required to turn around the company.
On the other hand, consider the resurrection of the legendary Italian haute couture house Schiaparelli, known for the introduction in the 1920s of women's shorts, colored zip fastenings, and catwalk shows. After being shut down since World War II, it was repurchased in 2009 by Diego Della Valle and relaunched in 2012. Diego Della Valle, the chairman of Tod's Group who also revived the famous brand Roger Vivier, has brought Schiaparelli back on the stage of the fashion business after more than 60 years. This is not the only case in the luxury world. The almost immortal vitality and endless potential of a luxury brand can never be compared to any other normal brands.
The crisis was a wake-up call for the luxury industry. All métiers were hit by the 2009 recession but not at the same level. The métiers reacted in different ways. Watches were showing the most profound weakness, decreasing in all markets to the tune of 20 percent, which scared the Swiss and most other brands. Jewelry followed with a decrease of 15 to 20 percent. Arts de la table fell at least 20 percent or much more. Ready-to-wear for women and men fell 10 to 20 percent depending on the brands, and even perfumes fell between 7 to 15 percent. It affected L'Oréal, Estée Lauder, Clarins, and their competitors. The most resilient were leather goods, which explains the consistency of Louis Vuitton, Goyard, Hermès, and, within the brands, Chanel, Gucci, and Dior bags and other leather goods.
Overall, the watches and jewelry segment faced a mixed reaction. While the recession was known to hit the watch industry the worst, some people still invested in the Rolex brand in times of crashing stock markets and devaluing currency. Luxury houses like LVMH were known to have fared better than the likes of Richemont, because LVMH, through TAG Heuer, invested in hard luxury versus Richemont, which focused on soft luxury. Brands like Hermès, Swatch, Chopard, Hublot, and De Beers faced declining profits, whereas Dior fared well in the watches and jewelry sector. However, industry figures depicted a decline of 31.9 percent in June 2009 and a slowdown in the summer of 2013 due to unfavorable economic climate in Europe and in China. Swiss exports of watches declined, indicating that it was an industry-wide phenomenon.
For the wines and spirits sector, brands like Diageo, Moët & Chandon, Pernod Ricard, and Rémy Martin all reported a significant decline in profits. Diageo, which was more exposed in Ireland and Greece at the time they were saddled by the debt crisis, was the worst hit of all, indicating a strong negative impact on sales.
Luxury cosmetic and fragrance brands were hit by the recession, too. Estée Lauder and L'Oréal slid into the red, and undertook significant cost-cutting operations. The recession hit this segment in part because women tend to stock beauty products and perfumes. During times of recession, they usually fall back on the stock they have built over the years. However, some companies managed to stay profitable, including Sephora, Revlon, and Sally Beauty.
The crisis was affecting other brands, especially in the field of arts de la table. In 2009, Lalique, Daum, Baccarat, Cristalleries de Saint Louis, and many others suffered a great deal. On the other hand, 2009 was a very interesting period that tested the strengths and weaknesses of the sector. The conglomerates showed poor figures compared to the bright numbers posted year after year for the previous 10 years. Sales of brands such as Burberry, Armani, and Cartier – including the whole Richemont Group – suffered. Hermès, Louis Vuitton, and Prada were probably the most successful survivors; in fact they were winners in terms of announcing positive figures of sales.
The crisis was for real as far as the luxury world was concerned. The response of the luxury sector revealed to the analysts, researchers, investors, and other stakeholders that luxury was sensitive to the economic situation of the global world, just like every other sector. In fact, no one could pretend that luxury was invincible, and rich investors realized that the niche aspect of luxury was fading away. This was in fact the consequence of the evolution of the luxury world. Not only big and financially strong conglomerates with millions of customers faced the crisis – it was also faced by small family-owned players in the luxury business. They were all affected by the crisis and the stock market.
Strategic Response to Crisis
The strategic response to the crisis was not easy. It showed that the evolution of the luxury sector was still wide open. Transformations were taking place. Luxury could not be defined as it had been before. Brands had to reposition themselves during the crisis, adopting starkly opposing strategies.
The response to the 2009 crisis was varied. A change in consumer behavior was observed during the recession, wherein consumers spent a lot more time comparing prices of various fashion brands. Thus, the conversion of a potential customer into an actual customer required more time and resources. Before, a consumer bought 10 products, but now he or she buys just one, and only after careful deliberation.
The broad strategies adopted by players during and postrecession involved two fundamental orientations: internal and external. Internal strategies, as the name suggests, were internal to the company and were those that were not visible to the consumers, whereas external strategies were those that were undertaken to gain the consumer's attention and buy-in. The internal strategies included cost-cutting, greater focus on the product quality, financial restructuring, and downsizing. Bernard Arnault described it thus: “a natural tendency of companies during a crisis such as the one we are in now is to cut costs, drop prices, and stop expanding, because it has the most immediate impact on numbers.”6
The external strategies included expansion in terms of both product offering and geography, repositioning, upscaling of the brand to tap the richer among the super-rich, or downscaling to recruit a larger customer group.
In response to the crisis, as a knee-jerk reaction, some luxury brands tried hiring freezes, reducing the number and the size of the collections, rationalizing media spending, and reducing headcounts. It was felt that dropping prices and cutting costs were the last resorts. The press referred to it as cost containment. For example, Dolce & Gabbana slashed its prices by 10–20 percent. At the same time the company began a search for alternative low-cost stitching techniques and reduced spending on advertising (returning to low rates of 20 years before). Stella McCartney closed its boutique in Moscow just 18 months after it was opened. Richemont closed 62 stores, mainly in the United States, while Burberry absorbed heavy charges on its Spanish stores. In November 2009, Burberry unveiled a cost-cutting program, which resulted in the closure of the Thomas Burberry collection. It hoped to generate infrastructure efficiencies by shutting down six stores and reducing headcount by more than 1,000 people. All this cost Burberry $6.7 million in the period, with the hope the company would generate savings of $77.8 million. In response to the slowdown of Asia, their key market, Burberry announced in September 2012 that it would freeze hiring, lower travel expenditures, cut marketing spending, and defer IT projects. Estée Lauder followed a four-pronged strategy with layoffs of about 2,000 employees, freezes in pay, discontinuations of non-profit-making brands, and cuts in discretionary capital expenditures of 25 percent.
Contrary to the cost containment approach, Bernard Arnault stated, “What we have learned in the many crises we have been through is that this (cutting costs) is a mistake, especially when it comes to luxury… If you don't put your products on sale, consumers feel they are buying something that retains its value… Even during tough times we can continue to invest and during the crises I went through in the past 20 years, we always gained in market share.”7
Different companies tried a different set of strategies to reposition their brands. Christian Dior exited its logo and accessory product business as it pursued an upscaling drive, in the hopes that the super-rich would not be affected by the crisis. Coach, which happened to be in the heart of the subprime crisis in the United States, felt that “normal” buying behavior among consumers had experienced a shift and consumer spending levels would never return to what they had been precrisis. Thus, an internal change in the company itself was required. Coach explored lower price options for the
Vanessa Friedman, 2009.
Vanessa Friedman, 2009.
