Luxury Retailers Missing the Bling
By Tom Ryan
While there will always be rich people, their purchasing behavior is expected to change due to the global financial crisis. According to an article in The Wall Street Journal, luxury retailers are wondering if it has become “unseemly to spend money publicly,” given the crisis and whether a long period of ostentatious spending is ending.
“The answer may have a lot to do with how these consumers want to be seen,” wrote Christina Binkley, author of the article. “It’s not necessarily a good thing to show up at the tennis club with a new $30,000 crocodile handbag when your friends’ net worth has been halved and the Federal Reserve is spending billions to keep the banking system afloat.”
That view comes as Lehman CEO Richard S. Fuld Jr. was grilled by Congress early last week over his multimillion dollar bonuses, and U.S. Rep. Henry Waxman suggested a growing public outcry over high executive pay. Two AIG executives were also similarly grilled over their bonuses as well as a lavish retreat for insurance agents after the announcement of a government-backed bailout. The article stated, “The rising tide of anti-wealth sentiment could well affect how conspicuous the rich want to be.”
September’s sales results also saw luxury stores come under pressure.
Comps dropped 15.8 percent at Neiman Marcus Group, 10 percent at Saks, and 9.6 percent at Nordstrom. With stores in New York, both Neiman, which owns Bergdorf Goodman, and Saks were particularly affected by Wall Street’s troubles and by a decline in spending by tourists taking advantage of the weak dollar.
Burt Tansky, Neiman’s CEO, said that “based on our September performance and the current economic environment, we expect customer demand will remain weak for an extended period of time.”
Speaking to the Journal, Francesco Trapani, chief executive of Bulgari Group, admitted he is cutting back on his own jet-setting lifestyle. The jewelry, luxury-goods and hotel magnate recently sold his 137-foot yacht, and he’s holding off on buying any more homes.
“My sense is that this Christmas is not going to be a successful one,” said Mr. Trapani. “The things that are happening are so big that it would be silly to assume they won’t have an impact.”
Discussion Question: How will the global economic crisis impact the luxury sector? Do you see a “rising tide of anti-wealth sentiment” affecting luxury spending?
It is obvious that spending in the luxury segment will slow down. But I don’t think we will see any slowdown in ultra-luxury goods. Ultra-luxury goods are custom made items, rarities, yachts and airplanes. I think there are ton of people making money off of this economic meltdown and that will increase the wealthy buying pool. The slow down in luxury brands will probably be in the single digits and will also be short lived. Bringing more exclusive products to the market can offset any decrease in the flagship items.
The low end of the high end will cut back–people who can afford it but just saw their “walking away money” walk away, and see a long slow recovery. As to the question about displays of wealth–I don’t think much will change. Those who live by “if you’ve got it, flaunt it” and still have it, will still flaunt it. There will just be fewer who actually have it.
There will always be rich people, true. But there won’t be as many, and they won’t be quite as rich. But retailers, for the most part, would be mistaken to change their branding philosophies. Nordstrom is Nordstrom. Target is Target. What retailers do need to look out for is changes in customer value, and changes in customer needs and expectations. Pricing, inventory, marketing and content relationships will change. If retailers cannot stay current with those changes, they risk their current customer loyalty.
The risky speculation and the resulting stock market crashes in 1929 were the catalyst which tipped the wavering US economy over the edge. The disparity between the haves and have nots and the economy which was based upon consumption of certain goods (Automotive, Radios, Food and Apparel) began to teeter and then, with the market crashes, that confidence was lost and the economy slipped into a long depression. In 1929 the rich massively reduced their expenditures on on luxury items, and slowed their investments. Main street, made up of the middle-class and poor, rapidly slowed their credit/installment expenditures as they were worried about losing their jobs and homes because they would be unable to pay the interest. The inevitable spiral began from that point, with industry reducing production in response to declining demand, laid off workers due to declining production. This in turn precipitated the rate of default by Americans and placed in jeopardy those institutions and companies whose products had been purchased on credit (cars, radios, etc) which led to those industries rapid decline.
In the 2000’s, real estate values began to decline, fuel costs increased and reduced disposable income, Americans began to default on their credit payments, including homes.
In post crash 1929 the American wealthy massively decreased their lending to the capital markets (reduced their investments) which impacted the international markets and further reduced demand for US dollars. In 2008, capital markets began to decline due to lack of deposits and financial risks involved with loans.
In conclusion, many of the wealthy will decrease their expenditures on luxury goods and will be searching for ways to maintain their wealth. In times of incredible uncertainty, even the wealthy reduce.
Spending patterns will change, even among the outrageously wealthy (or outrageously big spenders). In part, this is because some of the big spenders will not be able to continue supporting that lifestyle. There are, as noted, those who have enough wealth that the current problems won’t affect them but they are still relatively few. Classy spending won’t go out of style. Maybe walking into the club with a $30,000 bag will be in poor taste, but walking in with a $5,000 or $10,000 classic bag probably still will be accepted. This mood also is temporary. As the economy starts to improve (and it will, of course), luxury will come back into fashion.
I may have related this story previously, but considering the topic, it is worth repeating.
I have a friend who is a personal shopper at Bergdorf Goodman’s. I asked her if she is seeing any difference in purchases by her clients. She responded, “Yes. In the past they just bought whatever they want without hesitation. Now they ask the price, then they buy it.” She has seen no change in the amount of money they spent.
Her clients aren’t stretching to purchase merchandise at Bergdorf’s. But, many who are participating in the luxury goods market are. Those will go away and the retailers will feel it.
The same goes for conspicuous consumption. Those who can afford it don’t think twice about it. Those who are stretching are stretching precisely to reflect a high net worth profile. They will be less conspicuous with their luxury goods because they will have fewer luxury goods.
In America–and in applicable elsewheres–both the rich and want-to-be-rich have been living large for so long that solvency feels like a sacrifice. Look at credit card records.
Global conditions will likely cause luxury consumers to be a bit more circumspect but they will conquer any unseemliness by rationalizing, “We shall live within our means, and fortunately we have so much means.” Yes, one less yacht may be sacrificed and a few less giant diamond rocks may not hit the credit cards, but save your pity for retailers catering to luxury consumers.
While luxury will see a decline as a business segment, from a customer perspective, there are clearly groups that will continue to spend. In discussions with a merchant serving the ultra-wealthy yesterday, they are not seeing a noticeable decline and in fact are seeing increases.
While it is okay to make generalizations about the luxury “sector,” when you get more specific about groups of customers such generalizations become misleading. Hence it is now more important than ever that merchants at all levels know there customers and track their spending to see which groups are continuing to spend and which are not.
Speaking of bling, don’t forget that the price of gold and other precious metals has gone through the roof. It’s entirely possible that the pricing has reached the point of absurdity, even for the semi-rich.
Spending on luxury goods will likely be flat this year. Retailers should expect the mix or type merchandise purchased to change. Many of the big spending hedge fund and Wall Street people will not be receiving bonuses like last year.
The mood in America is changing, so the spending will change. Expect to see more goods purchased for internal reward rather than external show. Expect some of the wealthy to purchase a high-end home theater rather than an exotic sports car. Some may purchase high value artwork rather than jewelry. Hiding wealth is not out in America, but there will likely be some adjustment this year.
Amen to Max. I agree totally. The root of the problem is a business system that hands out excess money that normal consumers cannot comprehend. When the roots are exposed to reveal fraud and plenty of government involvement in setting up practices to sustain it, there’s no way to feel good about having to scrimp, cut spending and reduce gifting to even your family.
Let’s not confuse the public perception of greed vs. wealth. Big difference in how the public perceives well-being from gluttony. Not every wealthy spender recently ripped off the American tax payer. The public will know the difference.
I don’t think that we are seeing anti-wealth sentiment. Rather, we are seeing a dialogue about executive pay, with an emphasis on fairness. Americans like things to be fair and executive pay, relevant to worker pay, has grown at a much faster rate. Many Americans want to bring it back into balance, to reestablish some sort of fairness.
Of course I think luxury spending will decrease. The stock market is down 44% from last year. People have to “resave” for retirement and college funds.
I also think that although people recognize the difference between greed and wealth, there is jealousy and a growing anger toward the top income earners. This is represented by the fact that no one seems to care that certain politicians want to raise taxes on small business owners earning over $250k even though they are the job creators. People don’t want to understand, they are angry at the greed and that sentiment is being spread to anyone in the upper income brackets.