Luxury Takes a Dive.

When Clarins announced earlier this month that it was shutting down Thierry Mugler's couture house, fellow members of the luxury industry were hardly surprised. After a decade of astounding double-digit growth, luxury is experiencing a bona fide slump. In December, Gucci Group cut its full-year profit forecast, saying its third-quarter earnings had dropped 14 percent. Armani announced last week that it grew a meager 2.3 percent in 2002, down from 23 percent in 2001. And for the first time, Versace canceled its runway presentation during the couture shows--happening in Paris this week--citing cost cuts. "Almost all the luxury brands have been hurt by the economic downturn," says Dana Telsey, luxury goods analyst for Bear, Stearns & Co. "It's not a good time."

What happened? To be sure, luxury was hit by several outside forces it didn't foresee: the September 11 attacks, which curbed luxury travel and tourism; the economic downturn, which ate away at disposable income, and the looming war with Iraq, which has made consumers-- particularly in the United States--nervous about spending. But the biggest problem has been created by the CEOs themselves: the democratization of luxury. For centuries, luxury companies were family- owned affairs that catered to the extremely wealthy and therefore immune to economic cycles. But in the past decade, most of those family companies were gobbled up by tycoons to form "luxury groups," like LVMH Moet Hennessy-Louis Vuitton. To help meet shareholder expectations for growth, many began offering cheaper versions of their products. "There are only so many crocodile handbags you can sell at $10,000," says one European investment ...