A Luxury Marketing Council Panel Discussion

June 11, 2009

M2 Ultra Lounge, New York City

Moderator

Greg Furman, Founder and Chairman, The Luxury Marketing Council

Key Note

Mike Santolli, Associate Editor, Barrons

Panelists

Matthew J. Doering, SVP, & Senior Partner, Fleishman-Hillard, Inc.

Charles McLean, SVP, Communications and Marketing, American Museum of Natural history

Phillipe Pezet, President and CEO. Bulthaup Corporation

Paul Raffin, CEO, Frette

Andrea Spring, Managing partner, Blue Star Jets

Greg Furman:

The goal of the LMC is to put the smartest luxury marketers in the same room, help everybody win greater share of wallet of the best customer and a better understanding of how the luxury market customer is changing and be a greenhouse to forge collaborations among kindred spirit luxury brands in New York.

Mike Santolli, Associate Editor, Barrons

Thanks very much. I’m going to give a really direct look at our present affairs and my personal ones about where we are in the economic trajectory, and in the markets.  Maybe it is a sort of a big picture implication of this whole period, because I do think that it’s been such a dramatic period in the economy and we’ve come so far to an elevated level of consumption.

But exactly what kinds of enduring changes might result from this recession? Of course, this is all educated guesses. One thing I think is pretty clear in the last month or two is the financial crisis, the credit crisis, whatever we might call it, is over. That period of downturn is in the past. The most intense period of panic and contraction about what the economy’s going to look like, that was what we were consumed with last Fall. We are now back, if you look at any of the market conditions or the economic numbers, we are now back to a condition where it was before we had that Capital markets freeze. The radical alteration to behavior happened as rapidly as it has in any period in history. This didn’t sneak up on us; it actually just fell off, and we’ve actually recovered from most of the panic.

I can point out a lot of individual data points on that, but the reality is we no longer have total system failure. That’s the good news.  It’s now consensus that we cannot recover every cent, I agree but now (Robert) Frank’s saying the 3rd quarter is supposed to be an upturn. There’s two reasons for that, one is the 3rd quarter last year was so flawed, and after Lehmann Brothers failed in September it was essentially like the economy just quit. It ground to a halt. That we’re now looking at a period where just normal consumption is going to look like better news.

The other reason is that the authorities around the world have thrown free money at the system. They flooded the system with money. They made sure that we have enough equity to keep things plodding along. Just today retail sales for May were reported and they were up slightly month on month, 1/2% total, and down 9% year on year. And we’re now in such a state where the markets actually thought that was good news. So down 10% year on year is good news.

I will also point out, but I think the aggregate forecasts for 2009 for the overall luxury sales category is something in the realm of down 10%. But I can tell you a lot of major industries would welcome down 10% top line this year. Many of them make cars.

So it’s one of those things that we’re now adapting to a center, that we’re used to growing faster than the economy and the industry was built around growing fast and now in fact is a spasm of fear and caution that means that this segment is gonna shrink more than the economy this year. I was at a conference at the Interactive Agency headquarters on the West Side Highway, and it’s exactly the same adaptations over in advertising. The fact that interactive ad revenues are going to be slightly down this year means the sun’s rising in the West for these people, but that doesn’t mean it’s a disaster for you.

Here’s one thing I found interesting recently, a quote by the President of Christie’s Europe, at a luxury conference. He basically said the auto market is going to have a small decline in this recession and the past recession despite the fact that in almost every other respect this recession’s going to be worse than any in at least 28 years and maybe the worst ever. And he thought that wealthy folks know where they stand. They know what their finances are about. Yes, there’s been a massive hit in their worth, but in September and October you had no idea whether the ground under your feet was gonna hold. And now you actually have a sense that I know where I am.

One interesting aspect what he observed that Art Market in particular has slowed down even more than one might expect in prior months because likely sellers of valuable art had no idea what they might do with the cash. There was such massive uncertainty about where you might put money that you would rather have your wealth caught up in that painting than have the cash for it. There’s no more dilemma of where to put the cash.

Rise of Conservative Consumption

There’s going to be change in consumer behavior, in the way that consumers treat consumption. I don’t like the term conspicuous consumption, does apply to probably a small sub-set of people, but I think a general sense of conservative consumption is going to take hold. The sale trend has gone from zero to 5% in a few months, or a few quarters. It used to be 10% in the mid 90’s. That’s going to continue but the relevant market for luxury goods is not in the market that was over extended with debt in general and has to pay down credit cards balances and learn how to save. That is the predominant, psychology, and the behavioral ethic out there.  Whether it’s okay to buy stuff and be merry again. I think this psychology is going to come back faster than that marginal household that had zero savings.

Now, of course we are only back to where we were last October in terms of equity wealth, but everything about consumer psychology starts to look like March as opposed to October. So a few things out there point to coming head winds turning into tail winds, but not necessarily in a conspicuous free spending way.

And I think that value was already in the process of coming back. It’s all about defining what that value is. The Indian stock markets up 60% today, the Taiwanese stock market’s up 45% today. That means wealth creation in those countries, which will be the source of luxury goods consumption in the future, has rebounded rapidly.

We’re looking for those scenarios where we think the consensus might be a bit mistaken. I don't know what the trajectory of this economic recovery is going to be. We’re going to come back in the 3rd and 4th quarters relatively strongly I think. The question is going to be whether it’s just inventory developing, whether it’s this resulted free money or it’s going to be something self-sustaining. We’ll see about that next year, but it would be a surprise for the consensus if this wasn’t actually a lasting recovery.

We have to monitor every single number, but it looks like the contrarian call is that we get out faster and sooner. I’m not saying that’s my call right now but I think is worth worrying about what people call the upside risk, which means that demand grows faster than we expect. This is a big picture thought, what this economy takes innovations and popularizes them and makes the mass market so quickly that its no longer about luxury meaning the gee-whiz gadget. Everybody can afford a flat screen TV, within reason. Whereas five or ten years ago that wasn’t the case. Cell phones are now given away with a service plan.

The brand actually carries the more weight than technical gee whiz innovation when it comes to consumer loyalty and when it comes to what people are going to pay for. That’s something that I don’t think people conceptualize very well, but I do think for luxury merchandisers that means the brand obviously, backed up by quality, can be more engaged with customer than simply, this no status attached to walking around with a cell phone.

One non-consensus thought. Out of previous periods of economic turmoil came certain cultural changes. If I show you another lean decade, you can consider it a lean decade when there was loss of faith in big institutions, the things that I want to consume that, I actually think are important as opposed to what somebody is telling me to consume, will shift. We have the ingredients for something like that.