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Luxury brands can be their own worst enemy

Models walk the runway during the Betsy Johnson fashion show during NYFW Spring 2016 on Sept. 11, 2015.
Adam Jeffery | CNBC
Models walk the runway during the Betsy Johnson fashion show during NYFW Spring 2016 on Sept. 11, 2015.

From a sluggish Chinese consumer to a stronger dollar, luxury firms are already up against a slew of challenges. But are they making things even harder on themselves?

As global sales of luxury goods slow—with Bain consultancy predicting sales will once again increase in the low-single digits this year—the off-price and second-hand markets continue to build steam.

Last week, online consignment shop thredUP secured $81 million in additional funding led by Goldman Sachs' investment arm. Earlier this summer, luxury consignment shop The RealReal partnered with upscale department store Neiman Marcus on a program that offers sellers an extra 10 percent if they receive payment via a Neiman Marcus gift card.

Meanwhile, high-end retailers including Nordstrom continue to open outlet locations, as sales at off-price companies such as TJX keep outperforming the broader industry.

All in, Bain estimates that the off-price market represents more than 30 percent of total luxury sales.

"Like everything in retail, it's all about segmentation," said Hana Ben-Shabat, a partner in the retail practice of A.T. Kearney.

In the case of Neiman Marcus, for example, Ben-Shabat said the typical person who shops on The RealReal tends to be different than a true Neiman Marcus shopper. That's because a lot of people can't afford a $3,000 handbag when it first hits the shelves but they can afford to purchase it secondhand, when the price drops to $500.

"It's a really different audience," Ben-Shabat said. "It's more like a service to their core customers as opposed to anything else."

The same could be said of thredUp, which has positioned itself as much a place for consumers to clean out their closets as to shop for second-hand clothes.

Following the series E funding it announced last week, the resale site expects to process more than 2 million pieces of clothing each month by the end of 2016, and hire an additional 1,000 employees. It currently has about 500 employees and processes more than 700,000 items a month.

Another beneficiary of consumers' lust for name-brand goods at a discount are traditional retailers, who are opening outlet shops to reach a broader swath of customers. Widely recognized as a leader in this area is Nordstrom, which operates 183 Rack outlet locations and counting. The department store has repeatedly said that these stores serve as an entry point for people who don't yet shop at its full-price locations.

On its August earnings call, Nordstrom said that last year, 1 million Rack customers started shopping at its full-line stores or website for the first time. Additionally, co-president Blake Nordstrom said the Rack business represents the retailer's biggest source of new customers, attracting around 4 million of them in 2014.

Though these figures alone could tempt other retailers to develop a similar strategy, Pam Danziger, founder of Unity Marketing, warned that luxury brands need to first think through the potential harm it could do to their brand equity. All they've got to do, she said, is look at Coach.

When that affordable luxury brand's core business started to flat-line, management decided to boost revenues by building out an outlet presence.

"As a result it's like, who's going to buy a regular-price Coach bag?" she said. "Disruption is this popular word now, and it's not just the Internet."

The key to Nordstrom's success, experts have said, is that there is a clear difference between the merchandise found in its full-price stores versus what's sold at Rack.

Claudia D'Arpizio, a director at Bain, agreed that the way brands approach outlet stores—and discounting in general—makes all the difference. As an example, she pointed to China, where shoppers have spoken out against brands that discount in-season items.

But regardless of brands' efforts, D'Arpizio conceded, there are almost always deals to be found.

"There's always a way to do some bargaining, even in season," she said.