Luxury Sales Hold Up in Uncertain Times

Oct 05, 2007

By George Anderson

There’s little concern that the rich will continue to spend big on luxury goods, but what worries retailers in the upscale end of the market is that middle class consumers who have traded up on purchases in the recent past will shop at more moderately priced outlets during the upcoming Christmas selling season.

Michael J. Silverstein, a senior partner with the Boston Consulting Group, told Retail Traffic magazine that consumers with incomes between $30,000 and $80,000 a year represent up to 70 percent of purchases at some luxury retailers.

While macroeconomic trends have done little to dampen the buying spirit of the richest Americans, middle-incomers have pulled back in recent months.

Milton Pedraza, CEO of the Luxury Institute, told Retail Traffic, “With all the uncertainty, all the bad news we got in July and August, there was an abrupt slowdown in the luxury sector in September.”

Jay McIntosh, director of retail and consumer products with Ernst & Young, said to get a true view of what’s going on requires splitting the luxury market into two distinct segments. The first are for retailers catering exclusively to the super rich. The second are retailers that also serve consumers in more moderate brackets.

The upper end, which includes chains such as Hermes and Bergdorf Goodman, is expected to achieve solid gains for the holidays. Those that also serve middle-income customers will also grow but at a slower rate.

One factor that may help offset reduced spending on luxury goods by Americans is purchases made by foreign tourists who are finding favorable exchange rates against the weak dollar.

According to the U.S. Department of Commerce, 11.6 million international visitors came to the U.S. in the second quarter of the year. That number was up eight percent over the previous year.

Dana Telsey, CEO and chief research officer at the Telsey Advisory Group, is looking for six percent annual growth in the luxury goods sector.

“We spoke with buyers at almost every luxury department store out there and there continues to be strong demand,” she told Retail Traffic. “We think that a lot of the talk out there is more hype than reality.”

Discussion Questions: Do you see any cause for concerns in the luxury products segment of retail? Has trading up in certain categories become so established with some middle-income consumers that it will continue in the face of economic uncertainty? Will the weak dollar aid luxury retailers across the board or just those in destination cities such as New York, Los Angeles, Miami, etc.?

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3 Comments on "Luxury Sales Hold Up in Uncertain Times"

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David Biernbaum
14 years 7 months ago

The luxury and near-luxury markets will be just fine, not to worry. Consumers do not trade down under most circumstances. However, in an economic downturn consumers will look for better costs, lower prices, and they might cut back on the number of items they purchase. I’m not convinced that any of these things will happen anytime soon because it appears that the much touted recession might have been revised or postponed. Happy Holidays.

Mark Lilien
14 years 7 months ago

Many shoppers are “aspirational.” They splurge occasionally by purchasing an upscale brand. Sometimes they shop at an upscale store, like Coach. Sometimes the upscale store is actually the Coach outlet location or eBay. Even people whose incomes are middle class might buy a $150 Hermes tie as a gift, rather than a $1,900 Hermes watch.

The decline of the dollar helps U.S. stores near the Canada border, as well as major foreign tourist destinations, like New York and Los Angeles. Foreign tourists won’t be going to shop in Ohio.

Jeff Weitzman
Jeff Weitzman
14 years 7 months ago

I’m less optimistic about the economy and middle class buying power. Health care costs are going up significantly, again, and between the cost of food, the cost of gas, and the health care deduction that will take another bite out of paycheck, that little “splurge” on a luxury purchase may remain an aspiration.


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