Friday, February 6, 2009

Affluent still spending... but on what?

The previous post highlighted the notion that the uber-rich are still spending and on the most expensive and exclusive luxury goods. While this might be true, it might also be a bit deceptive, since it is only a small segment of the affluent in America that is actually making these purchases. The larger segments of affluent individuals in America are continuing to spend, but not on such extravagant luxury goods.

First, the affluent market is composed primarily of people with middle class backgrounds who continue to pursue a somewhat middle class lifestyle with middle class values. About 90% of the affluent, or 10 million households, are not conspicuous or ostentatious consumers. They spend conservatively and save carefully. America's current credit and economic problems might have been avoided if these affluent people, with their conservative spending and saving habits, had been recognized as role models. They have demonstrated the importance and value of living within your means.

Second, only about 10% of the wealthy, or the 1 million households that account for less than 1% of US households, might be considered conspicuous consumers. With the exception of this relatively small niche segment, the affluent market does not appear to be very knowledgeable about the pricing and brands of products that are generally recognized by marketers as being in the higher price points associated with the luxury category. This seems to create an opportunity to substantially increase the market for high end luxury products if the affluent market can be educated about why they should consider buying them and the brands that offer them.

False View of Luxury Market Created by Anecdotal Research Provided to the MediaNone of this is new news or indicative of a new trend. The conventional wisdom is that the US has witnessed increasingly conspicuous and ostentatious consumption by an increasingly affluent market for a period of about 30 years, which has been interrupted by brief interludes of retrenchment during the occasional recession and the 9-11 tragedy. This popular perception of the luxury market and the wealthy has resulted from anecdotal "research" provided to the media that used examples such as a young Wall Street attorney spending $50,000 of a year-end bonus for a new watch or a secretary spending $1,000 for a new hand bag.

Other examples of conspicuous consumption among the wealthiest 1% have created the impression that there were many hundreds of thousands of people making a million dollars a year or more among the ranks of the entertainers, professional athletes, Wall Street bankers and attorneys, Fortune 500 executives, real estate developers, and entrepreneurs who have taken their company public. In fact the latest IRS data shows less than 400,000 US households in this income bracket.

With only about 10% of the US affluent engaged in conspicuous consumption, together with the purchases of luxury goods by international visitors leveraging the weak value of the dollar, a distorted view of the size and nature of the true luxury market in the US has been created.

The actual size and spending patterns of the affluent market are well documented by the data from the Internal Revenue Service and The Federal Reserve Board and the research of the affluent by former Georgia State University Professor Thomas J. Stanley that began in the 1970s and led to "The Millionaire Next Door" and a series of related books beginning in 1996. Dr. Stanley's research produced similar conclusions regarding the lifestyle, values, spending, and savings profile of the affluent as that suggested by the AARC research. In fact, since AARC's inception in 2002, the results of its research have been consistent with Dr. Stanley's research.

No Long Term Changes in Spending Evident Among the AffluentContrary to assertions by some luxury market consultants that the current economic problems are creating longer term changes in their lifestyles and reductions in spending on luxury and conspicuous consumption by America's wealthy, most of the affluent are behaving like their normal, rational, and frugal selves. Their careful spending is not a new trend.

While the concepts of "stealth wealth" and "luxury shame" are now being advanced by the retail and luxury consultants and futurists through anecdotal research about cut backs in the spending on ostentatious luxury, the sale of luxury goods and services, as defined by the majority of America's affluent, is not subject to much change in 2009, just as it has not shown much change over the past 30 years.

We don’t see any evidence that the majority of the affluent are showing major long term trend changes in their spending patterns and attitudes. They have never been ostentatious or conspicuous consumers. They have always been careful shoppers and savers who look for quality and value in their purchases, the brands they buy, and the stores where they shop.

The affluent market in the US is cutting back and deferring expenditures, according to AARC research in early 2008, due to current economic conditions, especially given the reduced values of their homes and stock portfolios. However, these expenditure changes should not materially affect the sales of the high end products and brands normally associated with ostentatious "luxury" because most of the people in this market have not represented a substantial source of the sales of such products. "They will not suddenly be switching from Manolo Blahnik to Stuart Weitzman shoes, from Prada to Coach purses, or from Four Seasons hotels to Marriott, because they were not supporting those brands previously.

The sales of the high end "luxury" products appear to be derived primarily from international "new rich" consumers and by the small segment of the wealthiest 1% in the US, as previously noted. A portion of the sales have apparently also been derived from those stretching their resources (especially their credit) to achieve a taste of luxury.

A segment of the small niche market of conspicuous American consumers will have to change their spending and saving behavior. The Wall Street investment bankers, attorneys, and others in related activities are experiencing large reductions in income and net worth. Many of the younger people in this group don't have substantial net worth to fall back on, as they were spending what they were making (and perhaps even more). Changes in the spending of these people, as well as among the wealthy "new rich" citizens of the countries now experiencing recessions and declines in oil and commodity prices, will contribute to the decline in sales of the ostentatious "luxury" brands.

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