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How Luxury Will Survive

marion.maneker — Tue, 03 Nov 2009 21:00:51 +0000

It will migrate to China and India.

It is no surprise that the bursting of the credit bubble led to a global crash in consumer spending on luxury goods. The traditional markets for luxury goods in the West and Japan—where 80 percent of the world’s $228 billion luxury sales take place—have hit a wall. In the United States, where aspirational brands became everyday items, the luxury business has gone into hibernation.

Maxed out, tapped out, and facing the need to pay off the decadeslong binge, Western buyers are saving instead of splurging on status-seeking. But instead of accepting this shabby fate, the more nimble luxury-goods firms are looking to the East, where the whole cycle of luxury development is beginning anew.

To really understand the relationship between luxury goods and the economy, it is worth going back to the ideas of Thorstein Veblen, the sociologist who created the concept of conspicuous consumption. A radical utilitarian, Veblen was offended by the waste involved in luxuries. Whether it was hand-crafting furniture or keeping servants for a single function like driving a car, Veblen railed against luxury as an affront to the efficiency of industrial production.

What Veblen missed was the foundation of the modern luxury goods business. Middle-class people, roughly defined as those with enough money to cover their immediate needs and secure their longer-term goals, understood the value of well-made objects. Handbags, clothing, and potential family heirlooms like silver and china didn’t have to be baroquely wasteful of a craftsman’s time and energy—as Veblen felt—to be more desirable. They just had to be more durable.

Your grandfather’s watch reminds you of your family’s status and reassures you that it can be maintained. Luxury goods, then, were a signifier of a larger sense of property. This was especially true of a number of the long-lasting fashion houses as well as the watch, jewelry, and leather goods businesses that make up the core of the modern luxury conglomerates.

But a funny thing happened to the luxury business as the West grew wealthy enough to support a vastly larger middle class. The best-known brands went from being artisanal manufacturers—literally making objects by hand—to become aspirational brands. The aspirational brand represents the triumph of signified over signifier; buying the product is an act of participating in the overall lifestyle image that the company has created.

A handmade Rolls-Royce would have annoyed Veblen because one could get an assembly-line-made car that did the same thing—got you from point A to point B—by consuming far less labor. Those who bought one would have said they were simply buying the best-made car they could find. Today you can get a well-made handbag that will last you a long time for not much money, but you buy a handmade Louis Vuitton bag to feel like a member of an exclusive club.

As more individuals in Asia accumulate enough money to satisfy their daily needs and begin to have confidence in their long-term prospects, they’re interested in demonstrating to themselves, their neighbors, and anyone they happen to meet that they, too, have joined the club. In a very real way, Asian buyers are getting both the best-made product they can finally afford and an aspirational brand at the same time. They’re making a leap from the 19^th century to the 21^st.

The companies need Asian buyers because an orgy of overspending in the West has left many of us with aspirer’s remorse. Recent numbers bear this out: Richemont, the Swiss holding company for a group of high-end luxury brands ranging from Cartier and Van Cleef & Arpels, to watchmakers Jaeger-LeCoultre and Panerai, to fashion houses like Chloé, saw its North American sales drop by 36 percent in the spring and summer quarters of 2009. That fall comes after a 12 percent decline the previous year.

PPR, the French conglomerate, says that its Gucci Group saw business fall off 10 percent in the third quarter of this year. There was also a see-saw of sales volume between North America and Asia. Gucci Group’s sales rose 37 percent in the greater China region where the company opened 38 new stores, bringing its total to 596.

Finally, the titan of the luxury business, LVMH, was better-defended. Its most recent trading statement showed a slight—less than 1 percent—decline in worldwide sales. Its core wine and spirits business was hit hard (as were watches and jewelry), as customers in their traditional markets either held off purchasing goods or substituted cheaper alternatives. But Louis Vuitton leather goods continued to be a global engine of sales and profits for the company because of a dramatic increase in Asian buying.

Back in the mature markets, there’s a different tale unfolding. Bain & Co., the consulting firm, still believes in the luxury story, but the plot is going to be different here. Claudia D’Arpizio, a Bain partner and its luxury guru, says, “One of the biggest changes we’ve seen in consumers is that ‘price’ and ‘luxury’ are no longer synonymous.” In other words, the aspirational buyer is now also a price-sensitive buyer.

In the West, brands that can “reach down” to the aspirational buyer at a lower price-point but still maintain the feeling of participating in a broader lifestyle seem poised to thrive. That may portend a fracturing of the aspirational market. While the true luxury companies—watch and jewelry makers and other high-end products—retreat back to the province of the very wealthy, small and medium fashion businesses will be at risk. We’ve already seen the recent failures of Christian Lacroix, Escada, and Yohji Yamamoto.

On the other end of the spectrum, companies like that can maintain a clearly articulated hierarchy of brands and exercise disciplined financial and managerial controls will also thrive. Ralph Lauren (RL), which announced results this week, has increased profits even though its sales are down. But we can begin to see the emergence of new low-priced luxury brands in the remarkable success of J.Crew (JCG), which recently doubled the estimates on its third-quarter earnings and projected same store sales growth in the “high single digits.”

What allows J.Crew to thrive while other fashion and luxury businesses collapse? A preppy aesthetic of understating one’s affluence. That’s something Veblen could get excited about.

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Tue, 03 Nov 2009 21:00:51 +0000

The Woman Who Made It on Wall Street

heidi.moore — Tue, 03 Nov 2009 14:53:21 +0000

Lessons from Sallie Krawcheck's rise.

Women are the foot soldiers of the business world, but they are rarely the generals. So it's worth asking why no female has been as successful in scaling Wall Street as Sallie Krawcheck, Bank of America’s (BAC) wealth management chief. While other women struggle to avoid the "glass cliff," she barely walks into a bank before she is groomed as a future CEO.

Krawcheck is best known for the kind of media adoration you can't buy—for instance, that famous cover story from Fortune magazine, “In Search of the Last Honest Analyst.” But her rise began well before—and was speedy. In six years Krawcheck went from junior banker at Donaldson Lufkin & Jenrette to chief executive of research firm Alliance Bernstein. She clocked just two years at Citigroup (C) before becoming CFO in 2004. Nine months after a falling-out with Citigroup CEO Vikram Pandit in 2008, she was back in the game with a better deal: Bank of America wooed Krawcheck, just 45, to run its mammoth brokerage. And within six weeks on the job, she was named as a possible successor for its departing CEO. But as successful as she has been in winning over the media, interviews with former colleagues show Krawcheck has been just as effective in winning over her peers, too. Her rise has not been flawless and is still not assured after her troubled turn as Citi CFO. But it is very real.

Even so, Krawcheck's career is an anomaly at a time when women's progress in the workplace seems bleak. Women are breadwinners for 40 percent of American families, according to Maria Shriver, but they're not bringing home very much bread. In a year in which the president signed a fair-pay act to equalize the sexes' salaries, the handful of female CEOs earn a pittance compared with their male counterparts. The financial crisis has not changed attitudes; we may know that women are more risk-averse, but both sexes would still prefer to entrust their money to men. Female executives have rarely lasted long in prominent positions and often lose their reputations when they leave: Think of Carly Fiorina at Hewlett-Packard (HP), Erin Callan at Lehman Bros., or Zoe Cruz at Morgan Stanley. Those who soldier on pay the social price for their rarity and often struggle to plug into men's networks.

The secrets of Krawcheck's success, however, hinge on her social skills. Primarily, Krawcheck knows how to avoid making enemies, which makes her painless to promote. Second, she has built a reputation as Mrs. Clean, which is a hot commodity on a tarnished Wall Street. Third, Krawcheck borrows management tricks from both genders. While her colleagues note that she has trademark "female" traits—a warm interest in others' feelings, an obsession with preparation, an aversion to financial risk—she mixes them with frank talk and open ambition. A former Smith Barney colleague attributes her success to her ability to read people—and a room. "Sallie understands people, which is something, regardless of gender, that you don't often see in current executives."

Krawcheck's ability to avoid making enemies grows out of her relentlessness in courting friends. She has started all of her jobs with a charm offensive on co-workers and clients. After only a few weeks at Smith Barney, she flew down to Jackson, Miss., to hug little old ladies and shake hands with Smith Barney advisers who were struggling to disown Citigroup's controversial ties to WorldCom—particularly because WorldCom's president was a Jackson hometown boy. Krawcheck did it again this summer by wooing the toughest group at Merrill Lynch: the firm's 16,000 financial advisers who often opposed the executives. Before she had a desk at the BofA building, Krawcheck lunched with a former Merrill CEO to get the dirt on the business. On the CEO's advice, she made a prompt introductory phone call to Travis Musgrave, who was the top representative of the firm's "Thundering Herd." She accepted his invitation to spend a September evening in Orlando with the 13-member advisory board of the brokerage and 700 of the firm's top-performing brokers, according to a person familiar with the matter. Krawcheck stayed four days, waylaying brokers in elevators and hallways to quiz them about the business. And she won them over, according to a senior financial adviser. Krawcheck sought and gained the endorsement of a group that could have destroyed her Bank of America career before it started.

Krawcheck is also burnished by her reputation as Mrs. Clean. She built her name at AllianceBernstein, a research firm that owed nothing to Wall Street investment banks. Krawcheck was quick to show her skepticism as an analyst who pushed Wall Street CEOs for information: In 2002 she told Fortune, "If I went into a meeting with a company and it turned out they were telling the truth, I was pleasantly surprised." The Fortune cover made her the face of Wall Street's last remaining shred of credibility. Sandy Weill, the chairman of Citigroup, hired Krawcheck and her spotless reputation to rehabilitate Smith Barney in the middle of the WorldCom, Enron, and "boom-boom room" scandals. Last year, Krawcheck was willing to throw her career away for a principle: She believed Citigroup should pay restitution to some clients who lost money on the bank's auction-rate securities and hedge-fund investments. It was a point of tension with her boss, Pandit, but it was a good way to go. It didn't block her way to Bank of America, which needed credibility with clients.

Krawcheck's reputation for honesty comes from her penchant for startlingly frank observations. At the Forbes Executive Forum a few years ago, Krawcheck told the crowd about her first husband's affair, conducted because of her extended work hours and his career jealousy. On Wall Street—as in Washington—the truth still has the ability to surprise. As an analyst, she used to tell an aggressive joke: "How do you know when management is lying? Their lips are moving." When asked why more women didn't rise in finance, Krawcheck didn't blame the boys' club: "There is something about women getting tired. They get to be 30 and they get tired." Even so, Krawcheck rarely talks about her gender, which would build barriers with male colleagues—but often discusses the challenge of raising a family, which men can theoretically relate to. She is something of a maverick among female executives, because she is all too willing to portray her struggles as shared, while many female executives want to project Superwoman. This makes Krawcheck easier to relate to, because her co-workers see what she's up against.

But Krawcheck's aura of amiability did not protect her from the biggest challenge—and possible hurdle—in her career: her less-than stellar turn as Citigroup's CFO from 2004 to 2006. She received low marks from analysts and fund managers who wanted a clearer picture of the company's financial position, and who criticized her for the bank's high expenses and its outsized risk-taking. However, she rebounded from the job, while other Citi CFOs have since faded into relative obscurity. So her social skills and past success at least bought her the benefit of the doubt from her bosses: Citi CEO Charles Prince gave her a juicy assignment at Smith Barney even after the lackluster tour of duty. Several people familiar with Krawcheck's tenure as Citi CFO say Prince didn't take it too hard on Krawcheck because he may have recognized that no one could untangle the twisted financial roadmap. While this kind of thinking protected her internally, the message never reached the outside.

Krawcheck's popularity was of little use to her in the CFO job. Citigroup was so vast and its reporting system so complicated that the bank was unable to provide basic measures of profitability, such as a net interest margin or an accurate accounting of expenses, according to people familiar with the matter. But despite the dysfunction, Krawcheck put her mark on the finance department. She prepared obsessively and instituted a weekly account of Citigroup's financial position. Krawcheck is a former journalism major, and she used a system popular with magazine editors: Staffers assembled a massive book, delivered it to her house each Friday night, and then fielded her calls throughout the weekend. She picked up so much information that she spoke on quarterly earnings calls without a script, says a person familiar with Krawcheck's tenure. She also tried to lessen the influence of the bank's infamous internal politics by creating a board of 15 people to evaluate investment proposals before they reached the CEO. The measure was meant to prevent Citi's investment decisions from turning into a popularity contest. In 2005, she also created a group to monitor Citigroup's liquidity, which insiders consider a prescient move given the bank's struggle with losses in the financial crisis. Bank of America might not have much cared about Krawcheck's experience as CFO, but if it did, she may have helped herself by not just killing time or throwing up her hands in despair. This is actually a quality that Krawcheck has in common with many successful female executives, who preach "not giving up" as the chief chapter of their gospel.

Krawcheck's career is not open to everybody, of course. Most women don't need to manage 16,000 people. But her management approach was also the core message delivered to 2,000 women who attended Deutsche Bank's Women on Wall Street conference last month: Make friends, not enemies, create a pleasant work environment, be persistent, work hard, and accept that change is the only constant. Wall Street isn't going to turn out 2,000 Krawcheck clones; it just needs more than one.

How To Find $288 Billion in Hidden Gold

martha.c.white — Wed, 04 Nov 2009 19:47:01 +0000

Just ask the Treasury.

Buried in the Treasury’s International Reserve Position report is an intriguing bit of math. The document details the total amount, by weight, of the Treasury’s gold reserves, plus a dollar value for said metal. But some fast division reveals something interesting: The Treasury marks the value of its gold at $42 an ounce, the price settled on in 1973, two years after the United States scrapped the Bretton Woods System, which had held gold at $35 an ounce for decades.

Wait, what? Spot gold is heading toward $1,100 per ounce, and the Treasury is embracing a Cold War relic of a price? If the Treasury’s bling were valued at the spot price, we’d be sitting on a literal gold mine of nearly $288 billion. Why doesn’t the Treasury account for the huge run-up in gold prices?

For starters, marking the Treasury’s gold to market would create a huge headache of an ever-fluctuating balance sheet as the price of gold rises and falls. Plus, if gold tumbled, we’d lose our hypothetical wealth as quickly as we’d accrued it.

More importantly, the United States isn’t selling its cache. Evaluating the Treasury’s gold for the market would be like putting a price tag on the White House or the Statue of Liberty—a possibly entertaining but pointless exercise. For the Treasury to say it suddenly has greater wealth in its coffers might make us feel better about the burgeoning deficit, but it doesn’t really change anything. For revaluation to have any economic impact, we’d have to sell.

And if the United States were to dump its gold on the open market, there’s no way we’d get today’s spot rate. Governments around the world collectively hold about 20 percent of the world’s gold reserves. Among these, the United States holds about one-third of that. Pouring it into the market would make prices crash. Even if the Treasury were to sell off gold a bit at a time, anticipation of future sales would exert a downward pressure on prices. Any transaction would also require deft political maneuvering and delicate negotiations, since other central banks plus the industry-backed World Gold Council wouldn’t be too keen on us holding a red-tag sale on our gold.

Raising the value of the Treasury’s gold stockpile would have an inflationary effect, too, which is the last thing the Federal Reserve wants right now. In 1933, then-President Roosevelt hiked the book value of gold from $20.67 to $35 an ounce to battle deflation. It did the trick, but the move was risky. Given that the Fed now has safer ways to create inflation, a revaluation and sale would come across as the powers that be playing fast and loose with a shaky economy.

There are certainly people who think the United States should unload some of its stash, on the grounds that the gold standard doesn’t work and by holding onto the metal, we’re clinging to a de facto version of an antiquated policy. Research papers, such as this one, argue that the wealth we keep locked up in gold coins and bullion would be better utilized if injected into the economy.

The problem, detractors argue, is that selling gold is a one-shot solution. Unlike raising taxes or cutting spending, you get to sell your gold only once. Yes, it might help us out of this slump, but we would have one less major asset to fall back on the next time the economy dives.

Explainer thanks James Barth of the Milken Institute, Michael Bordo of Rutgers University, Mark Calabria of the Cato Institute, and Dimitri Papadimitriou of the Levy Economics Institute of Bard College.

The Mystery of the Rising Stock Market

daniel.gross — Tue, 03 Nov 2009 20:33:18 +0000

If the economy's stagnant, why are stocks up? The answer is disturbing.

Here's a puzzle: The stock markets are doing very well, yet the performance of the underlying economy doesn't seem to justify optimism. The buoyant S&P 500 has risen 53 percent since the March bottom. And while the economy expanded at a 3.5 percent rate in the third quarter, unemployment is high, incomes are stagnant, and consumers are shaky.

It's possible that the stock market is just getting it wrong again. After all, the markets, which are supposed to process investors' attitudes about the future, hit record highs in October 2007, just as the U.S. economy was about to pitch into recession. But it could be that the notion the stock market is an accurate gauge of the domestic economy's temperature is outdated.

The Dow, the S&P 500, and the NASDAQ are primarily indices of large U.S.-based companies, not main street businesses: more Davos than Chamber of Commerce. These increasingly cosmopolitan firms have been busy globalizing and expanding their operations overseas. In 2006, according to Standard & Poor's, 238 members of the S&P 500 broke out revenues between U.S. and non-U.S. sales. These companies notched about 43.6 percent of sales outside the United States. For large companies that had already saturated the U.S. market, the home market was something of an afterthought. In the second quarter of 2007, 66 percent of Coca-Cola's (KO) beverage business came from outside North America.

And thanks to the long recession, demand for products and services of all types in the United States has shrunk even since 2006. Yes, the global economy in 2008 experienced its first year of shrinkage since World War II. But growth has resumed, and in some places—Peru, China, India—it never stopped. As a result, the globe's economic geography has continued to change, with the United States accounting for a smaller chunk of global output and demand each year. For much of the past two years, virtually all growth in economic activity has taken place outside America's borders. As a result, U.S.-based companies are becoming even more reliant on non-U.S. customers and operations for sales. S&P last summer updated its numbers. In 2008, the figure rose to 47.9 percent (with 253 of the 500 companies reporting), up from 43.6 percent in 2006. Put another way, in two years, big companies' proportion of sales coming from outside the United States rose 9.8 percent. It's likely the 2009 figure will be something very close to 50 percent.

If companies participated in foreign markets primarily by exporting U.S.-made goods, this shift would be good news for the U.S. economy and workers. But that's not how it works. In fact, in the months after the global credit meltdown, U.S. exports plummeted. They bottomed in April, at $120.6 billion, and though they have been rising, the August 2009 total is still 20 percent below the August 2008 total. Globalization is changing the way we do business. It's not a matter of U.S. companies exporting goods—burgers, soda, cars, software—made in the United States to Beijing but rather, making goods overseas and selling them overseas.

The Financial Times reported that Disney (DIS) this week is releasing Book of Masters.

"Based on a Russian fairy tale and produced in Russia using local talent, the film is the latest step in Disney's broad push into local language production," the FT reports. As Disney CEO Robert Iger put it: "We would not be able to grow the Disney brand … if we just created product in the US and exported it to the rest of the world." If Book of Masters succeeds, it will be good for Disney's American shareholders but won't do a whole lot of good for its U.S.-based employees. Or consider American icon General Motors. GM's sales in China are rocking. In the first nine months, the company sold 1.3 million cars in China, including more than 181,000 in September. By contrast, GM in the United States in the first nine months sold 1.5 million cars in the United States, down 36.4 percent from the year before. And in September, GM sold just 156,673 cars in the United States. That growth in China is good for GM's shareholders and for some of its executives. But since most of the cars sold in China are produced there, with parts produced by suppliers in China, rising sales in the Middle Kingdom won't translate into jobs for unionized workers in the Middle West.

The rising U.S. stock market and a weak, slow-growing U.S. consumer sector aren't really in contradiction. Given the large-scale trends transforming the global economy—and the role of large U.S. companies in it—it may be possible to have a sustainable rally in American stocks without a sustainable rally by American consumers.