Practical action for luxury goods companies
As little as just a year ago, many luxury companies believed that their brand power and the high net wealth of their customers meant that they were largely insulated from an economic downturn. By Helen DickinsonBut what a difference a year makes and, as we approach the first anniversary of the collapse of Lehman Brothers, what a year of unprecedented events we've seen.
At the Financial Times Business of Luxury Summit in Monaco earlier this year, KPMG presented a white paper called Luxury Business: Responding To The Crisis. The white paper showed how, until recently, many luxury companies believed that they would be unaffected by events in the wider economy. However, they are now learning that they are at least as vulnerable as any other consumer business.
Unfortunately, like a number of retail sectors, many luxury goods companies now find themselves in the grip of a double crisis: sales have declined drastically while debt has become more difficult and costly to raise and service.
So what can luxury goods businesses do in the current situation?
In addition to exploring the liquidity crisis, KPMG's white paper identified some potential courses of action that could urgently improve operational performance, which I thought I would share.
For many luxury companies the pressure has come from the combination of falling sales at a time of rising finance costs. The credit crisis has dramatically increased the cost of servicing debt, and in some cases the combined rise in finance costs and fall in sales has pushed companies close to collapse.
In most cases the core problem is one of liquidity. The signs of a liquidity crisis are not difficult to spot: budget targets are suddenly missed; margins fall, working capital increases and companies become increasingly reliant on trade credit. Meanwhile supplier conditions will be tightening, and banks and clients will be asking the company for much more detailed financial data.
What many companies do not realize is that in current conditions a business can move from apparent health to financial distress in as little as one quarter. And even as the global economy shows some signs of stabilization, luxury companies - especially medium-sized companies - continue to go into financial crisis.
However, there is practical action which companies can take. The white paper suggests that there are four golden rules that luxury companies should bear in mind when planning for survival and recovery:
• Revise market positioning. Companies faced with falling sales often persist for far too long with extended product portfolios or business lines that no longer make sense: rapid repositioning is vital;
• Cut costs intelligently. Cutting the right costs is difficult. While continuous cost reduction may be required for survival, it has to be achieved without reducing quality, sacrificing precious people resources or diminishing marketing impact;
• Maintain strategic investment. Fear of increasing indebtedness in a debt-adverse market is leading some companies to freeze investment. That may keep stock market investors happy in the short term, but eventually it will undermine a company's competitive position;
• Manage liquidity. Although liquidity has become the leading issue for CFOs, many companies still do not have a good handle on how much cash is being held up within the business, or where. Luxury companies, accustomed to a focus on product and sales, may be worse than most. Acting to improve liquidity must therefore be at the top of the agenda.
The key to surviving now and prospering in the future is for companies to realise how drastically and rapidly they need to improve their operational performance. It's a natural reaction, but many companies approaching a financial crisis can be tempted to cut everything they can just to stay solvent.
That might be a mistake: if companies are going to cut costs they need to cut them intelligently, while still investing for recovery. Quality is intrinsic to the whole concept of luxury, and there can be no compromise on that.
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