RAPAPORT… Topping the important issues facing luxury retailers today is not just whether the recession is over, but how long its inhibiting effect on consumer spending will linger. From the low-end of the economic strata to the upper levels, shoppers’ attitudes toward what they spend money on, how much and how often, have changed. And even with a return to positive economic forecasts, they are not planning to return to the way they lived and shopped before. This is not your prerecession shopper!
“Coming out of the recession,” says Paco Underhill, chief executive officer (CEO) of Envirosell and the author of the new book, What Women Want, “all of us realized that our cars were too big, our houses were too big, our debts were too big, our bellies were too big and we needed to go on a diet. And it was important for us, whatever our place in the social spectrum, to spend within our budgets.” Part of what that meant, he goes on to say, is that “the luxury market consumers for a year or two realized that conspicuous consumption was bad manners. And now that they are back in the market, they are shopping a little differently than they were before.”
On the Road to Recovery?
The answer to whether or not the U.S. economy is truly on the path to recovery depends on which statistics you look at and which experts you talk to. Strong first-quarter sales following record year-end results seemed to indicate happy days are here again — Bain & Company forecast an 8 percent rise in luxury spending in 2011, with the U.S. remaining the world’s largest market for luxury goods. But then again, the government reported that from January through March, first-quarter growth slowed to an annual rate of 1.8 percent and unemployment claims rose in April. Amid all these schizophrenic statistics, it’s hard to know whether the worst is behind us and if luxury really has regained its luster.
Based on the benchmarks established by the National Bureau of Economic Research (NBER), a committee of academic economists, the Great Recession ended in June 2009, marking the conclusion of the longest economic downturn in United States history since the Great Depression. But whether that news filtered down to the shopping public — and when — is open to debate.
“People really didn’t care what the eggheads were saying about the recession being over; they still felt it. However, that began to change in early 2011,” explains Ken Goldstein of The Conference Board, who personally is of the opinion that the recession is, in fact, over.
“It’s certainly not over for the 8.9 percent who are still unemployed,” emphatically states Robin Lewis, chief executive of The Robin Report and professor at the Fashion Institute of Technology (FIT). “There is a great swath of the population who have not seen wage increases in a long time and if they have, it has been very little. It’s a very down economy.”
Continues Lewis, “I don’t have a vision of a robust future anytime soon. There is no business investment. I don’t think we’re going to see a recovery until 2015 and it’s not going to be the same as before the bubble years.” According to Lewis, the “big picture” long term will be decisive in determining whether the U.S. can continue forward as an economic powerhouse and leader. “Seventy percent of the U.S. economy is based on consumption — we do not create value; we consume it. If we can’t get off the consumption addiction that is driving us, we will fall like the Roman Empire.”
Edie Weiner, president of Weiner, Edrich, Brown, Inc. and a leading futurist, scoffs at the idea that the country even experienced a recession. “It was rather a fundamental transformation of the U.S. economy.” She argues that it didn’t behave like a recession, citing the fact that it did not exhibit a failure of business or industry or a “total decline in demand.”
Weiner identifies several factors that contributed to this upheaval in the U.S. economy:
Baby boomers have not produced the expected “huge bump” in economic growth. Rather than spurring economic activity in retirement, they have to continue working to compensate for declining portfolios and dwindling savings.
Many of the jobs lost will never come back. Even if people find jobs, many are earning less.
People are living longer. They need money for retirement and to “sustain the incredibly high rising cost of health care.”
Disposable income dropped as many people who previously leveraged their home equity now no longer have equity or easy access to credit. Recent graduates have the highest debt levels ever recorded as a result of the “incredibly galloping costs of education.”
Affluents Open Their Wallets…But
“The recovery proved more resilient than anyone expected,” says Milton Pedraza, president of the Luxury Institute, citing the “global demand for U.S. products from innovative companies such as Google, Apple and Facebook. The affluent and ultrawealthy have done phenomenally well. Luxury is cyclical and dramatically outperforms in upturns and drops dramatically in downturns. The top half has recovered nicely but they haven’t gone beyond the peak of 2007.”
While Pedraza observes that the “wallets of the wealthy have opened,” the same is not true for mainstream America. “There are millions of millionaires,” says Weiner, pointing to the fact that never before have we had “such a lot of people with a lot of money to spend.” Still, there is a “huge squeeze on consumption on those in the middle,” while the rest of the population is basically at maintenance level.
“The luxury segment,” Lewis explains, “is driven by the stock market and financial markets — which are an anachronism. It says nothing about the economy — it’s Las Vegas.” He agrees that spending by the wealthy is increasing, but points to the psychological factor that the recession has embedded into their minds.
Christopher Ellis, managing member and president of the Boston-based Consensus Advisors, attributes the surge in luxury purchasing to the “feel-good attitude that has been created by virtue of the colossal, colossal government spending finding its way into corporate profits but not creating jobs. The stock market is very buoyant — people are feeling wealthy and the zero interest rates affect everyone. They are paying minimum capital gains taxes. They’re spending their monster bonuses.”
“When you move out of the stratosphere of the top-end luxury consumer, I don’t see healthy growth. Everyone is broke. Municipalities have no money. What happens next? I don’t know,” says Ellis. “I don’t see where the fiscal ship will right itself. In 2008, when everyone was terrified, there was a moment of truth. The economy was based on phony real estate — the anchor driving the economy down just as it was driving it up. People would have taken the medicine then — we needed radical surgery and pain to excise the ills of the naughty. The solution, however, was made out of freshly minted dollars.”
While some experts look to the emerging economies as the new luxury frontier, Weiner is “always optimistic about the U.S. It is a hotbed of entrepreneurial activity and the hallmark of resilience in the world. We have grappled with multicultural issues since our founding, something that many other countries now face. It doesn’t matter if the Chinese economy becomes the largest in the world. Ultimately, it is about the ability to absorb aspirations and dreams and turn them into creativity and invention.”
Survey Says
As far as the gilt-edge shopping sector is concerned, while there is light at the end of the tunnel, it still isn’t shining quite as brightly as in the prerecession days for at least a chunk of the population. According to a recent Deloitte survey, 43 percent of Americans feel the economy is still in a recession. But then again, nearly half — 45 percent — of households earning $100,000 or more indicate their confidence in the economy has improved over the past six months, compared to 24 percent among those earning less than $100,000. A mid-April Gallup poll reported that 31 percent of those surveyed earning $75,000 or more believe the economy is growing; 52 percent in that group think the country is in a recession or depression. The Deloitte study also reported that households are paying attention to events that could curb their willingness to spend. More than seven out of ten respondents — 71 percent — cite concerns about higher energy prices, up from 54 percent at this time last year and nearly one-half — 47 percent — point to higher medical costs. Additionally, 44 percent indicate political unrest in other countries is a factor that could cause them to lower their spending.
On a more positive note are the results of the sixth annual American Express Publishing and Harrison Group survey of almost 1,500 households representing the top 10 percent of the income spectrum. The just-released 2011 Survey of Affluence and Wealth in America concluded that for the first time since 2007, significantly more affluent and wealthy American families will be substantially increasing spending in 2011 in 18 luxury categories. The findings include:
· The percentage of households planning to increase their spending is up 87.5 percent over 2008, while 2011 has a 25 percent increase over 2009-2010. Over 45 percent of America’s wealthiest families — $500,000 minimum discretionary income — intend to increase premium goods and services outlays.
· Within the luxury shopper categories alone — clothing, accessories, jewelry, home décor, etc. — researchers estimate spending will increase by $26.6 billion, or nearly 8 percent. Researchers estimate an 11 percent increase in luxury travel and a 12 percent increase in luxury automobile purchases, assuming supply.
· The percentage of consumers who expect to reduce their luxury consumption in 2011 has dropped by nearly 50 percent in the past year alone — from 16 percent to 9 percent — and over 300 percent since 2008.
“It is a relief to finally be able to see a significant return of affluent consumers to the luxury marketplace,” says Dr. Jim Taylor, vice-chairman of Harrison Group, summarizing the good news for luxury marketers, producers and retailers. Still, Taylor notes, even the affluent remain “skittish,” with 70 percent believing that the recession is still on.
It’s a sentiment echoed by yet another measure of the affluent mindset. Pam Danziger, founder of the marketing consulting firm Unity Marketing, and author of the new book, Putting the Luxe Back in Luxury, says the company’s quarterly Luxury Consumer Index, which measures the attitudes of affluents, has come halfway back from where it was during the recession, but it hasn’t recovered all the way. “It’s still very dicey out there and people are still very concerned. Two-thirds of our luxury consumers surveyed the first week of April said the recession was not over yet.”
Not Business as Usual
In its white paper, “The New World of Luxury — Caught Between Growing Momentum and Lasting Change,” the Boston Consulting Group notes “the signs of a revival do not augur a return to business as usual’’ especially for the luxury market. No longer are customers buying luxury on a whim — or paying no attention to price. Ketty Pucci-Sisti Maisonrouge, a member of the faculty at the Columbia School of Business and principal of luxury consulting firm KM&Co, explains, “The rich got a scare in 2008-2009. They weren’t sure of anything going forward. One of the most important key consequences of the recession is that all the luxury customers have become more discriminating.” According to Lewis, affluents “will closely assess the value of what they are getting.”
Yet Goldstein remains optimistic that the U.S. economy is fundamentally strong. In his opinion, “It won’t be a here-we-go-again regarding the recession. It will be about how much further food and gas prices are going up. The biggest change is that consumers have become more cautious about debt.” Pedraza calls it a “toss-up economy” because the jury is still out as to whether it is sustainable or we are up for a bigger fall.
“What we’re seeing coming out of the recession is that a lot of the affluent shoppers’ mindsets are very similar to the middle class when it comes to being responsible shoppers,” says Candace Corlett, president of WSL Strategic Retailing. While they are coming out of the recession sooner, with more money to spend, they are shopping with a different attitude. “It’s no longer the wanton spending that there was. It’s now more responsible, more cautious. They have certain rules that they’re going to follow.” And while, she observes, “we have seen a return of the more affluent to the stores where they enjoy shopping, there is an awareness of ‘I’m no fool and, yes, I may be willing to buy a boat or spend $2,500 on a handbag, but I’m also going to check prices on paper towels.’”
“While luxury shoppers during the recession might have traded down within the luxury channel, shopping within the different tiers, what we’ve seen is that people have come back to their old ways.” says Dimitri Vermès, vice president of the retail division of CBX, a full-service strategic branding and design agency. “But although affluent shoppers may be anxious to buy, they are buying more timeless or classic pieces.”
Quality Sells
“Is the brand worth it?” That question remains top of mind for affluent customers, according to Maisonrouge. After luxury retailers heavily discounted prices, customers became unsure of the real value. Furthermore, she points to the fact that customers now ask themselves “Do I really need it? Is it a necessity?” Goldstein notes that even the rich are not immune to bargains.
Pedraza observes that the wealthy want something that will last for five to 20 years. They are cautious and not being frivolous. Moreover, they are negotiating hard. They feel they have the edge because they can afford to wait.
“Quality will always sell,” advises Maisonrouge. “Companies must go back to their core values and really deliver true quality and true service.”
In terms of diamonds, Pedraza says the demand for jewelry has come back, “but it is the last category to turn up significantly since it is not seen as necessary as apparel.”
But while jewelry is the ultimate luxury, it can fit in with the new affluent consumer’s mindset, suggests Danziger. These shoppers are looking for purchases that are ultimately “worth” more to them, in that they will enhance their lives for years to come. “It’s a different type of ‘investment thinking,’ in that the product is no longer a discretionary purchase they buy for one season and then get rid of. It’s something that can last for season after season.”
Moreover, Maisonrouge points out, diamonds offer consumers both timelessness and a value proposition. “Not only can you wear and enjoy a diamond, but there is also the knowledge that if things go really bad, you can sell it. Diamonds are different than other accessory categories — they make a woman feel beautiful, plus there is the intrinsic understanding that they increase in value.”
A New Breed of Consumers
In its white paper, the Boston Consulting Group labels the recession as “the tipping point for several trends — including profound changes in consumer behavior and the competitive landscape.”
“I don’t think we’ll ever go back to a mindless more-is-better construct,” says Kate Newlin, retail strategist and author of Shopportunity and Passion Brands. The new shopping matrix means finding a balance between low-cost, high-convenience factors. “It’s deciding how much time and effort versus money the consumer is willing to invest in the acquisition of an item. Stores do themselves a disservice in assuming that price consideration is the deciding factor for everyone.”
“If there’s enough of a recovery, people will loosen up the purse strings,” says David Capece, chief executive officer (CEO) of Sparxoo, a digital media agency based in Tampa, Florida. The truth of the matter is “consumers like to consume. All other things being equal, they prefer to spend than not to spend. Right now, they’re still trying to be fiscally responsible but at any sign that things are all clear, there’s some pent-up demand and they’ll be ready to spend. It’s just a matter of waiting for that signal and that signal hasn’t come.”
It is with the much-courted prerecession “aspirational shopper” that you’ll see “the most long-term effect of the recession,” says Corlett. “The reality of managing aspirations and getting in touch with who you are and what you can afford was a rude wake-up call. There’s a lot more awareness about the tradeoff of having to work hard to get what you want.” And there’s a willingness to cut back on spending in some areas to afford spending in others. Making smart choices is now a pervasive mindset, she points out.
There is a notion of responsibility, says Peter Rose, senior vice president at The Futures Company, a trend and futures marketing consultancy, citing a trend seen in the company’s Yankelovich MONITOR, an annual tracking study of American consumers. “Consumers recognized a new era at hand and that if they did not begin to act more responsibly in terms of how they spent, in terms of how they lived their lives in general, in terms of the brands with whom they decided to have a relationship, in terms of paying greater attention to corporate social responsibility, the country was going to continue to be in big trouble.”
This imbedded sense of shopper responsibility for the consequences of what they are spending wasn’t there prerecession, says Rose. But taking on debt at exorbitant interest rates and a deal-with-it-later attitude have gone with the recession. “Shoppers don’t want to fall into that trap again. And then there are external factors pushing down on them, so even if they behaved well and paid off their credit card in full, they still may have had their credit limits slashed in the past couple of years. It’s something that has permeated all of society.”
The result of that thinking, Rose says, created an overarching sense of being more mindful of the consequences of the decisions made when consumers shopped and that they could not continue to “overdo.” But rather than a sense of frugality going forward, he says, which at best was “a short-term and necessary coping mechanism,” the new mantra is “prioritization. ‘I’m going to make some really hard decisions about what I can or cannot buy and the things that make the cut for me and my family are based on our situation and our needs rather than based on our wants.’ But that careful evaluation still leaves plenty of opportunity for luxury, as the pros and cons of any purchase are carefully evaluated.”
