What's Happening In The Luxury Market? The Latest Research Provides Contradictory Clues
The American Affluence Center's report is based on the responses from 439 men and women who promptly responded to their survey and meet the minimum net worth requirement of $800,000. Their households have an average annual income of $290,000, an average net worth of $3.1 million, average investable assets of $1.7 million, and an average primary residence value of $1.1 million. The underlining below is mine, which may define an important future trend.
• The index for future business conditions is 22 points below the prior Spring survey index and 30 points below the Fall 2009 survey. Given the low rating of current business conditions, this future index is relatively negative, as it reflects an expectation of limited improvement from a poor starting point.
• The index for change in the stock market is 14 points below the prior Spring survey index and 33 points below the Fall 2009 survey. The current index reflects a 3 point decline in the "higher" rating and a 12 point increase in the "lower" rating. The "same" rating was 8 points lower. These ratings seem to suggest an expectation that the market will be largely unchanged 12 months out.
• The index for the expected change in after-tax personal income is 8 points below the prior Spring survey index. This index suggests little optimism about the prospects for income growth over the next 12 months.
• Preservation of capital became the primary investment objective, for the first time, in the Spring 2009 survey and is now 13 points higher than capital appreciation The importance of capital preservation, relative to the other goals, varies by age, gender, income, and level of net worth and investable assets.
• Most of the individual items show very little change from the prior Spring survey and some even show a slight increase (though the numbers are very small). Interest in acquiring a primary residence, in total, increased over the Spring survey (due to plans to build) and is at a level not seen since the Fall 2007 survey.
• Given the 11.4 million households represented by this survey, it can be estimated that the market segment represents potential purchases of 1.8 million autos, 1.7 million remodeling projects, 1.4 million cruise buyers (total of 2.7 million cruisers), 353,000 vacation homes, and 673,000 primary residences.
• None of the 17 spending categories is in positive territory (i.e., index of 100 or more). With the exception of dining in casual/family restaurants and recreational activities, the index for all of the categories was down from the prior Spring survey, typically by 3 to 5 points. This suggests some retrenchment from the increased spending plans that seemed to be associated with evidence of "frugal fatigue" in the Spring survey.
• About 41% of the affluent say they will make a conscious effort to reduce or defer expenditures during the next 12 months. Their specific spending plans for 8 major items and 17 products and services are very different from those who say they are not reducing expenditures.
• The age 59 and under, women, and lower income and net worth segments are more likely to be reducing expenditures. The 41% reducing expenditures is the same as the Spring 2008 (40%) level and below the Fall (50%) and Spring 2009 (60%) levels.
• Among those indicating a conscious effort to reduce or defer expenditures, the primary reason (71%) is uncertainty about when the economy will recover.
• Almost one in eight do not plan to buy December holiday (Christmas and Hanukah) gifts this year. This is a slight increase from the Fall 2009 Survey (about 9%) and well above the pre-recession 2006 survey (3%).
• Among those who plan to buy December holiday gifts in 2010, the average total expenditure of the adults in their household was $2,399 in 2009. This compares to an average expenditure of $2,505 reported for 2008 holiday gifts in the 2009 survey. The median 2009 expenditure was only $1,160.
• Among those who expect to buy holiday gifts in 2010, about 3% plan to spend more than in the prior year (the same % as in the 2009 survey), 29% expect to spend less (down from 38% in the 2009 survey) and 69% plan to spend the same (up from 59% in the 2009 survey). Surprisingly, some of those who say they are making a general effort to reduce expenditures are planning to spend more for holiday gifts this year.
These data, as usual, have both positive and negative aspects. These and other data points have been assimilated by Unity Marketing, Pam Danziger, CEO, who has recently stated the tough economy has permanently reined in the purchasing habits of the current generation of affluent consumers and upscale brands should expect more conservative spending until Generation Y enters the luxury market in force in 2020.
"High-end brands", she stated,"will have to market more aggressively to drive sales for the next several years and will not be able to rely as heavily on purchases at the highest price points. Instead, these companies should follow the lead of Neiman Marcus, which extended its brand down-market with its Last Call brand. The assumption is that something was lost in the recession, but you should be thanking God for the recession. There are structural changes going on in the consumers you sell to"
She believes the market won't resolve itself until 2020 when the Millennials ( those who are born in 2000 and after!) reach purchasing prominence. Ms. Danziger spoke on the "State of Luxury Marketing Today," a presentation at an event hosted recently by the Luxury Marketing Council.
One of her concerns and points of extreme disagreement lay in the data presented by Bain & Co. as it released its ninth annual Luxury Goods Worldwide Market Study, declaring that luxury spending this year has returned to pre-slump highs. This report stated the luxury sector had rebounded almost completely from the global recession and is recording near-record sales revenues in 2010. Going into 2011, sales growth is expected to level out to a 3-5 percent rate as the market returns to relative normalcy.
Bain & Co. stated that luxury sales online are outperforming overall sales of the Internet, growing 20 percent in 2010 to reach nearly $6 billion. The channel will be increasingly important to luxury marketers, especially going into this holiday season.
Finally, sales in China grew an astounding 30 percent year-over-year, reaching nearly $13 billion. The country is projected to become the third largest consumer of luxury products and services by the middle of the decade.
All of this sounds positive, But Ms. Danziger said that Bain's research is dominated by global luxury brands who have been successful by expanding projections into emerging markets such as China and India. She said that such an approach glosses over the fundamental driver of the luxury market – the consumer.
"Luxury brands," she continues, " have decided that the best route for winning back revenue post-recession is to go up-market and focus on pushing ultra-expensive products. However, while ultra-affluent consumers have recovered from the slump and are likely to purchase such items, their investments alone will not provide the revenue luxury brands need."
Upscale goods and service providers instead need to attract HENRYs - High Income, Not Yet Rich. (Actually the acronym is HINYR, but that doesn't sound too good, mean anything or is as memorable as HENRY)
A key demographic, HENRYs consist of consumers with average annual incomes between $100,000 and $250,000.
This consumer group was a boon to luxury brands prior to the recession, having propelled them into higher price points based on the wealth created by real estate and financial investments. However, when those two markets collapsed in fall 2008, HENRYs reined in their spending, a problem for luxury brands.
Ms Danziger suggests the solution then for luxury brands is to go down-market and emphasize the quality of the products as much as possible. "We need to be thinking more like Consumer Reports and less like Vogue," Ms. Danziger said.