‘The Luxury Drought’

There’s a gap between older affluent households and younger folks who are eager to purchase life’s better things but don’t quite have the earning power. Add to this a broad division between very high net worth households and those who are modestly well off and the recent recession that has changed buying habits, and you are looking at a foundation of slow growth in the luxury sector for the next ten years, according to marketing expert Pam Danziger.

“Demographics is destiny in lots of ways,” Danziger, president of Unity Marketing, Stevens, Pa., told an audience of luxury professionals Tuesday in New York. The she explained how demographic trends are creating a slow period in luxury spending.

The main consumers of luxury goods and services are affluent households, she explained. They are the top 20 percent of households in income with average earnings of about $170,000.

Danziger divides affluent households into three groups: 25-34 (made up of Millennials) who are “not quite there,” in terms of earnings; 35-44, “younger affluents” (mostly Generation X), the “most prolific consumers;” and the 45-54, “mature affluents” (mostly Baby Boomers), who don’t spend as much on luxury as their younger counterparts. The older affluents is the dominate age group in the luxury market today and until at least 2019. The recession plays into this but the main reason is because the younger affluent group is a relatively small compared to the other two age groups.

“Mature affluents are going to dominate the market between now and 2020,” she told the audience at the event sponsored by The Luxury Marketing Council. “We’ve got to wait for the Millennials, the babies of the baby boomers, to come on board and they’re not going to reach middle age and reach that window of affluence until about 2019 and 2020.”

To make her point, Danziger showed a chart of population projections of by age. One line which curves in an upward manner consists of mature affluents who “are really peaking.” Another line, which started high but then went on a downward curve represents the young affluents. The space in between is what she calls “the luxury drought.”



“This period is going to be dominated by more mature affluents who just do not spend as much or have as heavy an appetite for luxury as the younger affluents,” she said. 

“I call it a drought because it doesn’t mean that it’s drying up,” she continued. “It doesn’t mean the luxury market is going away, but it does mean you’re going to have to work harder to make ready in this marketplace. You’re going to have to work harder and be smarter than the next guy because there aren’t as many people that you can sell to.”

Danziger said marketers need to target the 25- to 34-year-old group by providing products and services geared for that demographic and engaging them with social media.

“We knows these people have a heavy appetite for luxury,” she said. “We know they are friending all the luxury brands on Facebook. But guess what? They don’t have the money to buy those brands yet so there’s going to be a lot of opportunity for marketers to figure out how to connect luxury brands with 25 to 34 years old before they get money in their pockets.”

Report Tracks ‘Dramatic Changes’ in the U.S. Jewelry Market

Pam Danziger

The U.S. jewelry market emerged from the recession to post a 7.5 percent increase in consumer expenditures from 2009 to 2010, after two successive years of negative growth. Yet the jewelry market today is very different than it was in 2006 and 2007 before the recession, according to a recently released report. 

Unity Marketing's Jewelry Report 2011 notes that jewelry makers and retailers who are expecting to pick up where they left off with the same products targeting the same consumers will find themselves in the lurch.

“Since 2006 Unity Marketing has tracked dramatic changes in the jewelry market related to consumers' product and shopping preferences,” said Pam Danziger, president of Unity Marketing.

For one thing, increased demand for men's jewelry accounts for much of the market's growth.

“Among the most profound shifts our research uncovered is the growing demand for men's jewelry,” Danziger said. “While the rising cost of materials accounts for some of the growth, increased demand for men's jewelry also contributed to the rise in the jewelry market from 2008 to 2010.” 

Jewelry marketers must innovate to find growth in the new economy, she added. “Jewelry marketers and retailers must take into account the many changes that their consumers have experienced coming out of the recession. Jewelry marketers have to be willing to challenge the old strategies and create new designs at new price points to be sold in new ways.”

An example of a company that took to innovation is Danish-based silver jewelry designer and manufacturer, Pandora. The company, known for its charm jewelry, posted worldwide growth of 92.6 percent to $1.2 billion in 2010.

Danziger explains each Pandora bracelet is a customizable piece that allows wearers to commemorate life events and interests with the addition of beads. With base bracelets in the $65 to $1,500 range and beads running from $40 to several hundred, this is a product that offers the opportunity for small splurges over time that will be meaningful to the owner.

“Rather than just selling another piece of jewelry, Pandora has transformed their product into an experience that its customers collect to commemorate milestone events and memories,” Danizger says. “Pandora is a game-changing competitor for traditional jewelry marketers. They sell a new type of jewelry item in new types of stores to a new value-conscious consumer eager to create a personal expression of their lives and memories.  Pandora has a built in repeat business that has a loyal following, since nobody can buy just one Pandora charm.”

The example of Pandora also speaks of dramatic change that continue through 2011. The company's spectacular rise since it went public in October 2010 was followed by an equally spectacular fall in August, when its stock fell 70 percent in a day, following a less-than-stellar second quarter report where the company’s outlook was drastically downgraded. The company blamed rising prices for silver and other jewelry making materials and poor execution.

Despite the company’s recent woes, its charms and other jewelry remain popular throughout the world.

Survey: Affluents Buying More Jewelry from Online and Discount Stores

The worst of the recession may be over for players in the jewelry industry but affluent consumers are trading diamonds and gold for jewelry made with white metals and other materials, according to a recent survey. In addition, these high-worth consumers are turning to online outlets and discount stores.

About 28 percent more affluent consumers purchased jewelry during the first half of 2010 than the same period last year, according to Unity Marketing's latest luxury tracking survey. In addition, the average amount an affluent customer spent on jewelry increased by 7.3 percent.

“More affluent consumers purchasing jewelry and spending more money translates into a newly revitalized market for luxury jewelry,” according to a statement in the survey results, which tracks the purchases of 1,359 affluent Americans.

While consumer spending on luxury jewelry is up, the survey, by the Stevens, Pa., market research firm, reveals changes in what jewelry products people are buying and their preferences in gemstones and metal fabrications. For example, affluent consumers spent less on gold and diamond jewelry in the first half of 2010 as compared to the same period last year. They turned instead toward white metals like sterling silver and platinum and colored semi-precious stones. Further the consumer market for "luxe" crystal and man-made or faux jewelry has never been hotter.

Post-recession the luxury consumers' favorite destinations for jewelry shopping have also shifted, according to the survey. Jewelry stores lost 21 percent of the luxury consumer's share of wallet in the first half of 2010 as the internet and discount stores, outlet stores and warehouse clubs captured more of their spending.

“These changes in product preferences and shopping patterns among affluents hint at even broader changes taking place among the overall jewelry consumer market at all income levels,” said Pam Danziger (pictured), Unity Marketing president and lead researcher in the new jewelry study.

This survey of luxury consumers was conducted July 3-8. The average income of participants was $306,700 and their net worth was $15.2 million. Their average age was 44.8 years old. A total of 45 percent of the participants were male and 55 percent female.

Survey: U.S. Luxury Spending Down 27%

Pam Danziger

Luxury consumers in the U.S. cut back their level of luxury spending during the second quarter of 2012 by 8.2 percent from first quarter, according to a recent survey. The decline in spending was even more pronounced when comparing year-over-year, down 26.9 percent.

The Luxury Consumption Index for the April to June period shows that “luxury consumers got nervous about their financial status,” said Pam Danziger, president of Unity Marketing, which runs the quarterly survey of affluent Americans.

“The up and down trajectory of the LCI that we've seen over the past year measures continued uncertainty among affluent consumers who make up the heavy lifters in the overall consumer economy,” Danziger, said. “Looking back at over the past three years, we find that the luxury consumers, particularly the ‘ultra-affluents’ (the top 2 percent of U.S. households), unleashed pent up demand for luxury indulgences during 2010, but since then affluent confidence, and their willingness to spend on luxury, has been constrained.”

Danziger said that spending among ultra-affluents dropped to the lowest level seen since 2008. In addition, nearly one-third of the affluents surveyed believe the country is worse off now than it was three months ago.

“If this key consumer segment for the super-premium luxury brands continues apace, many luxury marketers will have a hard time meeting high comparable sales goals this year,”  Danziger said. For the next six months, Unity Marketing continues to expect challenges for luxury brands to encourage the affluent to trade up to their high-end brands, especially the lower-income HENRYs (High Earners Not Rich Yet with HHI $100,000-$249,900), who have taken a hit to their wealth and earning potential as a result of the recession and ongoing weakness in the U.S. economy.”

Danziger points to the recent quarterly release by leather goods maker Coach Inc as an example of a brand that seriously overestimated HENRY customers' willingness to spend. Coach tried to eliminate coupon promotions tied directly to its discount outlets, which are the company's biggest source of revenue, and which attract HENRY customers looking to stretch their dollars. This misstep, she said, led to Coach reporting weak same store sales growth in the quarter ending June 30, which then caused its stock to have its worst day on Wall Street since the 9/11 attacks.

“The number of people willing and able to pay a premium for luxury brands, like Coach, is getting smaller as this weak economy continues,” she said.

Unity Marketing has been calculating the LCI since 2004 based upon five key measures of luxury consumer confidence including their expectations for future spending on luxury, their personal financial conditions and their overall assessment of the economy as a whole, in surveys conducted every three months among over 1,200 affluent luxury consumers.

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Survey: Consumer Confidence Among the Affluent Drops Sharply

The top 20 percent of households by income are no longer feeling confident about economic conditions in the U.S. and are spending far less, according to a quarterly survey of the affluent consumers.

The Unity Marketing Luxury Consumption Index took its steepest quarterly plunge since the recession (between fourth quarter 2007 to first quarter 2008), falling 16.8 points to bottom out at 66 points. This is significantly lower than the previous period’s 82.8 points. The LCI currently stands close to the level attained at the onset of the 2007-2008 recession.

"Consumer confidence among the affluent (which account for 40 percent of consumer spending) has fallen sharply since the beginning of 2011,” said Pam Danziger, president of Unity Marketing, which runs the survey. “Not since the middle of 2009 has it been so low.”

The survey of 1,272 consumers with an average income of $301,000 and an average net worth of $856,000 was conducted July 6-13.

“If those at the top income levels feel stressed and unwilling to spend, imagine what it says about people living in middle-income households,” Danziger said. “We stand on the precipice of a double-dip recession, if the affluent consumer’s confidence doesn't turn up in the next quarter.”

Corresponding to the decline in luxury consumer confidence, the average amount spent by affluent consumers on luxury goods and services in the second quarter 2011 declined by 8.4 percent from the first quarter and dropped 18.4 percent over same quarter last year.

High net worth consumers (defined in the survey as having $1 million or more of investible assets and representing some 47 percent of those surveyed) have more to spend on luxury, as the high earners make do without. According to the survey, 42 percent of high net worth consumers expect to increase their spending on luxury goods as compared to 14 percent of high-wage earning affluents.

“The high net worth consumers in our sample feel significantly more confident about their financial status than those with lower net worth,” Danziger said.

“Market pundits have been telling us that the 2007-2009 recession has run its course, and that it was only a matter of time before this event would have diffused into the consumer economy. However, this is not the case, borne out by continued weakness in consumer sentiment,” said Tom Bodenberg, Unity Marketing's chief consumer economist. “On the other hand, the stock market has shown firm, almost counter-intuitive strength as many organizations report high earnings. The rise in the stock market translates into a rise in the investment portfolios of luxury goods consumers, which translates into greater discretionary spending, especially among the high net worth segment, as distinguished from the high earners who are holding their spending in check,” Bodenberg said.

Danziger added, “Increasingly income alone is not an accurate measure of a household's spending power. In the current economy many high-earning households are living pay check to pay check just like those in the middle-income brackets. Once the monthly expenses are met, the lower net worth affluents don't have much left over with which to indulge in luxury.”

Luxury Consumption Index Stalls, Responding to Mixed Market Signals

Unity Marketing's Luxury Consumption Index stalled at 78.3 points in July 2010 as affluent consumers display uncertainty about prospects for the economy in the next three months. The survey’s founder says this apparent lull in the luxury economy “is reason for concern.”

Significantly more luxury consumers (36 percent) say the country as a whole is worse off now as compared with three months ago—a 5 percent rise, according to the survey of 1,349 luxury consumers was conducted July 3-8, 2010 (Average income $306,700 and net worth $15.2 million; 44.8 years; 45 percent male and 55 percent female).

Value positioning is key for luxury success through third and fourth quarters 2010, says Pam Danziger, president of Unity Marketing, a marketing consulting firm.

“Without a doubt the luxury consumer market is in a much better place today than it was a year or so ago, but the latest survey warns marketers not to ease up or be over-confident that the recession's effect on the luxury market are over,” Danziger said. “Nearly three out of four luxury consumers surveyed believe that the recession continues, which in turn impacts spending on luxury goods and services. Marketers are advised to continue to position luxury as a value proposition, by keeping luxury connotations and image up front in advertising, packaging and service, but communicating in a very subtle, almost one-on-one way, affordable pricing.”

Survey findings in the quarterly survey, include:

* Spending on luxury rose a modest 7.7 percent quarter-to-quarter. Luxury consumer spending, however, rose dramatically year-over-year, up nearly 60 percent from $19,952 on average to $31,665. Unity expects the same trends toward modest quarter-to-quarter spending increases to continue throughout 2010.

* Categories that attracted higher levels of spending among luxury consumers in the second quarter included luxury beauty and cosmetics, high-end cooking tools, men’s luxury clothing and apparel, men’s luxury fashion accessories, home electronics and travel.

* Aspirational affluents (incomes $100,000-$249,999) started to trade up once again to luxury, according to the survey. They increased luxury spending by nearly 30 percent in the quarter, their highest levels of spending seen throughout 2009. High-end clothing, fashion accessories, personal electronics, wine and spirits, and beauty products were the most popular items.

The pace of growth in luxury consumer spending will remain modest over the next two quarters, according to Tom Bodenberg, Unity Marketing's chief consumer economist.

“Affluents still have a lot of uncertainty about the economy which dictates caution when it comes to spending on luxuries,” he said. “We don't expect to see moderation on this cautious attitude until the beginning of 2011.”

The Wealthiest Shoppers Choose Amazon.com

The wealthiest 2 percent of the U.S. population have embraced online shopping with Amazon.com by far their favorite online retailer, according to a recent Unity Marketing survey.

“Amazon.com has consistently emerged in Unity Marketing’s quarterly surveys as ultra-affluents’ top online shopping destination, regularly attracting about 45 percent of all ultra-affluent shoppers, a percentage that is typically two to three times greater than the next most popular website,’ said Pam Danziger, president of Unity Marketing.

Ultra-affluents are defined by Danziger and Unity Marketing as persons with annual incomes of at least $250,000.

“For the most discerning affluent shoppers Amazon offers outstanding levels of customer service along with an expansive product selection,” Danziger added. “Further, Amazon ‘learns’ the shoppers preferences and offers new selections based upon previous needs which boosts the company's revenues and the customer's satisfaction.”

What stands out from the data, however, is the interest ultra-affluents have in online shops that are geared toward savings. In Unity Marketing's most recent luxury tracking survey, among ultra-affluents surveyed, some 14 percent shopped through auction site eBay.com, just over 10 percent frequented local coupon site Groupon.com, and about 8 percent visited the local “want ad” site, Craigslist.com. All three of these frugal shopping sites were in the top eight among all sites visited.

Also attracting the bargain-hunting, yet wealthy “fashionistas” are flash sale sites like Shopittome.com, Gilt.com, Hautelook.com, BeyondtheRack.com and Amazon's new entry into the category, MyHabit.com, according to the report. Another favorite site for the wealthiest tech-oriented bargain shopper is Buy.com.

“While ultra-affluent consumers may make purchases of top-end luxury items online, the data show that these consumers are also interested in finding great deals and perhaps selling a few of their own unwanted items online,” Danziger said. “It is important for marketers to realize that their wealthiest shoppers are keenly interested in value and bargains, particularly online.  These deal-oriented sites attract even those at the highest income levels.”

Survey: Ultra-Affluent Consumers are Spending Less at Luxe Department Stores

Barneys New York flagship store

Barneys New York, Nordstrom, and Bergdorf Goodman emerged as the top three luxury department store destinations among those with annual incomes of at least $250,000, according to a recent survey by Unity Marketing. However, a look back at the previous year shows ups and downs among ultra-affluent patronage of these retailers:

* Barneys New York, which currently attracts some 22 percent of ultra-affluent consumers, has weathered two quarters in the past year when patronage dipped as low as 16 percent. 

* Nordstrom ranks as the second most popular destination, however, its share of purchase among ultra-affluents dropped by more than 5 percentage points from the fourth quarter 2010 to first quarter 2011. 

In fact, among the seven leading luxury department stores included in Unity Marketing's luxury tracking survey, only one—Saks Fifth Avenue—captured a larger share of ultra-affluent shoppers this quarter as compared with last quarter, according to the survey titled, “The Luxury Report 2011: Ultimate Guide to the Luxury Consumer Market.”

Luxe department store patronage among ultra-affluents is down after peaking in third quarter 2010. The survey from the Stevens, Pa.-based luxury market research firm defines ultra affluents as those with annual household incomes of $250,000 and above, the wealthiest 2 percent of U.S. households who spend the most in the consumer economy.

Even more striking is the decline in the percentage of ultra-affluents shopping in these luxe department stores overall, said Pam Danziger, Unity Marketing president. While the percentage of ultra-affluents shopping in luxury department stores peaked at nearly 75 percent in the third quarter 2010, it has declined since, leveling off at about 70 percent. She says that relatively small declines in patronage on a percentage basis translate into big drops across the market. Regardless of ultra-affluents' favorite luxe department stores, it is clear that nearly a third of these wealthiest Americans are not passing through any of their doors each quarter.

“These top retailers—who are known for being destinations for the wealthiest customers—can serve as both a model and a cautionary tale for others who would like to operate in this space,” Danziger said. “While the popularity of each store waxes and wanes quarter-to-quarter, the overall trend is that ultra-affluents are slowing their pace of shopping in the luxury department store sector. If the downward trend among ultra-affluents continues, each of these stores may have to rethink their approach if they are to remain a compelling and attractive destination for the wealthy.”

Luxury Consumers Curtail Conspicuous Consumption

The strong demand for luxury goods and services in the U.S. during the past two to three years has largely come to an end as conspicuous consumption seems to be out of favor with affluent households, according to the results of a recent survey.

Luxury consumer confidence as measured in the Luxury Consumption Index “took a deep dive to levels not seen since the recessionary period of 2008 and 2009,” said Pam Danziger, president of Unity Marketing, which produces the quarterly survey.

The LCI saw a decline of nearly 15 percent in the average amount spent on luxury in the fourth quarter of 2011. The latest luxury tracking survey was conducted January 7-18, among 1,333 affluent luxury consumers with an average income of $286.300. They represent the top 20 percent of U.S. households

“The LCI has been on a topsy-turvy course since 2010, one quarter it goes up, the next down. But looking over the course of the last two years, the LCI lost more than it gained,” Danziger said. “At the start of 2012 the percentage of luxury consumers expressing a definite willingness to spend more on luxury (one of the major components of the index) was down.”

 

Tom Bodenberg, Unity Marketing's consumer economist, says the results of the survey show that luxury consumers have become “non-committal.”  

“There appears to be a trend of non-conspicuous consumption—perhaps as fallout from the 'Occupy' movement—among North American luxury consumers,” he said. “Buying behavior will shift to an almost 'hidden' form of consumption of luxury goods—where ostentation is minimized. The actionable demand for luxury goods and services, on the whole, is flat and still substantially below the levels of two to three years ago. What is interesting is that this apparently 'recession-proof' segment of the marketplace has also been greatly affected by the downturn. Media reports of a 'renaissance' in the luxury market appears to be limited to an extreme top tier of consumers, a small number compared with the bulk of the luxury marketplace potential.”

Danziger says affluent customers are looking to find value when they shop and luxury brands need to recognize this.

“If your brand doesn't deliver a suitable return on investment, they'll turn to competitive brands that will give them high quality without such an extravagant investment,” she said. “Take Coach, for example, ranked this quarter as the top fashion boutique destination among luxury consumers, as well as the number one fashion accessories brand. Coach offers its customers high quality, long lasting and still luxurious handbags but with an average price around $300, making the bags expensive for the masses, but affordable for the 'classes.”

Luxury Consumer Confidence and Spending Rise

The outlook for the luxury industry is improving, according to luxury research and marketing firm Unity Marketing. The firm’s measure of affluent consumer confidence, the Luxury Consumption Index, improved by 4 points to reach 76.1 for the first quarter 2011. 

"The uptick in this quarter's LCI reveals a more positive outlook among affluent consumers about the economy at large, as well as increased optimism about their personal economic situation," said Pam Danziger, Unity Marketing president. "Affluents backed up their growing confidence by spending 4.1 percent more on luxury goods and services in the fourth quarter as compared with the same period last year."

Luxury categories that posted strongest growth year-over-year as measured by the average amount spent by affluents, included: Kitchenware and housewares (including food processors, juicers, espresso machines), electronics (such as high-end televisions and digital book readers and travel (luxury cruises).

"While we may not see the boom times of 2003-2007, the current LCI shows an increase from the previous quarter, and may signify that the recent bump in retail demand may be sustainable,” said Tom Bodenberg, Unity Marketing's chief consumer economist. “Closer analysis reveals that despite a noted reduction of market pessimism, this has yet to fully translate into increased demand."

The latest luxury consumer survey results are published in Unity Marketing's Luxury Tracking Report 1Q2011 -- The latest report on what luxuries affluents are buying and how much they are spending.  The survey was conducted January 6-13, 2011 among 1,237 affluent luxury consumers (average income $308,700; median net worth $861,000; age 43.9 yrs; 42 percent male and 58 percent female).