What Effect does Financial Crisis have on the Fashion Luxury Market - Coursework Example

What effect does financial crisis have on the fashion luxury market? Teacher’s 6th May 2009 Table of contents Topics Page # 1. Introduction What does financial crisis mean?.............................................................................. 3 Luxury goods and the present scenario? .................................................................. 3 2. Effect of financial crisis on fashion luxury market…………………………….. 4 3. Measures taken to prevent luxury items from financial crisis…………………. 7 4. Highly effected luxury products……………………………………………….. 8 5. Conclusion …………………………………………………………………….. 9 References 1. Introduction What does financial crisis mean? The term financial crisis is largely used when the financial institutions lose a large quantity of their value. The financial crisis is allied with banking panics, stock market crashes, bursting of financial bubbles, currency crisis and sovereign defaults. The global financial calamity started in July 2007, when around the world stock markets collapsed, and the financial institutions plunged. The governments started to release some effective packages in order to save their financial systems. The investors became frightened by the abrupt decline in the stock market, which reduces their investments in the market. Luxury goods and the present scenario A luxury good is a good for which the demand of the consumer increases as the income level increases. Luxury goods have always been a symbol of prosperity and wealth for ages, for the spendthrifts, who desire and enjoy buying. Owning and wanting to be the owner of luxury items such as the latest designer clothes, jewelry, watches, is a pleasure on its own. Items that comes with a heavy price tag than ordinary items and have a known brand name is identified as luxury item. In economics, luxury goods have said to have high elasticity of demand, which means that when buyers become wealthier they would like to spend more and more cash on the luxury items. It also means that when there is a turn down in income level there will be a decrease in demand. Both income and demand are directly proportional to each other, if one increases the other rises as well and vice versa. Income elasticity of demand is not constant with respect to income, and the demand may changes at different income levels. That is to say, a luxury good becomes a normal or an inferior good at a higher income, if we take an example of a rich person who would stop buying increasing numbers of luxury cars for his automobile collection to start collecting airplanes as his purchasing power increases. Some manufactured products, got the status of luxury item due to their quality, design and better performance as compared to the products, which are said to be the subsitute of the item. More importantly, due to an increased competition in the market, consumers are less brand loyal and would switch to another brand easily. To retain customers, it becomes essential that the luxury item should maintain and improve the functionality, features and style, with increased durability and performance. Luxury goods tend to play a vital role of status symbol as these goods identified the purchasing power of people who own them. These goods are not necessarily only used for their quality and performance but rather used because of their hefty price, in order to display the wealth of the purchaser. 2. Effect of financial crisis on the fashion luxury items Due to the downturn in the financial systems globally, this year, things seems to be getting worse. Specifically, for the fashion luxury market because it is influencing the purchasing power. In order to find a suitable position in the market in such turmoil, all businesses are trying hard that their items generate revenue. An importer of luxury fashion goods reported that the company’s sales revenue declined by 11 percent since September 2008. According to him, the fourth quarter dropped the sales last year. "Many people have less money in their wallets due to the sharp decline in the stock index caused by the global financial crisis with foreign investors pulling out of the local capital market," he explained. The country’s economic condition leaves purchasers, even who are of high income, disappointed. He thinks that, “the global financial downturn is going to hit much tougher to the company’s sales this year. Many people are short of money due to the crash down in the economy which results in the financial crisis.” An article in NewYork times says “that people will feel poorer and spend less, resulting in a severe economic slowdown”. France which is considered to be an origin of luxury fashion goods is hardly hit by the recession. The high income consumers allover, has taken aback from the purchase of luxury items due to the economic slump. Every day seems to bring a wave of bad news in the industry and results in the fretfulness for the firms. The high-end market or the luxury market was once considered to be the toughest market which was immune from the decline in economic crash down and would take less pressure, now is deteriorating the sales growth of the luxury market of United States, Europe and Japan. In an article of China Daily, Battered luxury brands eye Chinese market for growth, says, “A study by the Bain & Company consultants in October predicted global luxury goods sales growth would slow sharply to 3 percent to hit 175 billion euros ($220 billion) in 2008. The slower growth rate stood in sharp contrast with 6.5 percent in 2007 and 9 percent growth in 2006. The study also forecast the luxury sector would face its first recession in six years in 2009, with sales declining by up to 7 percent.” This study shows that the luxury market of US, Europe and Japan are likely to decline in the financial turmoil. The global recession is definitely affecting the buyer’s purchasing power and changing their spending habits and in this situation luxury items are the first to decline. The US luxury consumers are spending very low on the items due to the fluctuations in the market. The American Affluence Research Center surveyed and figured that in the luxury items category, the respondents expect to spend less for another one year. Things are turning out to be quite serious and in great depression globally and more specifically in America, which has been hit hard by the financial turmoil. The extravagance items are no more in gleam as the recession has put the market in grave circumstances and also affecting a well celebrated big event Christmas. Dennis Weber, a luxury goods analyst says, "We expect the downward trend to continue into Christmas - the key time for these brands - with no let-up in the new year.” This means customers of all kinds are feeling the pain and facing the financial crisis throughout the world and the situation would continue to remain the same or could become worse for another year. Hong Kong which is a place of some of the Asian’s richest and successful people is now also experiencing a great turmoil in the fashion luxury market. The good times of the Hong Kong luxury items seems to fly away when the crisis hit. According to Peter Smith, head of research and consultancy with Savills Valuations and Professional Services, “the luxury sector looks set to fall by 25 to 30 per cent in the near future, wiping out all of the gains of the past year.” The consumers continued to spend carefully on the luxury items as they could feel the pain of economic crisis and high end income consumers are directly hit by the recession and are trying hard to change their ways of living and spending money. Stevens, PA conducted latest survey which finding tells, “In the fourth quarter 2008 affluent consumers spent 6.4 percent less on luxuries than they did in third quarter 2008.  The segments of the luxury market experiencing the steepest declines in consumer spending were luxury fashion accessories, kitchenware, electronics and upscale home furnishings.”  3. Measures taken to prevent luxury items from financial turbulence When the hard time comes the consumers would not spend money on the luxury items and would tighten their purses. So in order to sustain in the market D’Arpizio suggests some golden rules for the luxury makers which would help them to uplift their business and cope with the economic fluctuations. He says “Build a Smart Cost Culture - hunt for profits (in working capital, G&A, supply chain) but avoid cutting strategic costs (marketing, creativity). Dont under-spend versus competitors. As with the downturn at the beginning of this decade, brands that cut overhead costs while investing in their customers and products will be in the best position to recover strong year-over-year growth once the economy improves." 4. Highly effected Luxury products (by Bain & Company) These luxury items are identified by Bain & Company in a press release: Jewelry sector growth has dropped off from +9% in 2007 to +2.5% in 2008 as jewelry sales in both Europe and the Americas have cooled. Watches (+9%) seem to be the only category resilient to economic downturn, largely due to emerging markets which are driving growth (watches are usually the first "luxury item" to be purchased in emerging economies). Fragrance growth will be cut in half in 2008 to +2.6%. Financial high-flyers feeling the pinch of the global economic meltdown scrambling to sell Ferraris for a loss. Sales are decreasing also in the automobile industry which involves luxurious cars like BMW and Ferrari Conclusion After discussing point of views with reference to many articles, it is stated that the fashion luxury market was hit hard by the economic fluctuations and predictions are being made that it will remain in recession in 2009. Different strategies could be adopted by luxury makers in order to sustain in the current crisis situation. The consumers either of high-end income or of middle level income, both are in a state of anxiety and uncertainity and are feared of spending money. The companies should make their products affordable for the purchasers, so that the luxury items should come through comfortably, should introduce programmes for the old customers which make them purchase the product, help to maitain the sales revenue and becomes profitable. According to the above described studies it can be concluded that many firms are experiencing financial downturn from the past year 2008 and the forcast has been made that this turbulence will continue for the year 2009. So the measures given by an anaylst in the above discussion could be helpful in order to avoid too much fluctuations in the sales of luxury items and on the overall business. References: Bain & Company. (2008, November 29). Worldwide luxury goods market growth projected to slow substantially by end of year and head into recession in 2009, from, http://www.bain.com/bainweb/About/press_release_detail.asp?id=26657&menu_url=for_the_media.asp. Elaine Sciolino. (2009, January 14). In the Lap of Luxury, Paris Squirms, from, http://www.nytimes.com/2009/01/15/fashion/15paris.html. Rosamund Urwin. (2008, November 12). Luxury is feeling chill of recession, from, http://www.thisislondon.co.uk/standard-business/article-23600020-details/Luxury+is+feeling+chill+of+recession/article.do Xinhua. (2009, April 11). Battered luxury brands eye Chinese market for growth, from, http://www.chinadaily.com.cn/bizchina/2009-04/11/content_7669126.htm. Read More