Retail Detail. Dangerous Game: Has Saks Ruined Luxury Retail?

February 10, 2009 • Shopping


Has Saks ruined the luxury market, forever?

Saks Fifth Avenue slashed prices by up 70% on designer clothes last November before the holiday season even began…and all fashionista hell broke lose? Manolo Blahnik shoes going for $160? It started a stampede.

According to an in-depth article in yesterday's Wall Street Journal, Saks's deep, mid-November markdowns have completely unraveled the luxury-goods industry. The 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.

The problem Saks faced last November is one that haunts the U.S. economy as a whole: too much inventory. So Sak's strategy was to deeply discount. The problem with that is…shoppers then start to expect it.

Stephen I. Sadove, Saks's chief executive, says his action helped his company avoid massive losses, or worse. However, he might not have counted on his competitors following suit. Hit by the worst holiday season in almost 40 years, rivals including Neiman Marcus and Barneys New York, slashed prices, too. Christmas came early for those shoppers looking for a great deal.

That, in turn, killed smaller boutiques. How could they compete withe the department stores now? Nationwide, boutique owners were blindsided. Tracey Ross, a
well-known boutique in L.A., decided not to match the cuts right
away. So she was stuck trying to sell $2,400 dresses and $1,400
handbags at full price when similar goods were going for pennies just around the corner.

Ms. Ross says she
phoned and pleaded with designers to take their merchandise back. They
were "in complete denial," she says. "They said, 'You're Tracey Ross.
You'll sell it.' "

In the end, she says, she had to discount so
steeply that she couldn't pay her designers. "I am like, 'Do the math.
I sold your $800 shoes for $50.' " She closed her store and filed for
bankruptcy protection on Christmas Eve.

Still, the bigger retailers are feeling pain. Last Thursday, Saks said January sales fell nearly 24%. Neiman Marcus expects its first quarterly loss in a holiday shoppingNm_sale
period that anyone can remember.

Last year luxury goods were still big sellers at full price, but by mid-November, there were already a few signs of trouble. Five days before Saks slashed its prices, Neiman Marcus had cut its own by 40%. And designers themselves were quietly trying to drum up cash by selling current fashions at fire-sale prices (to 90% off) at private "sample sales."

Saks broke the cardinal rule of leaving the goods at full price at least two months, saving markdowns until the very end of the season. Yet, to Saks's surprise when they deeply discounted in November, the luxury brands they carried in their stores like Prada, Bottega Veneta and Louis Vuitton followed suit at their own stand-alone stores.

Perhaps the biggest consequence is that customers are now questioning the entire premise of luxury goods: Why pay top dollar today if big markdowns could be coming tomorrow?

These types of sales could ruin many designers. Some, including Marc Jacobs and Derek Lam, are thinking about splitting their product lines or withholding some top runway items from department stores in order to feature them in their own stores. Clearly, Saks executives aren't in favor of that. Backpedaling, Mr. Sadove, now says  he's working on damage control with designers. "If people's feathers got ruffled, we want to unruffle them."

Extreme discounting of luxury goods is a dangerous game. Not only does it potentially leave customers feeling duped for paying full price, it also erases profit margins of 50% or more.

"The luxury industry has to devise a new business model," says Arnold Aronson,a consultant and former Saks chairman. Late last year, Saks informed designers that they would be expected to cover some of the cost of Saks's price-cut decisions. Saks says the designers weren't asked to shoulder the full burden of its extreme discounting at year's end.

In hindsight, Saks executives say they may have cut too much in some areas. High-end shoes and handbags would probably have sold out, even at higher prices, because shoppers see them as more practical wardrobe updates than another new outfit.

This year, Saks is spending about 20% less on merchandise to keep inventories lower. Will we ever see full price again?

Read "Saks Upends Luxury Market With Strategy to Slash Prices" here.

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