Globally, the luxury fashion segment has come under pressure since the financial crisis as consumers cut spending in favour of higher savings and repaying debt. Retail spending is expected to improve in the second half of 2011 as the savings rates stabilises, unemployment levels remain low and average weekly earnings increase.
Since the global financial crisis Australians have increased their savings rate to just under 10 per cent, the highest rate since the mid-1980s. Consumers have also been focusing on reducing debt levels – credit card advances for instance are at their lowest level since 2004.
However, Australians have not stopped spending, rather become more discerning about their purchases. Retailers now need to fight for every dollar and provide better customer service, competitive prices and greater variety in order to retain customers. There are challenges for luxury brands, however, in a climate marked by heavy discounting among major retail and department stores.
The consumer price index for clothing and footwear fell to 106.9 in the December 2010 quarter, down by 4.8 per cent a year earlier. This shows the retail price of garments is contracting as businesses turn to discounting as a way to entice customers, and this is having some flow through to full-price, luxury spending.
The Oroton Group, which includes the premium Oroton and Ralph Lauren brands, posted revenue growth of 7.1 per cent over the first half of 2010/11 to $87.4 million, and flat net profits at $15.4 million. Oroton highlighted its decision to hold back on discounting – to preserve the long- term viability of these brands’ image – as a major reason for the poor sales result.
According to the latest Australian Bureau of Statistics information, spending in Australian department stores fell year on year for January (seasonally adjusted) by 4.1 per cent. This figure is supported by the latest figures released by Myer and David Jones, two stores which carry high-end designer brands.
Myer reported a 3.5 per cent fall in sales over the first half of 2010-11, while David Jones reported flat revenue figures which contracted by 0.2 per cent over the corresponding period. The marginally better performance by David Jones can be attributed to the fact that customers from higher socio-economic backgrounds tend to remain more resilient than the middle class to economic uncertainty.
And there is enough movement on the luxury front to encourage optimism for the near future...
The recent decision by Melbourne’s Chadstone shopping centre to open a “luxury precinct” including 12 luxury brands, in addition to 50 Australian and designer boutiques, suggests there is a growing market for such goods. Both Myer and David Jones are in the process of aggressively increasing store numbers and investing in refurbishment of stores to improve their appeal and image. Myer is planning on opening 15 stores by 2014 and David Jones is opening between four and eight stores by 2016.
The department stores are also wrangling to enter exclusive agreements with a number of designer brands to promote their market positioning. Recent additions to the Myer portfolio include Catherine Malandrino, Jayson Brunsdon Black label and Lee Anglomania by Vivienne Westwood; with top line sales at the store growing slowly between 2006 and 2010 from $3.17 billion to $3.2 billion. The newly refurbished Myer Melbourne store now includes a designer-only floor.
Meanwhile, David Jones’ top line sales have risen at a faster rate from $1.8 billion to $2.05 billion. In January 2011, it undertook a revamp of the labels carried by the department store. David Jones announced plans to boost its brand collection by a further 30 local and international brands including Versace and Pucci. As part of the shake-up, it ended its relationship with Simona, Escada and AG by Arthur Galan.
There are challenges however: online shopping is presenting a growing problem for traditional Australian stores which carry designer labels. Until the global financial crisis many international labels had shunned the internet as an avenue for revenue growth. They are now viewing it as a viable option; for example, Marc Jacobs finally introduced an online retail store in September 2010. While many of these sites currently send to US-only addresses, consumers are using services such as Parcel It On which offer freight forwarding from the US to Australia.
Other online retailers offer more direct methods to access designer goods. UK-based Net-A-Porter offers online luxury fashion and has over 2.5 million views each month, boasting over 300 designer brands. UK-based ASOS.com can offer items below Australian retail prices, with a Hugo Boss men’s suit recently priced at half the Australian retail price. Ongoing campaigns by retailers, including David Jones and Myer, to reduce the level at which GST is levied on goods imported into the country through internet retailing suggests it represents a significant leakage for these retailers. No doubt, greater insights will be revealed when the Productivity Commission investigates this matter as part of its current inquiry into the retail sector.