Last updated: November 30, 2012 6:04 pm

Tight belts take edge off Italian luxury

Prada store in Italy©Bloomberg

As austerity measures hit the home of brands such as Prada the quest for bargains has reached a new level of frenzy

For the well-heeled Milanese woman, there is a new must-visit shopping destination – the city's grimy southern industrial district. Here, big name brands hold warehouse sales of this season’s collections at knock-down prices for those in the know. As Italy’s recession deepens, it has become, says one smartly dressed lawyer, “the only way to shop”.

Italians have long balked at paying full price for the luxury goods they consider to be their birthright. But as austerity measures hit hard in the home of Prada, Versace and Armani, the quest for bargains and invitations to warehouse sales with rock-bottom prices has reached a new level of frenzy.

Luca Solca, head of luxury goods research at Exane BNP Paribas, estimates that the Italian luxury goods retail market has shrunk by around a billion euros in the past two years.

In 2010, the domestic market was worth an estimated €16.6bn, equal to almost 10 per cent of the global luxury market of €172bn, according to data from Altagamma, which represents Italy’s purveyors of luxury, and Bain & Company.

Factoring in seasonality and assuming tourist spend grows by 20 per cent this year, Mr Solca assumes that by the end of 2012 “luxury goods sales in Italy will still have shrunk to account for 7.6 per cent of the global market, or €15.7bn.”

Mr Solca blames the plunge on an “abrupt hit” to sales from the end of last year as austerity measures came into force. Company executives and designers complain that moves by the Italian government to stem tax evasion by banning cash payments of more than €1,000 and heavier taxation on property have hit local consumers particularly hard.

The strongest global players, such as LVMH, are indicating that domestic sales are down by around 20 per cent, although overall that decline will be less because of the boost from tourist sales. Weaker brands and players are expected to suffer an even sharper slowdown.

The downturn in the home of many of the world’s best-known luxury brands is adding to signs of a slowdown in the global industry. British brands Burberry and Mulberry have also been hit by consumers spending less, while a pullback in shopping in mainland China by consumers feeling the pinch from the country’s economic deceleration has taken the heat out of luxury goods shares.

Executives point out that in Italy, as in France and the UK, tourism is taking up some of the slack in sales. Armando Branchini, executive director of Altagamma, says that in major cities such as Milan as much as 70 per cent of luxury goods sales are to tourists.

However, shopping by Asian, Middle Eastern and Latin American shoppers cannot offset the depth of the plunge. Mr Branchini says another important trend depressing sales is that younger consumers who have benefited from the boom enjoyed by their parents are suffering from consumer exhaustion, along with more restricted means. “The cupboards of the young are full,” he says.

Sales to tourists are centred on Milan, Rome, Florence and Venice, so executives are being forced to shutter hundreds of stores in the smaller towns where luxury goods shopping has been a feature of Italian life for decades.

At Tod’s, the group behind the Tod’s, Hogan, Fay and Roger Vivier brands, group sales in the third quarter fell 16.9 per cent due to its overexposure to Italy. It has this year closed 130 stores out of its portfolio of 800 as it starts to shift its focus away from its home country.

Italy now represents 43 per cent of the business compared with 53 per cent this time last year. Meanwhile, sales to the US and Asia have increased. Thomas Mesmin, an analyst at Cheuvreux, believes “the collapse of Italy” should accelerate Tod’s “internationalisation and premiumisation,” or encouraging customers into higher price brackets.

For less nimble companies the outlook is darker, especially for those high-end designer brands perceived as now too expensive for Italians but which do not have the international presence to reach enough wealthier consumers beyond Europe.

Analysts say brands which thrived in the 1980s and 1990s consumer boom in Italy, such as Versace, Roberto Cavalli or Dolce & Gabbana are vulnerable to a dramatic downturn in Italian spending.

Worse still is the position of the “mom and pop” wholesale retailers that have been a feature of Italian town centres for decades. While luxury brands can hope for a bail out from a wealthy buyer, such as Qatar’s purchase this year of Valentino, these small wholesale retailers have no exit strategy. “The crisis is killing them”, says Mr Solca.

 

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