Is the Luxury Slowdown Normalization or Inflation?

There was a time last year when we heard luxury retailers say that the slowdown they were experiencing was a sign of “normalization,” but now they are warning that profits are continuing down. So, is this truly “normalization” or just inflation at its finest?

Read more: Luxury Retailers Say Slowdown Is a Sign of ‘Normalization’

The most recent luxury retailer to issue a caution about diminishing profits is Burberry, which delivered its warning on Friday (Jan. 12). The British brand attributed the impact on its bottom line to a decline in luxury sales during the holiday season.

For the fiscal year ending March 30, Burberry expects an adjusted operating profit between £410 million and £460 million, or about $524 million to $588 million. These figures are lower than the previous guidance given in November, which projected a range of £552 million to £668 million.

“We are continuing to deliver the transition to our new modern British luxury creative expression for Burberry which started appearing in our stores in early autumn,” Jonathan Akeroyd, CEO, said in a company press release.

“We are still in the early stages of executing on this, which has become more challenging against the backdrop of slowing luxury demand. We experienced a further deceleration in our key December trading period, and we now expect our full year results to be below our previous guidance.”

The company is reportedly committed to achieving £4 billion in revenue.

For the 13 weeks ending Dec. 30, total retail revenue was £706 million, compared to £756 million in the same period in 2022. Comparable store sales declined in the Americas by 15%, and in South Korea and EMEA by 10% and 5%, respectively.

The updated guidance comes before the planned Q3 trading update Friday (Jan. 19).

In November, the company reported an 18% profit decline, citing an overall slowdown in the luxury sector and warning that achieving the previously stated revenue guidance for FY24 is unlikely if weaker demand persists.

But it isn’t just Burberry who’s running to raise caution.

Earlier this month, Neiman Marcus Group mentioned a slight decrease in holiday sales compared to the previous year. Despite challenges in the luxury market and cautious shoppers, the company was pleased with the results, considering the impact of promotions in the retail sector on margins.

Geoffroy van Raemdonck, NMG’s CEO, provided that assessment during the ICR Conference in Orlando, Florida, this month. He provided positive insights into the holiday performance for fiscal year 2024, indicating a minor decline in comparable sales with consistent store trends. He noted that the company strategically focused on its relationship business model to enhance sales in the demanding luxury retail landscape. Van Raemdonck was content with the holiday momentum, noting the improvement from a negative 8% in comparable sales during the fiscal first quarter. Additionally, he highlighted increased spending among top customers and brands, along with strength in luxury categories such as jewelry, designer handbags, women’s shoes and beauty.

“While we are comfortable with our inventory position currently, we are competing in a retail environment that continues to be highly promotional and continues to impact our gross margins,” he said.

What Luxury Is Doing

Luxury brands typically steer clear of significant discounts to uphold their exclusive image, posing a challenge in discreetly selling unsold items without appearing desperate. While burning excess inventory was once common, it’s now discouraged due to the European Union’s ban on incinerating fashion waste.

In an effort to maintain brand control, luxury brands are reducing discounts by emphasizing sales through their own stores rather than wholesale accounts. They’ve also tightened control over department store discounts by establishing concessions to manage inventory and prices.

However, with an excess of stock, luxury brands are exploring alternatives. Off-price outlets have gained popularity, enabling brands to sell large quantities with adaptable pricing. Brands are also contemplating unofficial resellers who buy surplus goods and profit by exploiting regional price variations. Despite attempts to curtail this, recent reports indicate some brands are directly selling inventory to resellers.

Luxury’s Other Alternative

To be a successful luxury brand, you might not have to become the next Brunello Cucinelli, who is known to offer astronomical price points, but you can focus on the super wealthy — a move many luxury labels have pivoted to.

Last month PYMNTS wrote: “Wealthy consumers are like the VIP shoppers of the economy, representing a select group but packing a punch in spending power that checks out as a disproportionate percentage of overall consumer expenditures. In fact, the wealthiest one-fifth of Americans account for about two-fifths of all spending.”

During inflation, affluent shoppers have a potential retail advantage due to their financial resilience, and are more attractive to brands and retailers.

Companies like MyTheresa and Gucci have fully embraced this cohort of consumers.

Read more: MyTheresa Pivots to Savvy Shoppers With Serious Spending Power

How High Spenders Are Doing

The current economy, marked by inflation, has seen credit cards playing a vital role.

High-spending consumers, heavily reliant on credit cards for daily expenses, are now seeking alternative payment methods for essential goods and services.

A collaborative report by PYMNTS and Elan Credit Card reveals that in the past six months, one-third of cardholders increased their credit card expenditures, driven by a rise in costs. High spenders, constituting 38% of consumers using credit cards for at least 40% of monthly expenses, face challenges, with 12% maintaining revolving balances. Wages and income reduction, noted by 22% of high spenders, contribute to increased credit card usage.

Read more: ‘High Spenders’ May Seek Credit Card Alternatives as Balances Build

Opting for Balance

While certain retailers have focused heavily on affluent shoppers, the question arises: What happens when the aspirational shopper is ready to spend again?

In such a scenario, adopting a more balanced approach by targeting the aspirational shopper through strategic marketing and introducing approachable price points can help retain their patronage. Choosing to exclusively cater to the affluent may provide a quick spending boost, but it risks losing potential loyalty from the aspirational shopper, who has the possibility to make more frequent purchases compared to a one-time affluent shopper. The decision rests with the retailer, considering the price point differences between affluent and aspirational shoppers.

Are you willing to alienate one shopper for the other? Are you the Brunello Cucinelli of retail? But maybe rethink that, because even Brunello Cucinelli allows consumers to pay in installments.

Read more: Brunello Cucinelli: When Consumers Recognize Product Value, They Spend