Last October, Verdict Research (part of the Datamonitor Group) published a Global Luxury Retailing report predicting that the Asia Pacific region will overtake the United States as the second-largest market (after Europe) by 2012.

The news may be encouraging for U.S. luxury brands buoyed by tourists’ spending, but it’s proving to be a mixed bag for European brands that have set up shop stateside. Case in point: Louis Vuitton. The Paris-based luxury brand recently announced it was increasing prices in its U.S. stores by 5 percent to offset the weakness of the dollar – a factor that has resulted in the brand’s products being cheaper to buy in the U.S. than in Europe. Other brands, including Gucci, have also raised prices in the U.S. to counteract the steady rise of the Euro against the dollar.

Deborah Weinswig, managing director and senior analyst for Citi Investment Research, doesn’t expect luxury retailers to see a true rebound in sales for least nine months, but she insists some categories will weather the downturn better than others.

“Handbags will continue to sell,” Weinswig says, and “an up-tick in jewelry sales is also likely. Again, consumers think of an expensive piece of jewelry as an investment; it also generally holds its value – especially gold — which makes it stand out from many other luxury purchases.” In addition, she expects high-end fashion apparel to perform stronger than opening-price-point luxury clothing.

A big believer in the role of retail technology, Weinswig asserts that those who invest in IT will have an edge when it comes to navigating economic highs and lows. Those who have recently installed new applications like clienteling software “will generally be more successful at weathering the twists and turns because they’ve got the ability to do a better job of reaching out and connecting with shoppers,” she says. “Once a retailer has a better understanding of who’s shopping in their stores and why, they start to realize the payback.”

Sustaining sales
Christine Chen, senior research analyst at Needham & Co., insists luxury retailers such as Bergdorf Goodman and Barney’s will manage to sustain sales despite a challenging climate. “The biggest and best-known luxury brands are better positioned than smaller, lesser-known luxury items because people generally revert to what’s known during times when they’re purchasing more cautiously,” she says.

Chen, who follows Coach, expects items priced at the high end of the collection to be the bestsellers in 2008. Might economic indicators impact fashion indicators at Coach? “It could happen,” she says. “Women have been buying oversized handbags for a while now. By necessity, they may have to start buying smaller bags.”

Chen expects luxury retailers to control inventory and resist the urge to reach for a red pencil. “Retailers are more likely to make adjustments to the merchandise mix rather than lean on the promotions crutch.”

While sales of some luxury items will stagnate in 2008, Danziger is betting that affluent consumers will opportunistically buy imported and higher-priced items in an effort to get out in front of inflationary trends, as well as invest in their homes. For instance, some will buy real estate at a low price with the expectation of selling at a higher price in a year or two. Likewise, they’re likely to take capital and invest it in strategic home improvements.

Finally, Danziger believes 2008 may prove an excellent time for American designers to move ahead. “With the dollar weak against foreign currency, this is the time for American designers to take their luxury fashions on the road and into foreign markets,” she says. “U.S. prices will be very attractive to foreigners in the coming year. … On the home front, this may be an excellent year for American fashion designers to pick up the pace in marketing and brand building.”    

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