Retailers who serve the highest income consumers have always thought that they were immune to a recession. Historically, that has been true, more or less.

 

“Old-money” consumers traditionally have kept spending, regardless of economic cycles. But this time around, high-end merchants are reporting that their wealthy customers are cutting back.

 

Among jewelers, Tiffany & Co., the world-renowned jeweler, reported that sales of jewelry above $50,000 were modestly lower in the fourth quarter of 2007 versus the same period a year ago. Historically, this has been the fastest growing price range for the company.

 

Other jewelers report that their customers are shopping down. That is, they are buying a three-carat diamond when they would normally have purchased a four- or five-carat diamond. Or, those customers are re-working a piece of estate jewelry, rather than simply buying a new piece.

 

Other luxury merchants have reported sales slippage. Coach, Nordstrom, Saks, Neiman Marcus and others have reported either a sales decline or only a modest increase. Overseas, even brands associated with the super rich are under stress. PPR, which owns Yves Saint Laurent, Stella McCartney, and Balenciaga, as well as Compagnie Financiere Richemont, the Swiss parent of Cartier and Baume & Mercier, report that the pace of growth has slowed.

 

Factors Worrying Luxury Shoppers

According to research by Unity Marketing, which tracks luxury goods consumption, high-end shoppers are worried about four factors: 1) lack of confidence in the U.S. government; 2) mortgage banking crisis; 3) increases in the price of oil and energy; and 4) the decline of the U.S. dollar against major global currencies.

 

As a result, these shoppers have tightened their purse strings.

 

What else is different this time around? IDEX Online Research has identified one other major factor: not all high-end shoppers represent “old money.” In 1990, roughly 10 percent of all U.S. households earned $100,000 or more annually. Today, that figure is close to 18 percent, and should rise to 20 percent by 2010. About half of all high-income consumers are “new money.” New-money households don’t know that they are supposed to keep spending. Further, much of their wealth is invested in the stock market and multiple homes. These two investment categories have been under siege recently, so those consumers with exposure to the stock market and the housing market feel less wealthy, even if they have tremendous wealth on paper.

 

BIGresearch, the consumer tracking firm based on Worthington, Ohio, says luxury consumers are delaying major purchases. They may want a car, but they are reluctant to sign on the dotted line. In the back of their head is a nagging voice asking, “What if I need the money in a few months from now?”

 

When Will The Market Turn?

In its March 2008 magazine, the National Retail Federation published an article titled “Luxury’s Shrinking Purse.” It begins: “She’s got a closet full of luxury handbags, a jewelry box overflowing with gemstones, and dresser drawers stuffed to the gills with designer togs. But even luxury consumers can fall prey to fears of recession and the roiling financial markets.”

 

When will luxury shoppers loosen their purse strings? Michael Niemira, chief economist at the International Council of Shopping Centers, says that U.S. consumers will stay in their current restrained spending mode for another nine months to a year. They could step up spending just in time for the 2008 holiday selling season, or they could delay until early 2009.

 

Most economists and industry watchers don’t expect the current soft retail climate to firm up until after the November presidential election. Most say that regardless of who ends up in the White House in 2009, the prospect of change will likely boost affluent shoppers’ spirits, and thus increase their appetite for luxury goods.

 

Niemira, the economist, points out that luxury shoppers have a more direct relationship to the stock market than other consumers. The market’s gyrations are worrisome to those consumers. “Worry is not good for the psychology of spending,” he says. In other words, luxury shoppers can still afford to spend $400 on a handbag, but they are feeling less wealthy, so they delay the purchase.

 

Researchers with America’s Research Group say that well-heeled consumers have 60-70 percent of their wealth linked to the stock market. In addition, middle income consumers probably have a 401k profit sharing plan which is also tied to the stock market. Until the current credit woes are resolved, the stock market could show above average volatility. Even if those consumers have no intention of taking out their money in the near future, the large paper losses have a negative impact on their willingness to spend.

 

Which Merchants Benefit?

Some merchants will continue to post solid sales gains during this recessionary period. One obvious example includes retailers with international exposure. Tiffany & Company, which derives 41 percent of its sales from international markets, expects overseas stores to post significantly larger sales gains than its U.S. stores in 2008. Further, the company plans to accelerate the opening of new stores in overseas markets.

 

Which merchants with mostly domestic exposure will do well? The National Retail Federation says that the biggest and best-known luxury brands are better positioned than smaller, lesser-known luxury items. Why? People generally revert to what’s known during times when they are purchasing more cautiously.

 

Despite some weakness at the high end, most retailers of high end goods continue to post sales gains well above mass market merchants who target middle-income consumers. If a merchant is considering moving upscale, this might be a good time to do it, according to business consultants. 

 

Unity Marketing is betting that affluent consumers will opportunistically buy imported and higher-priced goods in an effort to get out in front of inflationary trends. In addition, Unity Marketing expects high income consumers to buy real estate at today’s low prices with the expectation of selling at a higher price in a couple of years. In addition, they are likely to take money and invest in strategic home improvements.

Unity Marketing also recommends that American fashion designers increase their marketing efforts and brand building. Jewelers should take note of this recommendation.