My column in the FT on Thursday is about luxury and premium good in the downturn:

The harder they come, the harder they fall, one and all. The decade of decadence, of affordable luxury and premium everything, from expensive spirits to fashion label clothes and first-class air travel, is over.

It was, of course, an illusion to imagine that the business cycle had gone away in historically cyclical industries such as airlines and luxury goods. But the years of expansion carried on long enough, with only a brief interruption in 2001, that a lot of people came to think so.

They have changed their minds. Virgin Atlantic expects to lose money in this financial year. Giancarlo di Risio, chief executive of Versace, is to step down after falling out with the family amid a 13 per cent fall in revenues in the first quarter.

Double-digit falls in demand for luxury and premium goods and services are common in recessions but this hangover is especially sharp. Big airlines suffered a 35 to 40 per cent fall in revenues from international first- and business-class passengers in the year to March.

So what should such industries do when faced with a slump in consumer demand? The textbook answer is to cut costs, curb output and do everything possible to adjust – apart from slashing prices.

“You must accept that you will sell less but the biggest mistake is to cut prices across the board and ruin your brands. People are not refusing to buy because prices are too high, but because they are frightened and are hoarding money,” says Hermann Simon, chairman of Simon-Kucher, a pricing consultancy.

There is logic to what Mr Simon says. Even for non-premium industries it takes three to five years to get consumers to pay the full price again once you have started discounting. As for luxury goods, price-cutting rips apart the industry’s artfully constructed image.

Discounting can exact a terrible price, as the imminent bankruptcy of General Motors shows. The company was the king of cheap finance and price-discounting even in the good times; it was left with thin to non-existent margins, having put its brands through the crusher.

But the reality for many companies (happily for consumers) is that they have no choice. Luxury and premium brands have grown so much – and reached so far into the mass market – that their owners cannot choose from a menu of cutting costs, output or prices. All are required.

You can read the rest here and comment below.

May 28, 2009 4:43am in Aerospace, Food and Drink, Management | Comment