RAPAPORT) Chicago Tribune: For some time now, more affluent consumers have managed to fly above the economic storms, creating a boon for luxury retailers such as Neiman Marcus Group Inc. and Tiffany & Co.

Not any longer.

As 2008 begins, evidence is building that the luxury market is losing its luster.

Neiman Marcus Group Inc. characterized the environment as "somewhat challenging" and is offering an extra 25 percent off already reduced designer merchandise through Friday. Coach, the highflying leather goods firm, anticipates its smallest fourth-quarter gain in six years and uncharacteristically lowered prices on some handbags just before Christmas. Sales at Nordstrom have stumbled as fewer shoppers reached for the stores` expanded assortment of designer brands. And even Starbucks` "affordable luxury" allure has cooled as measured by the first-ever drop in visitors to the coffee chain`s U.S. stores.

While the triple threat of declining housing values, tighter credit terms and rising energy prices have weighed most heavily on the average consumer, taken together the events have created "ennui" among luxury shoppers that is starting to put a damper on their spending, according to Unity Marketing, a firm that tracks luxury consumers.

After years of robust growth, the shift is expected to put luxury retailers to the test in the year ahead, particularly retailers that have relied on so-called aspirational shoppers, or consumers who "stretch" into designer territory when they are flush with cash.

Many luxury brands are going to discover just how dependent they have become on consumers` penchant to trade up, said Unity Marketing founder Pam Danziger. In her opinion, the market for luxury goods has "likely reached its peak."

"A lot of luxury consumers are the leaders, the movers and shakers, the people with corporate responsibilities and the entrepreneurs," said Danziger. "Their investment portfolios are taking a hit. They`re feeling the effect of the weaker dollar. They have a lot of questions about leadership in this country. You can`t pull stuff over on these people. They know what`s going on and they`re really very cautious."

The average amount spent by affluent consumers on luxury dropped 21 percent, to $12,142 in the third quarter from an average of $15,283 in the second quarter, marking the steepest decline since the fourth quarter of 2004, according to Unity Marketing. Luxury consumers` feeling of confidence also dipped in the third quarter to its lowest level since 2004, based on the firm`s quarterly survey of more than 1,000 consumers with an average income of $150,200 and average age of 43.6.

Danziger said she expects a similar decline in the firm`s fourth-quarter survey, due out in January.

Double-digit gains gone

For years now, the luxury segment has held up better than the rest of the retail industry with high-end department stores such as Saks Fifth Avenue and Neiman Marcus consistently posting double-digit sales gains.

The luxury segment, excluding jewelry, posted sales growth of 7.1 percent during the 2007 holiday compared with the year ago, exceeding the retail industry`s total 3.6 percent growth rate for the same time period, but decelerating from a mid-season gain of 10.8 percent, according to SpendingPulse, MasterCard Advisors` retail data service in Purchase, N.Y.

To be sure, the very wealthiest consumers are still spending, analysts said. But the merely affluent are a different story. They feel rich when their jobs are secure and their investments are growing, but can change their minds if the job market or stock market takes a plunge.

Luxury retailers are already starting to anticipate a shifting mind-set, starting with discounts.

Saks held a day-after-Christmas sale offering up to 70 percent off designer goods. A Marc Jacobs mink and python clutch was priced at $1,032.45, almost two-thirds off its original price of $2,950. Similarly, Neiman Marcus is touting $745 Manolo Blahnik strap sandals for a relative steal at about $400.

"The brands that sell to the affluent will be more challenged in 2008," said Milton Pedraza, chief executive of the Luxury Institute, a New York-based luxury research firm. "There is no question that in difficult times there is a push for a lot more innovation. There were no must-have items for this holiday. They need to be more creative."

Tiffany & Co. downgraded

Pedraza predicts luxury stores will take a page from their moderate department store brethren, focusing more intently on ways to differentiate their stores from the pack. That means more targeted customer e-mail invitations to special sales, boosting exclusive arrangements with unique designers and stepping up service to existing customers.

The Luxury Institute predicts luxury sales will increase at a rate of 5 percent to 9 percent in 2008, down from the double-digit growth of the last three years.

Banc of America luxury analyst Dana Cohen has already downgraded her rating on the stocks of Sotheby`s and Tiffany recently on concerns of slower sales.

Sales at a key Sotheby`s auction of impressionist and modern art came in below Cohen`s expectations, suggesting even the main sources of global wealth -- U.S. hedge funds, Russian commodities and Chinese economic growth -- could be pulling back, she wrote in a report.

As for Tiffany, sales at the jewelry company`s non-flagship U.S. stores are moderating. The trend is somewhat masked by an influx of European tourists traveling to New York to take advantage of the weak dollar, Cohen said. For the third quarter, Tiffany posted an 8 percent gain in sales at stores opened at least a year, a key retail metric, helped by a 25 percent spike at its New York flagship. Without that spike, same-store sales would have risen only 4 percent, according to Cohen`s report.

Neiman Marcus Chief Executive Burt Tansky cautioned analysts in a December earnings conference call not to "overreact."

The Dallas-based department store experienced a year-over-year decline in its fiscal first-quarter gross margin rate (profit after subtracting the costs of goods sold) in the wake of tepid reaction to some of its women`s designer apparel.

"We have experience with this," Tansky said during the call. "We`ve gone through it before. This customer does not trade down, she does not change venues, she does not leave us. What she does, if in fact this continues to be challenging -- we`re not sure it will be, not sure it all will be -- she`ll buy a little less."

c2008 The Chicago Tribune