Last week Saks Inc. made a drastic move by offering deep pocket discounts on luxury items, even offering such items as $1,995 Dolce & Gabbana messenger bag at a 60% Percent discount!

Bloomberg (read story) reports that the reduced prices are eroding Saks’s profitability. Revealing that the operating margin are shrinking for Saks and are less than half of margins at Nordstrom Inc and Neiman Marcus Group Inc.

The operating margin of Saks is shrinking from 5.3 percent in the fourth quarter to 4.7 percent in the first quarter. This is less than half of that of competitors, Nordstrom Inc and Neiman Marcus Group Inc.

Michael Niemira, chief economist at the International Council of Shopping Center projected wealthy consumer spending will now start to feel the pinch from a continued strained U.S. economy. Sales are expected to decline by 2% percent at U.S. luxury stores opened for at least a year. This is a direct result from financial industry job cuts, falling stock and housing value.

I am concerned that the approach to reduce pricing will take away from the value of luxury goods. After all luxury is and will always remain a perception of what the concept of value is defined as. Did Saks actually make the right move? Will others start to follow and how will this approach impact the U.S. luxury market?

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