The UK edition of fashion bible Vogue may have its finger more firmly on the pulse than it cares to admit. Its February cover star was Cheryl Cole, a TV talent show winner turned TV talent show judge, wearing a €1,225 gold satin Prada dress. This was the first time that the haughty glossy had put someone as déclassé as a pop star on its front page since 2003 — although it did honour Victoria Beckham, in a Nina Ricci silk dress (costing ten times as much) last April, after the former Posh Spice had quit music for “a fashion career”.

While the Girls Aloud and The X Factor star’s “revelations” helped shift 240,000 copies of the magazine — a record for the month — the populist gesture highlighted Vogue’s sudden predicament. The number of ad spreads — costing nearly €20,000 per page, and peddling some of the most pedigreed of labels — is down 20%. The January issue was around 60 pages thinner than a year ago. Meanwhile, the magazine’s US publisher, Condé Nast, decreed that Men’s Vogue, launched in 2005, would appear twice yearly instead of 10 times. This got off lightly, though: Condé Nast recently closed its German edition of Vanity Fair, citing the economic downturn, while Doubledown, publisher of Trader Monthly, Private Air and other aspirational titles, collapsed entirely. 


Newsstand grazers hardly need to consult the financial pages to glean that the €175bn luxury goods sector, long thought immune to economic fluctuations, is feeling the effects of the worldwide slump. MasterCard SpendingPulse reported luxury goods was the worst hit category in the final two months of 2008, with year-on year sales nosediving 34% between 1 November and 24 December in the US. The angst wasn’t all Stateside: for example, Tiffany’s global sales fell 21% during that period, with chief executive Michael Kowalski noting “cautious spending across the entire range”. 


In February, LVMH Moët Hennessy Louis Vuitton, the world’s biggest luxury group, revealed that year-on-year revenue growth plunged from 12% in the first half of 2008, to zero in the final three months of the year. For 2008 as a whole, sales rose by 4% to €17.2bn only because of favourable currency movements. Significantly, while scents and leathers did okay, profits fell in the more lucrative watches and jewellery business, undermining chief executive Bernard Arnault, who, 12 months earlier, had snorted that LVMH’s growth was resistant to economic cycles.


Arnault was not the only chief executive to be publicly humbled. Bulgari’s Francesco Trapani predicted a “very difficult” 2009 — its 125th anniversary — while reporting a 17% fall in jewellery sales and a drop of 28% for watches in the last quarter. And Gianfranco Ferré may be the first fashion label to file for bankruptcy: its owner, Milan’s IT Holding, says it cannot afford the royalties on licences for Just Cavalli, Versace Sport and Galliano.


Piling on the gloom, in the same month Richemont issued a profits warning as it reported a 12% fall in sales in the last three months of 2008. The Swiss owner of Cartier, Piaget and other high-end brands, described current market conditions as the worst it had encountered for 20 years. In a statement, Richemont said it saw “no cause for optimism”. Between last November and January the stock hit a new 52-week low 11 times.


On one of those tarnished days, the iconic French label Chanel pulled its globetrotting, handbag-shaped art exhibition, citing a “refocusing of investments”, portending the many muted or cancelled parties during the holiday season. The fashion industry’s new buzzword was ‘intimate’, evidenced by the 30 people instead of customary 500 at the Dior bash at New York’s Fashion Week. The mood was equally subdued at the annual Salon International de la Haute Horlogerie watch trade show in Geneva, where the number of buyers and press was down about a fifth on 2008.


The change in consumer attitude has been so rapid that New York-headquartered analyst Bain & Company, which publishes an annual luxury business report every October, will publish revised forecasts in April. Speaking exclusively to CNBC European Business, Claudia D’Arpizio, a Bain partner in Milan and lead author of the study, now predicts as much as a 9% decline in global luxury sales for 2009 as confidence shatters in mature markets. The growth of global luxury goods sales in 2008 slowed sharply to 2%.


“We were surprised by the level of the impact but not the downturn. This is the first time the market is global but also the market is consolidated in terms of customer base — an effect of the so-called democratisation of luxury,” says D’Arpizio. “Since the mature markets of the US, Japan and Europe contribute nearly 80% of luxury sales, soft spending in each region is already taking a toll.” 


The analyst expects luxury players to focus on category management, adjusting to shifts in taste and buying behaviour, engineering a shopping experience “that draws consumers to the best-performing, highest-margin products. Shoppers are focusing more on quality and intrinsic value”. 


D’Arpizio expects the biggest slides to be on luxury’s lowest slopes — the “aspirational” segment, where brands such as Gucci target upper-middle-class consumers with €500–€1,500 bags; and the “accessible” segment, where brands like Ralph Lauren widens its sights with €250–€500 bags. These segments accounted for about three-quarters of spending in 2008. At the highest tier — which Bain defines as 70 brands including Hermès and Chanel — sales for 2009 are expected to hold steady, following growth of 8% in 2008. 


High-end jewellery is likely to be more resilient, but more accessible jewellery will be hit, says D’Arpizio. “Luxury watches are typically purchased by men, and are directly impacted by the loss of jobs and bonuses.” 


Cosmetics and fragrances may avoid the worst of the recession, says D’Arpizio. “Emotionally, consumers are seeking products that are less ostentatious, and also looking for small indulgences. Cosmetics and fragrances help consumers stay loyal to the luxury brands they value, but at a lower price point.” 


Nevertheless, the sector will still inflict some worry lines. Quarterly sales at France’s L’Oréal, the world’s largest cosmetics company, fell for the first time at the end of 2008, as luxury products, such as Lancôme creams, which account for one quarter of sales, were left on US shelves. Mass market brands, such as Garnier and Maybelline, though, held their own. Chief executive Jean-Paul Agon said the split between the group’s more resilient mass market business and a slowdown in luxury brands would likely continue this year, for which he declined to offer a profits forecast. 


But it is the clothing sector that will see the biggest changes, says D’Arpizio. “Consumers have started to prefer luxury goods with a longer lifespan. In addition, Bain is seeing consumers become more willing to mix and match, including cheap chic items in their wardrobes. In accessories and leather goods, shoes remain an area where luxury consumers are less willing to compromise. This is especially true for women’s shoes, where high quality and strong fashion content can be had for a lower price than the handbags, which have come to symbolise the era’s excesses.”


Yet despite the credit crunch slowing the pace of development in emerging markets, Bain still predicts that luxury goods will rebound quickly, with spending surging 20%–35% over the next five years in Russia, China and India and Brazil, a consequence of increasing personal wealth, growth in global GDP and rising tourism.


The luxury industry cannot take this for granted though. According to a recent survey by DDMA Market Research & Consulting, Shanghai retail sales growth during the recent Chinese New Year period fell to single digits for the first time in three years. Chinese millionaires cut their spending to about two million yuan apiece last year, according Hurun Report, the country’s leading luxury business magazine. They had been forecast to spend about five million yuan before the stock market slump. 


Luxury houses may need to copy their customers’ belt-tightening but it is a juggling act between closing stores and cutting prices, says D’Arpizio. “They don’t want to take actions that could dilute their brand equity and positioning.” She says the players that will eventually capture additional growth will be the ones that improve consumer targeting, by rethinking the shopping experience, creating customer loyalty and driving growth “organically” through localised marketing. 


“We’re already seeing budgets being reduced as revenues are reduced. Advertising has been cut and a lot of budget is now being invested below the line — store revamps, direct mailing to core customers, activities with higher redemption rates. Brands have to resist the temptation to cut back on things like creativity and developing a premium shopping experience. As with the downturn at the beginning of this decade, brands that cut overhead costs while investing in customers and products will be in the best position to recover once the economy improves.” 


Of course, it also helps if there is a lot of cash on your balance sheet. While some companies, including LVMH and Salvatore Ferragamo, are scaling back openings — late last year Louis Vuitton scrapped plans for a new 10-storey flagship in Tokyo’s Ginza district — debt-free Giorgio Armani plans to open 10 Chinese stores in 2009, part of 35 new outlets worldwide. The company says revenue in China rose 34% in the first five weeks of 2009. It aims to have 150 outlets in China, Hong Kong and Taiwan by the year-end, and is also planning new flagship for Tokyo’s Roppongi district, having had a store in Ginza since November, 2007. Visibility is crucial, it seems, even if trading conditions are brutal.


Italian compatriot Ermenegildo Zegna, plans three flagship stores this year, even as it slows openings of smaller outlets. “We can’t change strategy every year,” chief executive Ermenegildo Zegna said at a February presentation in Milan. “This is also the moment to take advantage.” The first opened in Tokyo in March. Dubai and Hong Kong are next. 


Luxury brands are also piling into Brazil, where GDP is still growing, albeit at a reduced rate (see p52). Missoni, opened a concession inside the new NK Store in São Paulo last autumn, three months after Giorgio Armani opened a second boutique in the city. Gucci opened its first directly owned flagship in São Paulo in November, an event the then CEO Mark Lee called “a milestone move”. 


But not everyone believes that rollouts will safeguard the luxury brands in the long-term. Martin Raymond, of consultancy The Future Laboratory, says a radically different map of luxury will emerge over the next decade as BRIC economies combined with the growing wealth of the “Next 11” — Egypt, Indonesia, Mexico, Nigeria, Pakistan, The Philippines, South Korea, Turkey, Vietnam, Iran and Bangladesh — become more important to the sector than markets in the West are now.

“There are growing aesthetic and social differences that luxury brands will have to embrace if they are to woo these markets long-term,” says Raymond. “Russian tastes have changed over the past decade, from full-tilt bling into a more refined aesthetic. In the Middle East we are witnessing similar changes. To survive, they [Western brands] won’t just be expected to adapt, but to adopt the culture, social and ethical values of the people buying them.” 


More fundamentally, some observers say the luxury business will have to reinvent itself at home. Jean-Noël Kapferer, a professor of marketing and author of The Luxury Strategy, says the current luxury crash is a necessary corrective. “Luxury brands have survived many other crises and they will survive this one but the ones that will prosper are the ones that don’t bow to customer whims, or ‘position’ themselves.” 


He says many consumers’ long-term attitudes will change. “People who are tightening their belts now or buying substitutes may decide they’re not missing anything after all or what they miss will be genuine luxury. For example, the difference between a 12- and an 18-year-old Cognac is not much, but between an 18- and a 25-year-old is enormous.”


Kapferer says there will be a shift towards higher value and away from what can be outsourced: “Luxury is the ambassador of a culture, therefore it has to be rooted somewhere – France, Italy, the UK, wherever.” 


Finally, Kapferer notes that the most 
successful luxury brands’ advertising messages have always been humble and factual. “I think we may now see more brands play down the fashion angle. Pruning a tree 
makes the trunk much stronger. In the West at least, we may be seeing the end of the big logo sunglasses.” 


Possibly, even for Cheryl Cole.