Downturn Goes Upscale

By Ylan Q. Mui
Washington Post Staff Writer
Saturday, October 18, 2008

The low point came last week at Carol Mitchell's high-end boutique in Tysons Galleria.

For most of this year, sales of her Prada belts, Gucci shoes and Lanvin dresses had tracked last year's performance. Then the Dow industrials suffered their biggest decline in history, and her wealthy client base felt the pain. So did sales.

"The floor fell out of the place," Mitchell said. This week, on mixed news in the markets, some cautious shoppers returned.

Mitchell used to believe the conventional wisdom that luxury stores and their well-heeled shoppers were impervious to economic downturns. But as financial whiplash continues on Wall Street, sales at some of the nation's toniest retailers are plummeting. Many shoppers are cutting back and trading down, turning purchases such as designer stilettos from fashionable to frivolous, according to retail experts.

"Contrary to some popular predictions, high-end retail is not recession-proof," said Darrell Rigby, head of global retail for the consulting firm Bain & Co. "There's not a retailer in the country that isn't taking this downturn seriously."

Luxury sales had boomed in recent years as pricey labels such as Manolo Blahnik and Michael Kors became household names. In 2004, same-store sales -- a key measure of retail health -- grew an average of 9.6 percent a month at luxury chain stores, according to the International Council of Shopping Centers, a trade group. The segment continued to post some of the strongest growth in the industry through last year.

This year, retailers and industry experts say some wealthy consumers are shopping down-market while others are limiting the quantity of their purchases rather than the quality -- say, buying one Louis Vuitton handbag instead of two. Luxury same-store sales have dropped by a monthly average of 3.4 percent. In September, same-store sales plunged 10.9 percent. Budget-friendly wholesale clubs, on the other hand, were up an average of 8.1 percent this year and 7.4 percent last month.

"Before, when you had recessions, you didn't necessarily have this crisis on Wall Street," said Milton Pedraza, chief executive of the Luxury Institute, a market research firm. "A lot of wealthy people depend on financial systems."

Over the past month alone, U.S. stocks have lost $3.4 trillion, or 24 percent of their value. In a report released this week by Unity Marketing, which studies affluent shoppers, 44 percent of "ultra-affluent" households, with incomes of $250,000 or more, say their investments have lost a quarter of their value, while 31 percent said the prices of their homes have dropped 25 percent. They have reduced spending by nearly 18 percent so far this year compared with last year, a higher percentage than the less-well-off "super-affluents" and "comfortable affluents" combined.

"We're talking about changes of seismic proportion in terms of the way that they're spending and the way that they're buying," said Pam Danziger, founder of Unity Marketing.

Wealthy households, with incomes of $70,000 or more -- the highest bracket tracked by the Bureau of Labor Statistics in its spending survey -- make up only 30 percent of consumers. But they account for more than half of the country's consumer expenditures, according to government statistics, making any pullback in their spending painful for all retailers.

Leading the retreat are consumers like Shannon Haley, who has watched in dismay as the nation's economic meltdown seeps into her closet. The 31-year-old District resident used to make a big-ticket purchase every season, like her black pebble leather Prada bag or the python-and-patent-leather Stuart Weitzman heels she got in the spring. This season, all she bought was makeup.

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