Chaos in the luxury market

Wall Street Journal reports on the fallout from Saks's deep discounts on top fashion lines.

When Saks Fifth Avenue slashed prices by 70% on designer clothes before the holiday season even began, shoppers stampeded. "It was like the running of the bulls," says Kathryn Finney, who says she was knocked to the floor in New York's flagship store by someone lunging for a pair of $535 Manolo Blahnik shoes going for $160.

Saks' deep, mid-November markdowns were the first tug on a thread that's now unraveling long-established rules of the luxury-goods industry. The changes are bankrupting some firms, toppling longstanding agreements on pricing and distribution, and destroying the very air of exclusivity that designers are trying to sell.

Other high-end retailers followed suit, as did many of the designers who have their own retail outlets. But will consumers who grow accustomed to designer shoes at $160 be willing to pay $535 again when the recovery comes?

Besides creating a suspicion of high prices among consumers, Saks's actions broke the unwritten law under which designers and retailers operated: "Leave the goods at full price at least two months, and don't do markdowns until the very end of the season."

Some designers now are looking for ways to protect themselves in the future. Among the options being considered: Giving department stores only a limited assortment of goods, retaining the top items for their own outlets; or, operating leased departments with department stores.

... New York design house Derek Lam, which is known for cocktail dresses that sell from $1,200 to $3,500, is opening its own New York store next month. To protect itself against other retailers' discounts, it's thinking about creating "special editions" of its lines that wouldn't be sold in Saks and other retailers.

In hindsight, Saks admits that it may have over-reacted.

"We didn't need to do what we did in accessories," Mr. Frasch says. High-end shoes and handbags would probably have sold out, even at higher prices, because shoppers see them as more practical wardrobe updates than another new outfit.

The retailer is still not out of the woods. Saks shares were recently trading at $2.72, down from $22 in December 2007. In mid-January, it laid off 1,100 people, or 9% of its work force, and could close some stores.

This year, Saks is spending about 20% less on merchandise to keep inventories lower, but Mr. Frasch acknowledges the number is only a guess. The luxury-goods business is "absolutely flying blind," he says.

His boss, Mr. Sadove, agrees. "One of the big questions that people are asking," he says, is: "Will people ever buy at full price again?"

I'll be interested to see if the Saks approach or the Abercrombie & Fitch approach (refusing to cut price) is more successful.