New Year's Resolutions for the Luxury Market

When wealthy consumers feel the need to conceal their lavish purchases in plain paper bags and avoid public shame by attending underground shopping parties, it's obvious that all is not well for the luxury goods and services market. Once considered well insulated from economic downturns, the luxury market has received a brutal beating this year, with sales plunging 34.5 percent over last year. Here are some ways the ailing industry can resuscitate itself and land firmly on its feet:

1. Reduce inventory.

Smart luxury brands should dramatically reduce their production, says Bob Schwartz, interim CEO of Portero, an online auction-based marketplace for luxury merchandise. "The smart luxury brands have this approach built into their DNA; they know scarcity and brand protection is value," says Schwartz. "Selling more is not success. The ones who floated up with the market don't have this in their DNA, nor do they have a lasting brand to stand behind . . . they will thrash around offering deals and wither away."

2. Become more adept with online strategies.

The luxury industry has been slow to adopt Web 2.0 strategies and make websites the focal point of business. According to the Luxury Institute's Wealth and Luxury Trends—2009 and Beyond report, "Innovators such as Gilt, Ideeli, A Small World, Portero, Vivre, Couture Lab and several off-the-radar players such as Bespoke Global, are gaining traction online via membership models, global communities, and by aggregating categories of bespoke luxury designers and producers in one-stop-shop destinations." The report says that the economics of these online marketplaces will become much more compelling as the economic downturn makes opening stores and running traditional advertising economically challenging.

3. Don't succumb to slash-and-burn prices.

When a luxury retailer cuts prices too steeply, it threatens its brand's image of luxury and exclusivity. This couldn't have been more evident than during this holiday season. Several luxury retailers, including Bergdorf Goodman and Neiman Marcus, slashed prices so severely that they looked more like discount outlets than luxury mavens. There are other ways of selling a luxury product at a slightly lower cost that's attainable for consumers in today's rough market. For example, retailers can sell fragrances in smaller containers, which can help retailers minimize production costs.

4. Embrace corporate social responsibility.

Several luxury hotels in the Washington, D.C., area are offering special packages for the upcoming inauguration. Although they cost a pretty penny—up to $50,000—these packages mix luxury with philanthropy. For example, one of the hotels will give a portion of the proceeds to a charity of the guest's choice. Another hotel offered an eco-conscious package. The Luxury Institute says that wealthy consumers increased their preference for socially responsible brands from 51 percent in 2006 to 57 percent in 2007, and it sees that figure rising dramatically in 2009. "The global crisis of confidence in governmental, financial, and other institutions will drive luxury consumers to demand that luxury brands serve not just them, but society as a whole," according to the Luxury Institute's report. "They will require luxury brands to be ethical with all constituents, charitable in ways that make a difference to their beneficiaries, and eco-friendly in ways that can be documented."

5. Get consumers to trust your brand again.

Consumers who walked into luxury stores this holiday season may have seen rows of jumbled merchandise with overflowing bins and a smattering of inelegant, blaring sale signs. Have retailers forgotten what luxury means to the consumer? According to the Luxury Institute, consumers will "scrutinize luxury brands far more carefully going forward and will rely on authenticated, validated, and certified ratings to make purchasing decisions." Consumers still want brands to connect with them on an emotional level, focusing on superior quality and prestige.

6. Provide outstanding customer service.

I stopped by BCBG Max Azria last month and was delightfully surprised by the customer service. I was greeted by a very helpful employee who told me about special sales and promotions. She graciously offered me a flute of champagne. This is just the type of service that will put customers at ease to peruse the store longer than they intended. Luxury retailers should be welcoming, signaling the right amount of exclusivity without alienating their customers.