The market of deluxe goods passed its boom in 2006, when 22 leading global luxury companies reported an industry-wide revenue increase of 10.2% over combined industry revenues in 2005. This was brought back to memory by Unity Marketing in its report about the state of affairs in the market of deluxe wares entitled “Luxury Market Report 2008 – Ultimate Guide to the Luxury Consumer Market.” Yet when these luxury companies wind up their 2007 accounts, the results will be much more modest based upon a 4.4 percent drop in average luxury consumer spending in 2007.
Luxury consumers shifted their attention to sterling silver and semi precious stones from gold and gems, the report says. Jewelry shoppers drifted away from specialty jewelry stores leaning more towards Internet and other direct-to-consumer supply channels giving a chance to save. On average, luxury consumers spent 10.8 percent less on jewelry in 2007 than in the previous year.
“Affluent Americans backed off markedly in their pursuit of the luxury lifestyle, most notably in the second half of 2007,” the report says. “Going into 2008 their spending continues weak. This will place further competitive pressure on luxury companies and retailers.”
Retailers who serve the highest income clients have always thought that they were immune to a recession, Ken Grassman, an analyst of IDEXOnline, says. 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.
Tiffany & Co. 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, the sale of super expensive jewelry has been the fastest growing price range for the company.
Tiffany’s ilk in this market segment also report a sales slump. Their customers are now buying a three-carat diamond when they would normally have purchased a four- or five-carat diamond. Or, they are re-working a piece of estate jewelry, rather than simply buying a new piece.
Top-class jewelry sales running low is no news nowadays – this is reported by many American merchants, such as Coach, Nordstrom, Saks, Neiman Marcus and others, which have registered either a revenue 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, reports that the pace of growth has slowed; the same is happening to Compagnie Financiere Richemont, the Swiss holding owning Cartier and Baume & Mercier.
The Luxury Consumer Index (LCI) measured in the U.S.A. by Unity Marketing shows a stable negative trend. Unity Marketing’s latest luxury consumer tracking survey was conducted on April 7-11 among 1,258 persons with incomes of $100,000 or more. The average age of all those respondents was 45.9 years.
According to the data obtained, the index dropped 9.1 points at the close of the first quarter 2008 to a historic low of 54.4 points fixed by the company from the start of monitoring.
Affluent consumers expect the luxury market to continue its stagnation for at least the next six months. Seven out of ten buyers say the U.S. economy is moving though a period of recession and there is only tiny hope for its recovery in the current year.
“The LCI started to measure flagging consumer confidence about a year ago at the end of March,” says Pam Danziger, president of Unity Marketing. “But their spending on luxury didn’t begin to retreat until a little later in the year. Today with the LCI at a historic low of 54.4 points, we expect luxury consumers to be conservative in their spending at least until the Presidential election when new leadership may provide an emotional lift.”
In an earlier survey conducted by Unity Marketing, these consumers blamed President George Bush directly for the recent economic downturn, Diamonds.Net remarks.
Among other key factors driving the index lower, most important are the worsening consumers’ expectations for a future luxury market. Thus, 41% of the surveyed consumers expect to spend less on luxury in the next twelve months, compared with only 13% who expect to spend more.
Further, 71% of those polled said the overall financial health of the country was worse now than it had been three months ago.
Nevertheless, some retailers continue to post sales gains even during this recessionary period, Ken Grassman says. For instance, those exposed also outside the U.S. market. The same Tiffany & Company, which derives 41% of its revenue beyond the U.S. borders, expects its overseas stores to post significantly larger sales gains than its American stores in 2008. Further, the company plans to accelerate the opening of new stores overseas.
Which merchants with mostly U.S. exposure are doing well? This question is covered by the research of the National Retailer Federation (NRF): the best-known and biggest brands are feeling better on the luxury market than others. This is due to consumers’ conservatism which is currently exerting more influence on the buying ways – during rough times people generally tend to purchase what they feel more certain about.
The important thing is that despite all the weakness at the high end, business here is more brisk compared to merchants who target middle-income consumers. The sales growth rate of expensive things is significantly higher than that of mass consumption jewelry. Business consultants point it out that if a merchant is considering moving upscale, this might be a good time to do it.
As was already reported, 2008 was declared by many mass media sources to be “the year of premiumization.” Brandingstrategyinsider.com is particularly insisting on it, and this is spread to all commodity groups. On the one hand, premiumization means that consumers tend to buy more expensive and high-quality goods; on the other hand, it means that manufacturing companies and merchants are striving to find their ways to a more prestigious market segment.
A curious research undertaken by the Stanford University revealed the psychological impact of high prices on consumers. In a series of experiments students were offered identical products, but of differing prices. The respondents preferred the most expensive products, although all the products were equal in their consumer qualities. When those surveyed were subjected to brain scanning it turned out that one and the same product offered at a higher price gave them more pleasure.
According to the brandingstrategyinsider.com authors, the British consumption market is affected by the premiumization idea. British consumers are time-poor and cash-rich, says the site, and, as a result, they are more comfortable paying higher prices if the exclusivity and extra value is there. However, the site’s brand analysts are evidently overlooking “the Russian factor.” As has already been noted, a significant part of premium and luxury goods is consumed by so-called “Londongrad.” By different estimates, there are from 250,000 to 300,000 Russians and natives of the former USSR in London, and in their majority these are well-heeled people investing and spending considerable funds in one of the most expensive cities in the world, where, as they say, “there are no cheap things around.”
Unity Marketing also recommends that American fashion companies increase their marketing efforts and brand building. Jewelers should take note of this recommendation too, Ken Grassman says.
Luxury market experts’ task is to overcome the high level of resistance on the part of consumers, Unity Marketing believes. Pam Danziger advises that luxury marketers think of how to outdo the consumer rejection administering a series of measures usually employed in other market segments, such as gift-with-purchase, special sales or limited time discounts on selected featured products.
However, has the luxury market reached the bottom in its downfall or will it be continued?
According to Thomas Bodenberg, Unity Marketing’s economic forecaster, the worst is, perhaps, over. He stresses that the rate of decline in luxury consumer confidence slowed down and the LCI difference between the first quarter 2008 and the fourth quarter 2007 was less than that between the fourth and third quarters 2007. This may mean that luxury consumers’ confidence has reached a floor wherefrom it will start rising.
