailing bonuses.

The next to go were the premium buyers—tourists in the luxury sector, many of them from the BRICs and other emerging economies, who splurge on Burberry, Paul Smith and Coach. These shoppers kept up until late last year, when their momentum finally slowed.

Then there are the super-rich, for whom labels like Gucci, Hermes and Chanel are a way of life. This segment has continued to ride to new highs.

And they are far from done, according to Ron Kurtz of the American Influence Research Center in Alpharetta, Ga. “There are people in the one percent who did cut back during the recession,” says Kurtz. “Now they have ‘frugal fatigue’.”

Hermes, the maker of leather goods and accessories, reported 17 percent growth for the first quarter of 2012 on its home turf in Europe. The high-end jeweler Graff increased revenue by 13 percent. Armani, Gucci, and LMVH, the parent of Louis Vuitton, all had healthy returns to start the year.

The boom at the top has forced luxury companies to make extra efforts to reach out to wealthy individuals. “The luxury brands realize they have to court this community, to engage them with an urgency they haven’t had to before,” says Greg Furman of the Luxury Marketing Council.

Furman says the companies have learned to cooperate as they chase the same small pool of wealthy individuals. Brands like Mercedes and Brioni have to partner with each other, expanding their reach by appealing to each other’s loyal customers.

Those customers are even more important because overall, the luxury sector has begun to struggle, due to the uncertainty in the Eurozone and the recent slowing of China’s full throttle economic growth. The Bloomberg European Luxury Index has been flat since the beginning of the year, and is down nearly 10 percent for May.

Last week Tiffany & Co., the iconic U.S. jeweler that owns a large part of the premium crowd, released its earnings, detailing an underwhelming 4.5 percent increase in profit for the first quarter, following a disappointing Christmas season.

But Tiffany’s wobbling revenues only point up the growing divide between luxuries for the Haves and luxuries for the Have Less. Tiffany has long pursued customers at the lower end of the luxury market, making the firm more vulnerable to downturns in the general economy.

Other labels, like Coach and Louis Vuitton, which exploded in the pre-recession luxury boom, border on being overexposed, especially in label-mad Asia, and are looking to re-establish their luxury cred. Brands that capitalized on their popularity in good times, says Kurtz, “risk diluting their exclusivity.”

The most successful luxury purveyors, on the other hand, have been careful to limit access by keeping prices high and availability low. Hermes, for instance, determinedly maintains its waiting list for handbags that go for as much as $4,000, and has opened relatively few new stores. Louis Vuitton is reportedly countering its tarnished image by offering custom handbags to select customers.

Exclusivity has even become a model for reviving older brands. Schiapparelli, the fashion house founded by the eccentric designer Elsa Schiapparelli in the 1920s, is being retooled by its new owner, Tods, the high-end footwear company, as a “prêt-a-couture” brand, according to the Financial Times: “a new level somewhere between very high-end ready-to-wear and the made-for-you couture extravaganzas that cost from €20,000.”

Accessibility hasn’t spelled doom for everyone. Burberry, the 160-year-old British outwear company, has opened stores from Taipei to Brazil, while racking up record revenues. Its success has come through smart digital marketing, in-store perks, as well as good old-fashioned retail skills. “They always seem to be feeding the pipeline with really great stuff,” says Furman.

The luxury market is expected to shrink as Asia cools and Europe hunkers down. Earlier this month, Hermes's president lowered expectations for the year, predicting annual growth for the company of about 11 percent.

The slowdown will only give the super-rich more sway in the luxury market, and cause prices to rise on the best things, for the simple reason that unlike the rest of the world, says Kurtz, “the wealthy are getting wealthier.”

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  • A reporter and editor, Robert Frank is a leading authority on the American wealthy for CNBC.