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Luxury retailers worry that shoppers may pull back on spending

The recent stock market upheaval reminds high-end retailers of 2008, when the market crash led to deep cuts in spending among the wealthy.

August 13, 2011|By Andrea Chang, Los Angeles Times
  • Shoppers wander down Rodeo Drive outside the Salvatore Ferragamo store in Beverly Hills. Luxury retailers have watched nervously this month as stocks fluctuated wildly, which could cause their customers to pull back on spending.
Shoppers wander down Rodeo Drive outside the Salvatore Ferragamo store… (Mariah Tauger, Los Angeles…)

A week ago, Michael Heller was ready to drop thousands of dollars on a Jaeger-LeCoultre watch that he'd been coveting. But the recent stock market upheaval made him rethink the splurge.

"Instead of making an impulse purchase on a $3,000 or $4,000 item, we're going to wait six months," the 40-year-old management consultant said while shopping in Beverly Hills. If things don't rebound quickly, he added, further belt-tightening could occur "very soon."

That kind of thinking has spooked high-end retailers, who have watched nervously this month as stocks fluctuated wildly. Many fear a repeat of 2008, when the market crash led to deep cuts in spending among the wealthy and forced retailers to offer discounts as high as 70% off fresh designer merchandise. Luxury was the worst-hit retail sector during the recession.

In Beverly Hills this week, Pol' Atteu said the stock market turbulence was especially disappointing because it came just as things were starting to look up at his namesake haute couture women's boutique.

"We were all pumped, and now it's like — boom. Another hit," he said. "It's hard to recover, and emotionally it's draining."

The luxury sector has been a consistent bright spot in the retail industry this year, posting robust sales month after month as wealthy shoppers spent freely on designer handbags, shoes and jewelry. Luxury brands have been selling out of products even as they've raised prices. Chanel, for instance, has seen its $4,300 jumbo classic flap bag fly off shelves despite a $600 price increase in June.

Last month, luxury sales excluding jewelry soared 11.6% year over year, the 10th consecutive month of increases, according to data service MasterCard Advisors SpendingPulse, which estimates total U.S. retail sales. July sales were up 15.6% at Saks Inc., 7.7% at Neiman Marcus Inc. and 6.6% at Nordstrom Inc., outperforming the overall retail industry, Thomson Reuters said.

But luxury shopping is tied closely to stock market performance. Analysts said rich shoppers could pull back again if their portfolios take a big enough hit and if they sense long-term volatility.

"There's both a buying-power issue and there's also a confidence issue, both of which have been pretty well shaken in the last week," said Mike Berry, director of industry research at MasterCard Advisors SpendingPulse. "Ultimately if it becomes a prolonged slump, it's going to magnify the confidence effect and could take it beyond just a blip sort of thing and really begin to impact people's behavior."

That would be bad news for the struggling economy because affluent shoppers wield outsized spending power: the richest 20% of households account for about 40% of total consumer spending in the U.S.

Major retail stocks have fared a bit better than the stock market as a whole in the slump of recent weeks. A Standard & Poor's index of 92 retail stocks is down 11.2% since July 22, a smaller loss than the 12.4% drop of the S&P 500 index.

But many luxury stocks have plunged further over the same period; Saks has slumped 24.4%, Coach is down 18.6%, Tiffany & Co. has fallen 17.6% and Nordstrom has declined 14%.

Luxury retailers say they've already noticed a shift in mood among wealthy shoppers.

"Any time the market fluctuates like this, my business is impacted immediately," said Jodie Robinson, owner of casual couture women's boutique Anne Michelle, which has locations in Beverly Hills and Agoura Hills. "We were having a really good month and then it just fell off last week. People are not in a good mood to shop; it's depressing and uncertain."

After a strong July, sales have weakened this month at Eddia Beverly Hills, a luxury lifestyle boutique that sells $185 neckties and men's suits that start at $2,500.

"We were doing very well, but this month in particular it's taken a dive," store associate Steve Palabod said. "If the market is affected, it's going to affect us."

But Sherif Mityas, a partner at management consulting firm A.T. Kearney, cautioned that it had only been a week of wild market swings. He said it was too early for luxury shoppers and retailers to panic.

"This is a blip in the financial market; this is not going to impact the trend and momentum that the luxury retail consumer is on," he said.

That was the mind-set of David Kevorkian, 55, who was hanging out in Beverly Hills this week. The owner of an LED light bulb manufacturing business said he was brushing off the recent financial turmoil.

"I look at it as an opportunity for the stock market to rebound. I'm not going to change my lifestyle at all — one life to live," the Burbank resident said.

Others said they were adopting a wait-and-see approach.

On Rodeo Drive, 44-year-old Dominic Farrell, who plays the stock market for a living, had just spent $600 on clothing and a handbag for his daughters at Juicy Couture.

"If it really does crash, then yes, we'll change our spending," he said. "But if it keeps going up and down, we will be making adjustments."

Then he and his family headed into Louis Vuitton.

andrea.chang@latimes.com

Staff writer Tom Petruno contributed to this report.

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