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Six Ways To Profit From The Rebound In Luxury Spending

 February 09, 2010 10:37 AM

(By Larry D. Spears) If the rich truly have gotten richer during the current financial unpleasantness - as some pundits allege - members of the moneyed set have been smart enough to avoid flaunting their new wealth with a rash of high-end purchases.

Lately, however, this seems to be changing: The luxury markets led a January surge in the retail sector - a surge that could mean new opportunities for investors astute enough to grab for the golden ring.

When the economic downturn approached full speed in the fall of 2008, consumers responded by snapping their pocketbooks shut. The entire retail sector quickly went in the tank, and luxury-goods sales dropped in line with those of everyday wares. Holiday receipts fell sharply, dragging retail-sales totals for all of 2008 down by 0.5% - the first annual decline since the U.S. Department of Commerce began tracking retail numbers.

Luxury purchases dropped even harder, prompting ABC World News to headline a February 2009 story, "Luxury Sales Dive as Rich Feel Pinch - Conspicuous Consumption Drops..." In that article, Bain & Company, a top business consulting firm, predicted that luxury sales would fall as much as 7.0% in 2009.

That prediction appeared justified in the ensuing months as such luxury-sector lynchpins as fine watchmaker Movado Group Inc. (NYSE: MOV) and Harry Winston Diamond Corp. (NYSE: HWD) reported sharply lower results. Movado's revenue for the quarter ended April 30, 2009 plummeted 28.0% from the prior period. Harry Winston recorded three straight quarters of declining sales, with its third-quarter 2009 results for its retail segment falling 7.0% year over year. Other high-end retailers - from specialty fashion boutiques like Christian Dior SA to high-end department stores like Nordstrom Inc. (NYSE: JWN) - experienced similar weakness.

The slide might have continued, but for one thing - after bottoming out in early March 2009, the stock market turned higher and rallied through most of the rest of the year. While that didn't help the folks on Main Street all that much, leaving overall retails sales in a sizeable slump, it did pump up the value of Wall Street portfolios, prompting higher-end consumers to begin loosening their purse strings. Sales of luxury items - from fashions and perfumes to jewelry and autos - picked up, as did both revenue and profits for many of the favored luxury merchants (although most still continue to lag their performance in the boom years of 2003 to 2007).

Creative and out-of-character marketing efforts also helped turn the tide for some top-end retailers. The New York Times reported in August that Bloomingdale's in Manhattan was holding "private sales," with individual shoppers being discreetly offered special, unpublicized discounts on items salespeople saw them considering.

A similar strategy was undertaken by Neiman Marcus Inc., which sent out e-mail alerts to select clients just hours before what they called "Midday Dash" sales, which offered discounts up to 50% on luxury items. One week's sale featured a $1,395 Burberry handbag marked down to $697 and a Carmen Marc Valvo chiffon gown reduced from $1,150 to just $575.

Like Neiman, many other high-end brands and stores also began utilizing Internet promotions targeting select customers.

"Not so long ago, many of the luxury brands saw [the Internet] as a vehicle for the masses," said Gregory Furman, founder and chairman of the Luxury Marketing Council, a high-end industry group.

That viewpoint has changed, Furman said. More and more of today's upper-end retailers now see the Internet as a valuable marketing tool.

"The key is to design the message so it feels like personalized, one-to-one, customized marketing that demonstrates understanding of their needs, wants and values," Furman says.

The second-half upturn in luxury sales was sufficient to trim the sector's decline for 2009 to just 0.2% compared to 2008 - admittedly, also a bad year - but it couldn't save the retail sector as a whole. The Department of Commerce reported Jan. 14 that U.S. retail sales fell a seasonally adjusted 0.3% in December alone, led by an 0.8% decline in auto sales (in dollar terms, not units sold). That capped off a dismal year, as total 2009 sales tumbled to $4.14 trillion, down 6.2% from 2008 and the largest decline on record.

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