Conspicuous consumption has given way to conscious consumption; image courtesy of Bloomingdale's
The United States may be in a post-recession period, but many of the spending values created during the time have stayed with affluent consumers, causing a hesitancy to spend, according to a report from Unity Marketing.
While counterintuitive, affluent consumers feel wealthier today, but are less likely to use their perceived wealth, causing a drop in consumption of luxury goods. This “luxury drought” has made high income households reconsider their shopping habits, with a focus on finding good value rather than acquiring bragging rights through high-end brands.
“The conventional wisdom is that as people feel wealthier, they tend to spend more money on consumer goods and services,” Pam Danziger, president of Unity Marketing, Stephens, PA. “But in the current economy, with so many uncertainties and the memory of the effects of the recession and the damage it did to affluents' investments and home values, the affluent are holding back on their spending despite the fact that their wealth is increasing.
“I suspect that we will continue to see this reverse wealth effect to put the brakes on luxury spending in the U.S. until the overall economic environment not just in the U.S. but globally starts to show signs of strength and stability,” she said. “We are already one fourth of the way into 2015, and the global outlook continues to be troubling.”
For its Q2 2015 Affluent Consumer Tracking Study, Unity Marketing surveyed 1,200 affluent consumers with an average annual income of $266,900.
Spending slowdown
Affluents are now seven years older than they were when the recession hit. This is not good news for luxury brands, since consumers tend to make most of their luxury purchases earlier in life, decreasing their spending later in life.
Younger consumers, aged 22-44, are more likely to shell out for high-end goods as a way of seeking status. However, this age group’s individuals with an annual income of $100,000 or more are not great enough in number to make up for the loss of baby boomer and generation X consumers who are aging out of luxury spending.
Millennial consumers can't completely make up for aging out affluents
“Several factors are impacting affluents' spending habits today, a full seven years since the start of the recession,” Ms. Danziger said. “First, affluents are seven years older, and that is a long period in the adult lifespan of consumers, and even a bigger chunk out of the 20-year period when people reach their highest income levels, from aged 35-54 years.
“Older consumers in general spend less money on luxury goods, since they tend to make major luxury lifestyle purchases when they are younger, and as they age turn their spending toward more experiences, specifically spending on things to do, rather than accumulating more things.
“So in 2015, the affluent consumer market is simply a more mature one, and will continue to skew toward a more consumer target until the millennials start to reach affluent levels of income, which we should start to see in 2020, with a potential peak in 2026-2029 when the younger affluents—age 24-44 years—will reach its peak in number of consumers over those aged 45-54 years.”
Due to their affluent income, millennials are able to jump around the consumer market, preferring to shop from a mixture of high-end, low-end and price points in between. Thus, their spending power is immense and they will have the ability to truly dictate which brands make the cut and which will falter as they struggle to maintain relevance amongst this demographic.
Affluent consumers
Unity Marketing suggests that in 2015, many millennials will start to reach peak earning years, but it will be another decade or so before their numbers reach high enough to spur a consumer economic boom (see story).
A number of brands have had negative sales results as a result of this drought and aging luxury consumer population.
Tiffany’s sales were down 1 percent in the fourth quarter of 2014, while Ralph Lauren’s quarter ending Dec. 27 saw a 9 percent decrease from the previous year. Throughout Michael Kors’ 2014, the company had lowering comparable same store sales.
Ralph Lauren Purple Label ad
Defining moment
Part of the issue facing luxury marketers is consumers’ distrust of the term luxury. The belief is that instead of communicating quality, it is used instead to sell high-cost items that are overrated.
“To appeal to affluent consumers who have money to spend requires that marketers recognize that simply calling their product ‘luxury' doesn't necessarily make it so,” Ms. Danziger said. “Further, luxury has gotten a negative connotation, with public opinions turning against income inequality.
“Being rich and enjoying the privileges of wealth simply isn't something that the wealth feel comfortable showing,” she said. “So conspicuous consumption has turned to conscientious consumption.
“Unity Marketing's and the American Affluence Research Center's recent special investigation into the millionaire demographic found that the millionaires still 'live next door,' borrowing from Stanley and Danko's book 'The Millionaire Next Door.' They haven't moved! So marketers need to play to the personalities and spending habits that got the consumers to their millionaire status, which is careful, thoughtful and meaningful spending.
“The millionaires next door aren't afraid to spend, nor are they unwilling to, but you have to convince them that what you are selling them is worth the price. Asking them to pay a huge premium for a luxury brand logo may not measure up, when so much really good quality product is so readily available through the internet. “
Popular culture and the media have created misconceptions and misunderstandings of the affluent, which stall the efforts of marketers who buy into myths, according to research from Unity Marketing and the American Affluence Research Center.
“Do the Millionaires Still Live Next Door or Have They Moved: Demographics of Millionaires” says that while much focus is placed on Asian markets such as China and Japan, the United States has twice as many millionaires as the next top 10 markets combined, making it arguably the most important market for luxury goods. There are 12 million households in the U.S. with a net worth of $1 million or greater, and most choose to save rather than spend, eschewing an ostentatious lifestyle, calling for marketing that reflects these preferences (see story).
Whether reaching the millionaire down the block or the soon-to-be-affluent millennial, the Internet will continue to change marketing with increasing transparency.
“Technology is leveling the playing field for competitors,” Ms. Danziger said. “It is the ultimate democratic force for consumers. It equalizes all through the power of information.
“By contrast the whole concept of luxury brands are based upon a plutocratic idea, or power and influence based upon wealth and prestige,” she said. “With technology so affordable, people at every income level can access the informational power of the internet. With the idea of luxury brands the ultimate smoke and mirrors of marketing, techno-powered consumers can now pull back the curtain and uncover the myths behind these brands.
“Further thanks to enterprising entrepreneurs that are capitalizing on this and disrupting tradition, consumers can gain access to products that are every equal in quality to the luxury brands, if not in marketing-generated prestige.”
Final Take
Sarah Jones, staff reporter on Luxury Daily, New York