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Luxury Goods Market to Slacken; Prada Projects Modest Growth

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A symptom of an enfeebled luxury good market, Italian retailer Prada expects weakened sales growth this year, largely as a result of consumer wariness in Europe.

A Prada spokesperson said that the company anticipates same-store sales will rise at a modest “low single-digit” pace throughout 2014. Last year, the retailer experienced 7 percent growth. Rahul Sharma, managing director of Niev Capital, said, “All in all, a bit underwhelming. I do sense some waning in the newness, coupled with a significant increase in Prada’s price points. And I do think that, as well as a larger base, is starting to hurt demand a bit.”

In general, the luxury good market is slowing down considerably, partially due to a strengthening euro and the concomitant slackening of demand in the euro-zone. In 2013, the sector expanded by an unspectacular 2 percent to 217 billion euros ($299 billion), according to Bain & Co. This represents the least impressive growth in four years. According to Altagamma, the luxury goods market is set to grow 3 percent to 5 percent annually through 2016.

Much of the growth in luxury goods sales is likely to spring from steady Asian demand. Analysts are now predicting the continent to commandeer as much as 60 percent of the luxury market, as its domestic appetite for higher-end products swells.

According to the Economist Intelligence Unit (EIU), the prime mover behind Asia’s shift to luxury goods is rising household incomes and the rapid expansion of local economies. In a study entitled, “Rich Pickings: The Outlook For Luxury Goods in Asia,” analysts predict the most robust growth will come from China, which will have more than 13 million households with a disposable income of $150,000 or more by 2030.

India’s future growth will also be central; the study calls it a “key battleground for luxury brands as the retail markets would open up for foreign investments.” The EIU also forecasts that it will boast more than thirty million households with an income that tops $50,000 or more.

Malaysia and Thailand are also expected to become major shopping centers due to their comparatively low import duties on luxury goods. The notable exception to Asia’s increasing prominence in the luxury goods market is Japan, whose economic underperformance is expected to largely foreclose its participation in the continent’s shift.

As far as the U.S. is concerned, Sears’ aborted foray into luxury goods has chastened other retailers considering entering the market. In 2010, Sears CEO Eddie Lambert first conjured the idea that the retail giant could profitably straddle the fence that separates low cost and couture. Since then, he aggressively pushed to add more and more luxury items to Sears’ Marketplace site. Sears contracted with high-end suppliers of expensive brand name goods and then essentially functioned as a third party in the transaction with consumers. Customers were be able to buy Louboutin shoes, Chanel handbags and rolex watches as they shop for washing machines and hand towels. The retail experiment was a resounding failure.

Despite the gloomy projections for luxury goods, Prada still plans to add eleven new production facilities in Italy and one in the UK by the end of 2015. It also intends to increase its staff from 11,500 to 15,700. Prada’s net income climbed 0.3% to 628 million euros ($866 million) for 2013. Revenue jumped 8.8% to 3.6 billion euros ($5 billion).

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