The Dirtiest Word In A Luxury Brand’s Vocabulary Is 'Discount' But That Doesn’t Stop Those Brands From Accepting Heavily Discounted Ad Rates

Philip Stone November 27, 2008

Everyone had thought that economic crisis or not, luxury brands would weather the storm. But with the very rich suffering the same type of percentage wealth declines as the rest of us their hands are staying more and more in their pockets and that’s bad news for those publications that saw luxury advertising as one solution to the general advertising downturn.

The true luxury brands will seldom discount their goods, so with that marketing tool unavailable, and there’s no way they can ruin themselves by switching to cheaper and lower quality materials, they still need a way to maintain profits and one major  cost it can easily control is advertising.

So with The Wall Street Journal making no secret of the fact it is out to nail the New York Times, and with the Times very reliant on luxury brand advertising sold at premium pricing on its first few news pages, you just knew it would be a matter of time before Journal sales people would be running around Madison Avenue flogging advertising space at deep discount to the NYT, and guess what – there are takers – and big names at that.

Now you’ll find Louis Vuitton advertising in the Journal. Daniel Lalonde, president and CEO, says the company philosphy is to take the long view in economic cycles so discounting 25% off is not an option. “We haven’t changed our methods and merchandising,” he said, but that doesn’t mean he doesn’t accept discounted ad opportunities.

Upscale malls may have a problem this Christmas, but that might be good for newspapers since those malls will increase their advertising to attract foot traffic. Nate Forbes, managing partner for Forbes Company that owns the Somerset Collection Mall in Troy, Michigan, says, “We’re going through a tough time, but it’s going to be a recalibration of everyone’s business. The periods of luxury downturns do not tend to be as long or as severe.” Maybe, but this one  seems to be unlike any since the Depression  80 years ago.

Some brands may have no choice but to selectively discount, depending on how high their inventory,  but most will maintain the “no discount” policy – they may even boost their prestige by doing so --  and while they will suffer financially like everyone else they hope they will be well positioned for the reccovery.

The general retail view seems to be  that while stores don’t want to be thought of as discounters – too much loss of prestige there – they’re not going to be stupid, either,  and they will try to remain competitive  and have sales when necessary. And that might be good news for newspapers – the stores have to get the word out when they decide to have sales and the newspaper is worth its weight in gold in providing that service.

With luxury stores like Saks Fifth Avenue, Neiman Marcus and Nordstrom all reporting  double digit percentage sales declines in October from the year before, the fact is that leading up to Christmas more will go on sale and the stores will be advertising to get out the word. Saks, for instance, is another advertisier that has also accepted the Journal’s discounted pricing.

And the Journal is playing hardball. According to a Bloomberg report  the Journal  takes a look daily at the luxury brands advertising in the Times and it then sends out its sales people to get a piece of that business. And the Bloomberg article makes the point that The Times does not seem to be responding aggressively enough – rather surprising since luxury advertising makes up more than 10% of its advertising revenue.

But the Journal has a gamble of its own that depends very much on luxury brand advertisers. It started a quarterly glossy magazine, WSJ, in September, with the next edition due in December. The Journal makes a big deal of how many new luxury advertisers it is attracting for the magazine but the real question is just how much the Journal had to discount its rate card in this economic climate to draw that ad traffic. The word on the street is that rate cards are being abandoned and advertising is going at fire-sale pricing.

For the New York Times, of course, this couldn’t come at a worse time. Ad revenue for the New York Times Company dropped15% in October and with the Journal  discounting luxury advertising then no doubt the Times will have to do something too, if it is not already.  No wonder the company has cut out most of its dividend.

For the luxury brands things may well get tougher, and they may well need a better Christmas season in the developed world than they had previousl;y thought. They had seen China as a premier market that would continue to grow – China is still expecting economic growth of 7.5% next year -- but the signs are that luxury goods buying may well slow down there, too. “Luxury consumption will certainly be affected by the global economic crisis,” according to Liu Zheng, a luxury goods analyst quoted by China Daily. “Previous surveys have shown that many consumers of luxury goods are young office workers whose purchasing power for the items is extremely unstable.”

At a recent Wharton Marketing Conference, major luxury brands talked about how to market in such a falling economy. "We don't want to see huge price cuts that will create a lower-priced brand," said Brad Farrell, skincare brand manager for L'Oréal Paris. "That's because you don't want to tarnish your brand. When this is all said and done, you still have your brand reputation to uphold." 

But that doesn’t mean marketing can’t change. He suggested, for example, selling fragrances in smaller containers. "You can still maintain your brand integrity, but you're selling at a price point that's more accessible for the consumer in today's market." And he doesn’t oppose downmarketing with the product available in drug stores and the like because with the cash crunch that’s where more people are shopping.

The general thought in luxury land is that under no circumstances can the brand name be diminished (no flashy light advertising on Times  Square). "Good management weathers good times and the difficult times, and fashion doesn't change," said Patrick Abouchalache, who analyzes the retail industry as a managing director at Roberts Mitani, a New York-based investment firm. "You have to stay the course."