Luxury at 70% Off

Price-cutting began last year in some high-end department stores after Saks Fifth Avenue aggressively lowered prices in November, slashing as much as 70% off designer fashions that usually don't get marked down until the end of the season. The dramatic move put pressure on rivals to follow suit.

Panelist Frank Doroff, senior executive vice president and general merchandise manager at Bloomingdale's, said his store was forced to cut prices. "We had no choice. We had to get rid of the inventory. In October, the whole economy collapsed. All the stores had geared up with big seasons and they were left with all this inventory.... You don't want to cut prices, but at some point there's a sales drop that you just can't take."

Overall sales for Cincinnati-based Macy's -- Bloomingdale's corporate parent -- fell 9.6% for the first nine weeks of 2009 over the same period last year. Same-store sales declined 8.9%.

Discounting at luxury department stores made it tough for designers like Bottega Veneta. The Italian leather house, a subsidiary of the Gucci Group, is known for woven leather accessories like shoes, wallets, handbags and luggage. The brand saw its sales drop 8.8% in the last quarter of 2008. Given that "the price of craftsmanship hasn't changed, our margins are already [very] small," said Paschall. "It does hurt our business when they put things on sale that we would never mark down.... We really don't want to discount."

Fashion designers are not the only luxury vendors who believe discounting is dangerous. "I am very against cutting prices," said panelist Javier Vivas, general manager of The Box, a burlesque club and dinner theater on New York's Lower East Side, where customers regularly pay more than $1,000 per table for bottle service. The Box is owned by Simon Hammerstein and partially run by celebrities, including Jude Law and Rachel Weisz. "Nobody in the city's nightclub business has dropped prices because, if you do, they will smell weakness. You have to target the [customers] who have money [to] keep the integrity of the product."

Cutting prices could cause long-term problems for a luxury brand, said Andrea Soriani, marketing director for Maserati North America. Automotive News reported in April that sales of Maserati, a division of Turin, Italy–based Fiat, slid about 30% in the first quarter of 2009. "If you cut the price, you will never be able to increase the price again," Soriani warned. "You cannot cut the price and add value.... It's the luxury business. Take it or leave it."

Soriani suggested a better strategy would be to focus on the product's experience and value. "I'm trying to convince my customers that they do need a Maserati. I say, 'It's hand-built. Think about the value of the product.' You are still in the luxury business. You are not downgrading your product. I'm going to hide the guilty factor and go for the inspirational."

Some businesses that cater to the luxury market are modifying their products to make them more affordable. Panelist Stephen Starr, the owner of upscale restaurants in Philadelphia, New York, Atlantic City and Ft. Lauderdale, has noticed a change among customers since the economy slowed. Although the flow of diners has not diminished, they are opting for inexpensive wines over cocktails, he said. In response, rather than dropping prices, Starr has added new items to the menu. "You have to be careful not to just drop the price. That would cheapen what we do. So we put [lower-priced] items on the menu...  It's the same customer. We just want to make them feel comfortable by offering something less expensive ... without telling them that it's cheap."

In similar fashion, Munich-based luxury automaker BMW has also added a lower-priced item to its menu: a 'baby' version of the Rolls-Royce Phantom. Rolls-Royce sales dropped about 5% to 174 cars in the first quarter of 2009. The new smaller 200EX Sedan, set to hit the streets in 2010, will come equipped with many of the classic touches of its larger counterpart, but instead of a $400,000 price tag, it will sell for under $300,000. The new version is designed to appeal to existing customers as well as bring in new ones, said Andy Thomas, general marketing manager of Rolls-Royce Motor Cars. "We have a lot of owners who see the smaller car as their everyday car. And when you offer a smaller size, you open yourself up to a different segment."

Aside from trying to bring in new customers, luxury brands are also working harder to please their existing customers with flawless service. "You have no choice but to be almost perfect," said Paschall of Bottega Veneta. "When they make a request, you listen." Everything "that we sell," noted Bloomingdales' Doroff, "can ... be bought somewhere else. Service has always been important, but especially now. A person comes back for the relationship with their sales associate." Starr said his restaurant managers are working harder to keep in touch with his regulars. "We are targeting our existing customers, literally calling them up or e-mailing them. We're actually doing a better job. Our managers are scared, so they're being better. They're being nicer."