Luxury Institute News

December 18, 2009

Zale canceling orders, delaying payment

Dec 18, 2009
1:11pm EST
By Phil Wahba

NEW YORK, Dec 18 (Reuters) – Zale Corp said on Friday it has canceled some orders with suppliers and delayed payments, sending shares of the big U.S. jewelry store chain down sharply.

The struggling jeweler, which operates the Zales Jewelers and Peoples Jewellers chains, has faced steep sales declines for more than a year and mounting debt, as well as a probe into its accounting practices.

Zale refused to accept tens of millions of dollars of inventory at the end of November, according to a Wall Street Journal report on Friday.

“We are in the process of reviewing and canceling certain orders,” Zale Treasurer David Sternblitz told Reuters in an email. He declined to confirm the dollar amount for the canceled orders because Zale’s review is ongoing.

“There has been some delay in payments as we determine what merchandise will be needed for the season with a significant portion of the holiday still ahead of us and what should be returned to suppliers,” he said.

Sternblitz added that many of Zale’s contracts with suppliers allow for the return of a percentage of merchandise.

Shares were down 32 cents, or 12.7 percent, at $2.21 in mid-day trade, but had fallen as low as $2.02 earlier.

The Wall Street Journal, which first reported the news of canceled orders, quoted Zale’s Chief Financial Officer Matt Appel saying in an interview that Zale has cash on hand to pay suppliers.

“Barring something catastrophic, we will pay our bills,” Appel told the paper.

SALES SLUMP

Zale’s sales at stores open at least a year, a measure known as same-store sales, fell 18.6 percent in November, compared to the year-earlier period. The chain has been pressured as consumers focus their spending on essentials rather than luxury items such as jewelry.

That news, issued in early December, came less than two weeks after Chief Executive Neal Goldberg said on a conference call that the company was “cautiously optimistic” about the holiday season.

The cancellation of orders at a busy time of year is an ominous sign for Zale’s sales prospects, an analyst said.

“Anyone who thinks Christmas will be dramatically up is fooling themselves,” said Milton Pedraza Chief Executive of Luxury Institute. “It means they are in trouble, that they’re not expecting sales to be as good as expected,” he said of the cancellations.

While upscale rival Tiffany & Co is in better financial health, it may not benefit much from Zale’s travails, Pedraza said.

Read the full article at:
http://www.reuters.com/article/idUSN1822010220091218

December 17, 2009

Luxury prices: To cut or not to cut?

By Alyssa Giacobbe, CNNMoney.com contributing writer
December 17, 2009: 2:07 PM ET

(CNNMoney.com) — Step into Nordstrom a year ago for handmade Italian pumps and flats from designer Anyi Lu and you’d be shelling out as much as $595 a pair. This season, everything in the spring collection that hits stores next month goes for under $400. For CEO David Spatz, adjusting prices downward simply made sense: “The days of conspicuous consumption are over,” he says.

The decision to chop price tags has resulted in a 69% percent increase for Anyi Lu in wholesale orders from Spring 2009 to the Spring 2010 collection. But it presents Spatz and his fellow luxury marketers with a new challenge: Once you cut prices, can you ever go back?

Serial entrepreneur Gary Shansby, CEO of San Francisco-based Partida Tequila, argues that for premium companies, discounting is a form of brand suicide. “Once you start discounting, or accepting deals, there’s no way of getting back up,” he says. “In down times, there’s the impression that the simplest thing to do is discount. But when confidence returns, the consumer’s going to wonder why you want to charge $48 when just a few years back you’d sell for $30. You’re effectively telling people that your product was too expensive to begin with.”

With 50 years of experience turning brands like Famous Amos and Terra Chips from startups into major companies, Shansby calls on firsthand knowledge gained through four lesser recessions to support his stance. “Control your costs in other areas, like advertising or promotion, but hold onto your people and your positioning,” he advises.

Instead of lowering prices or distributing to discount stores like Costco  and Sam’s Club, as some of his competitors have, Shansby’s five-year-old Partida — which starts at $45 for a 750ml bottle — has collaborated with top bartenders to create and market specialty drinks. This, says Shansby, has resulted in greater sales for the participating bars and restaurants and, by extension, Partida. Revenues are up from last year by a double-digit percentage, he says.

Of course, Shansby’s previous entrepreneurial success has afforded him a certain amount of financial security. What about newer entrepreneurs who have less funding?

Milton Pedraza, CEO of the Luxury Institute, a market research firm in New York City, also thinks discounting should be a last-ditch effort. His research suggests that small brands fare better by producing less, and investing instead in product development and the customer experience. He advises entrepreneurs to get creative.

This year, Danbury, Conn., bath fixture company Waterworks — under new ownership since filing for Chapter 11 in May — is striking licensing deals to bring its rarified brand to a mass audience. Waterworks is partnering with retail megastores to set up Waterworks-branded “shop with in a shop” outposts, and launching a new line of textiles and bath accessories. The first wave will roll out in mid-tier stores such as Bloomingdales, and later move to more mass-market retailers like Bed, Bath & Beyond and Kohl’s.

“We’ve always wanted to increase our offering of simpler products, so we’re taking advantage of changes in the market and in our strategy to develop this new area of our business,” says CEO Peter Sallick. To fund the expansion, Waterworks closed more than 20 stores.

New York-based upscale clothing line White + Warren has gotten similarly creative. The 12-year-old line, sold in more than 500 specialty stores across the country, has long been known as a maker of luxe cashmere. For Holiday 2010, its winter collection, the label introduced lower-priced pieces in new fabrications, like under-$100 rayon tops and dresses, while holding its cashmere prices fast.

“Five years ago, our customer would come in and buy the same sweater in 10 different colors,” says co-founder and president Susan White. “People don’t dress that way anymore, so our challenge was to get her to buy two or three by creating a whole look: tops, dresses, scarves, that could pair with the pricier sweaters.” The first shipments to stores sold out within days.

“We changed our perception and we absolutely changed the actual product, but we didn’t walk away from our core business, which is the right cashmere item,” White says.

Even Pedraza is resigned to seeing more markdowns: “Turning inventory into cash is critical right now, and for the foreseeable future, discounting is the new normal,” he says. “But for longevity, a luxury brand needs to retain its credentials. It’ll be more resilient when the economy rebounds.” 

http://money.cnn.com/2009/12/17/smallbusiness/luxury_discounting/

December 9, 2009

Saks faces dilemma as luxury shoppers stay AWOL

Reuters
12.06.09, 1:59 PM ET

* Saks ramps up lower-priced merchandise, coupons

* Strategy risky, but Saks has little choice, experts say

* Buyers want more price points within top brands-Saks CEO

By Phil Wahba

NEW YORK (Reuters) – Struggling with slumping sales for the past two years, luxury department store operator Saks Inc is beefing up its less expensive offerings at the risk of diluting its brand.

But with even the most affluent shoppers keeping a tight grip on their spending this holiday season, is there really any other choice?

Some brand experts say its strategy of selling lower-priced items, along with offering coupons or gift cards and some straight discounting, all create risks for a company best known for its flagship Saks Fifth Avenue store in Manhattan.

“All these tactics erode the halo effect of a luxury brand,” said Milton Pedraza, chief executive of the Luxury Institute, a New York-based consulting company.

Last week, Saks reported that sales at stores open for at least one year, a measure of a retailer’s health known as “same-store sales,” fell 26.1 percent in November, including the Black Friday weekend that kicked off the holiday season.

To be sure, the comparison was skewed by the near panic levels of discounting in 2008, when prices on many designer clothing brands were slashed by as much as 70 percent in an effort to pump up sales.

But the trend is undeniable and all the more worrisome, given that Saks reported it had seen “weakness across nearly all merchandise categories.”

“There is no question that aspirational consumers are out of the market now — they’re gone,” Pedraza said.

Saks was hardly alone. Same-store sales at Neiman Marcus’ specialty retail stores, its Neiman Marcus and Bergdorf Goodman stores, fell 12.7 percent in November.

Luxury retailers face a long slog back to pre-recession sales levels, analysts said.

“I do think that the level and the expectations for the business are on a much lower level,” said Robert Drbul, a Barclays Capital analyst, who estimated that cheaper products accounted for about half of Saks’ drop in November sales.

DAMNED IF YOU DON’T

Swooning sales have forced Saks to expand its more affordable lines, given that the mindset of its traditional well-heeled shoppers has been changed by the financial crisis and as a result, they’re much more careful spenders now.

While Saks and other luxury purveyors would have once seen discounts, coupons and less expensive lines as beneath them, those incentives for shoppers have become a necessity because of what experts say is a permanent “resetting” of spending levels.

“There’s been a redefinition of what luxury is now,” said Robert Passikoff, president of Brand Keys, a New York-based consulting firm. “They’re backed into a corner. In luxury retail now, the issue is differentiation.”

To that end, Saks launched its own collection of men’s clothing earlier this year to appeal to affluent men for whom the recession, nonetheless, put top designers such as Ermenegildo Zegna beyond reach. And the luxury retailer has prodded suppliers to broaden their lines to include more affordable products.

Even though last year’s fire-sale discounts are long gone, Saks is offering 40 percent discounts on its website for items by high-end designers such as Versace, Burberry and Dior.

What’s more, Saks has ramped up the coupons it offers by 52 percent so far this year, while consumer redemptions have risen 14 percent, according to data compiled by coupon site CouponShack.com.

Saks CEO Stephen Sadove acknowledged that customers are looking for lower prices, though he said the retailer has not offered more discounts this year than in a normal year.

“They love their brands — they don’t want to trade down, but they like the entry price points within the brands,” Sadove told Reuters in an interview on Friday.

He defended the company’s strategy, saying it has had to adapt to the current climate.

Though Sadove declined to give any numbers, he said the men’s line has done well, meaning that other private lines could be on the way.

Investors seem to have faith in the approach. The company’s stock barely budged on Thursday on the news of the sharp drop in November same-store sales and it has recovered a little more than threefold since the lows of early March. But the stock’s price is still down about 70 percent from where it was two years ago.

“There’s the potential for the largest upside surprise as the consumer continues to thaw out and the stock market recovery takes hold,” Barclays Capital’s Drbul said.

For now, Saks appears resigned to being patient.

“The size of our company is smaller than it was before,” Sadove said. “I expect to see growth over time, but I don’t expect to see it return rapidly to where it was.” (Reporting by Phil Wahba in New York; Additional Reporting by Nicole Maestri in San Francisco; Editing by Jan Paschal)

Copyright 2009 Reuters

http://www.forbes.com/feeds/reuters/2009/12/06/2009-12-06T185937Z_01_N06139677_RTRIDST_0_SAKS-ANALYSIS.html

December 4, 2009

Luxury Makes A Comeback

Posted in Luxury Market

Jaguar, Oakley, and other brands are trying to put the ‘lux’ back in luxury, despite the recession.

CNNMoney.com
By Suzanne Kapner, writer December 3, 2009: 9:02 AM ET

NEW YORK (Fortune) — Here’s what the financial crisis sounds like at the top of the income ladder: When asked how the recession had impacted her life, one banker’s wife said, “The waiting list for a Birkin bag is a lot shorter.”

She was referring, of course, to the coveted Hermès handbag. Each bag is hand-stitched and takes weeks to make, which keeps supplies scarce. For the unconnected — those who are not socialites, celebrities, or super-wealthy — the waitlist can run two years or longer. Starting prices are around $5,000, but versions made of exotic skins, such as crocodile, command well into the six figures.

Even though conspicuous consumption is out of style, people are still buying Hermès bags. Third quarter sales were up 10% — a reminder that people are willing to splurge on products they consider worth the price.

It’s a lesson many luxury firms forgot during the boom years when, in an effort to expand market share, they courted the mass affluent — upper-middle-class customers who aspired to a more luxurious lifestyle than they could actually afford. “The luxury market went mass,” says Pamela Danziger, the founder of Unity Marketing.

Milton Pedraza, CEO of The Luxury Institute, calls the recent overreaching “faux luxury.” And, he says, a lot of companies forgot what luxury was all about. “They just slapped a logo on a canvas bag,” Pedraza says. “The products were expensive, but the quality was not very good.”

Now a handful of companies are trying to put the “lux” back in luxury by introducing products with more handcraftsmanship and detailing. Sure, these products cost more. But the companies that make them are betting people will be willing to spend more to get more.

Take Jaguar, for example. After going for the middle market with $30,000 cars in the 1990s when it was owned by Ford, Jaguar — now part of India’s Tata Group — is repositioning as more of a true luxury brand. The XJ Sedan, which is scheduled to hit dealer showrooms this spring, will carry a sticker price of $72,000 to $115,000, making the XJ Jaguar’s most expensive car on the market.

Jaguar chief designer Ian Callum has given the XJ a more modern look without skimping on the wood and leather that harks back to the brand’s heyday of British luxury. The XJ’s audiovisual system includes a 1,200-watt stereo and comes with headphones that allow each passenger to listen or watch what he or she wants. (Just imagine how many family fights could be averted if Dad got his dose of classic rock, Mom her Streisand, and the kids Hannah Montana.)

“The car’s interior is nicer than many living rooms I’ve sat in,” says Michael Silverstein, a senior partner with the Boston Consulting Group.

Jaguar only expects to sell 8,000 of the XJ Sedans, compared with 30,000 of the more mass-produced cars it used to make. But sometimes less is more. “With this economy, you’ve got to give high-end shoppers a reason to buy,” says Jaguar spokesman Stuart Schorr. “You do that by making the car more interesting, more indulgent, and more luxurious.”

Sunglasses-maker Oakley, though not considered a traditional luxury firm, is also going against the tide by adding more expensive products to its lineup. In November, Oakley introduced the “C Six,” a $4,000 pair of sunglasses made from 80 layers of carbon fiber that mold to your face. (Spokeswoman Brianne Bates calls the glasses an “engineering feat.”) The C Six sell for six times the price of the company’s previously most expensive glasses.

Likewise, this fall, Restoration Hardware launched the Artisan Collection, which includes more expensive items than its traditional fare, including a $4,000 trunk that doubles as a portable office. CEO Gary Friedman recruited craftsmen from around the world to create the collection and give it a handcrafted feel. All of the brass nail-heads on the trunk, for instance, are hammered by hand.

The Artisan Collection — which also features $1,500 end tables and blankets made of Mongolian cashmere and stitched on ancient looms — is popular enough that Restoration Hardware has extended the line through the spring, and it may stretch beyond that. “Gary (Friedman) feels that if people are going to spend money, we should give them a step up in quality,” says spokeswoman Ashley Boyle.

Not all firms are brave enough to buck the tide of falling luxury sales — expected to decline 8% this year, according to Bain & Company — and claw their way back up-market. Saks and Neiman Marcus, for instance, which both courted those mass affluent consumers during the boom, are capitalizing on a “trading down” effect during the bust by adding even more “affordable” merchandise to their stores.

But there are a handful of companies moving in the opposite direction by appealing to consumers who still have money. And despite uncomfortably high unemployment, there are plenty of them. After all, those record Wall Street bonuses aren’t going to be spent at Wal-Mart. 

http://money.cnn.com/2009/12/02/news/economy/luxury_comeback.fortune/