Under this title JCKonline analyst Rob Bates published an article on post-crisis consumer attitude towards luxury, which triggered quite an avalanche of comments.
Chaim yesterday posed a question we have all been wondering: Will the drop-off in consumer spending – and in particular consumer spending on jewelry – outlast the recession?
Certainly if you believe the New York Times this week there is a change in mind-set, with one luxury expert noting "half carat has become the new three carat." (Though the Times really should have noted that some of those businesses were in trouble well before the recession hit.)
A recent article in Slate’s Big Money on how luxury makers are coping with the recession (which I recommend everyone read) suggests the biggest shift may be in that area of the market known as "mass luxury":
...the view of some in the luxury business [is] that a large swath of the luxury consumer is not merely skittish but gone—financially unable to purchase or, having traded down to a more moderately priced good, found the drop-off in quality to be negligible.
That’s certainly possible, but I remind you that the desire to shop is part of the American DNA. Here one writer describes her reaction to getting a "new consulting gig" about six months after she was laid off:
... mostly what I felt was an urge to spend, spend, spend.
What I’d thought was my new frugality turned out to be bottled-up desire to buy stuff. In fact, I wanted to buy more than I had before the recession. Financial virtue went out the window. I started pricing a new laptop. A cute beach tote. I thought about putting money away and investing in my 401(k), but after I had brunch with a friend who is lucky enough to help run her family’s company and buys herself the most beautiful jewelry, I also pondered buying a really nice ring. I started hailing taxis instead of automatically heading for the subway. "Let’s go out for dinner!" I said when friends rang. And this was before I’d even received one check.
The Slate article notes things luxury businesses are doing to attract recession-era consumers, such as de-emphasizing "bling" and touting craftsmanship. Which certainly represents a possible way forward for our industry. Do most consumers realize that most diamonds are individually cut by skilled craftsman? Maybe yes, maybe no, but it can’t hurt to remind them.
If there is a change in the consumer mind-set, particularly towards the luxury sector, I would argue that it is taking hold more among younger consumers, who, even before the recession hit, seemed more interested in practical items (like IPODs and computers) and products which have a "greater meaning." Turning those consumers into jewelry buyers will be the industry’s great challenge in the years ahead.
Luis de Agustin:
Rob, I think you, and we commentators on your post are generally in agreement regards this topic. Nevertheless, you write in your follow-up, “The past 20 years may have been an aberration, but 20 years with a certain habit is hard to break.” This may just be the point.
If the emerging habit that replaces the previous twenty-years of debt economy and savings collapse is replaced by a move to save, stagnant wages, structurally higher levels of un and under employment, high inflation (pushing raw commodities, including precious metals, prices upward and reducing affordability), loss of the previous wealth effect of housing values, stricter categorization of needs vs. wants and the rise of “ethical badging,” consumers (personal and business) needn’t turn their backs on conspicuous consumption or lux or jewelry as something desirable, but their ability to satisfy their desire for these will slowly force them to change their previous habit, and a new one less welcome by JCK’s industry assume its place.
I agree people seem to be struggling to continue their previous consumption habits, and the jewelry industry struggles to satisfy that consumer habit. If somehow spending and buying habits don’t change for enough people, the industry may just shrink but survive as it was. However, if not, those firms choosing activist new strategy generation will act ahead of the reactive position and operate in a way that discounts a behavioral trend different from the recent past. And, BTW as a strategy, cutting costs won’t be the solution.
Rob Bates:
Hey, everyone, thanks for some great comments. I agree with Luis, that if the industry just waits until the recovery comes, that is a recipe for disaster, particularly since no one is sure when that will be. And if credit is more restrained when the recovery comes, that has to hamper consumer spending.
However, I am not aware of anything in the prevailing culture that will make consumers look at luxury items differently (with the notable exception of younger consumers.) I don't put much stock in this talk of consumers now hating the rich, turning their back on conspicuous consumption, or realizing that there is no difference in buying lower priced items (something savvy consumers always knew.)
I just don't think the culture has changed that much. People cut back because they had to, not because they suddenly realized they should. Americans still love the rich, and want to look like them. I know most consumers SAY they will keep spending down, when (and if) the recovery comes, but whether they will or not ... well, we will have to see.
I know that quote from Recessionwire indicates differently. Granted, that is just one person, but I'm not sure she is so unusual. The past 20 years may have been an aberration, but 20 years with a certain habit is hard to break.
The other point I want to make, and this is a bit off the subject, is everyone is focused on consumer spending, but corporate spending is another thing that could hamper the recovery. When I interviewed the head of Robbins Brothers, he said the company would be watching every penny from now on. How many other companies are like that? Consumer spending gets the spotlight, but I would have more faith in companies sticking to their budgets than the American consumer.
Abe Sherman:
I agree completely with Mr. de Agustin's assessment: there has been a change in the way consumers are going to spend. I would like to add two points. First, spending for much of this decade was done with borrowed money - money which was being thrown at us in the form of easy credit and the lowest rates possible. Money was free. Those days are now long gone and consumers will be paying for that spending for years to come. Frankly, we were dancing like it was 1929... and the music has stopped.
Second, there has been little talk about the Baby Boomers facing retirement. Many of the biggest spenders were among the 77 million Boomers who had felt secure in their robust 401K's, the ever-increasing equity in their homes, their employer retirement plans and their job security.
When, not if, but when we get back to a 'normal' economy, those Boomers will be about 5 years older than when this started two years ago and will either be staring retirement in the face, or with a pretty short time horizon.
Do we really think they will start consuming at 60 after a long painful recovery, as they did when they were 55 and everything was viewed through rose colored glasses? I'm certain that they will continue to spend, but on what, and how much? Those are the questions we'll all be dealing with.
To Mr. de Agustin's point about this being an opportunity, I also agree. However, changes regarding how we think about merchandising our stores is in order.
Yogi Desai:
I couldn't agree more with Mr. Sherman's comments. The Jewelry trade must think "young" and create jewelry that caters to the taste and pockets of the younger consumers as the boomers are getting too old to splurge on jewelry.
They have other priorities like health care and personal well being, travel and retirement, if they are lucky enough to be in a position do so. Fine Jewelry is going to be the last thing on their bucket list.
With gold inching towards $1000 mark and in current economic environment, alternative metals with creative styles, branded jewelry with a big fashion statement will thrive and continue to do well for a long time to come.
Luis de Agustin:
These comments about shopping DNA being part of the US consumer may be cute but do not rethink anything, and should be relegated to the utter nonsense department before they become prey of critical thinking. Let’s consider some facts before we walk into la-la land.
US consumer spending is changing, and not to something new or astonishing, but what came before 20-years of astoundingly high spending. Consumers are simply behaving as they have in the past, prior to unsustainable consumerism. As a result of the recession, US households have reduced their spending. They are spending less across the board, and the majority plan to keep spending down even when the economy recovers.
The majority of consumers does not expect their stock market portfolios to save them, and are acting as if returns won’t keep up with inflation for decades to come. US consumers have responded to the global economic crisis by cutting their expenditures and paying debt and saving more; and most of them have done so not by necessity but by choice.
The result is that debt averages are not at unusual levels today but instead returning to long term trends. It was the behavior of US consumers’ patterns for savings and debt and spending over the past two decades that was the aberration, not what is the start of a return to traditional spending patterns - a pattern that will cause companies to adjust to an altered playing field (at least it should).
This economic impact can only change if somehow household income grows faster than any group of economists expects. What the economists have evidence of is that the forces that propelled consumer spending – debt and savings - have gone into reverse, thusly causing consumption to tumble.
If income growth doesn’t materialize, and for now there are no signs of its reappearance in a substantial way, the consumer will continue to bear up in his cave and cause a serious drag on any recovery (the way this would function is that healthy income growth would help households reduce their debt burden without much trimming their consumption).
If this growth fails to happen, consumption fall could be profound. To place what’s occurred in recent years into perspective: US consumers have accounted for more than three-quarters of US GDP growth since 2000 and more than a third of global growth in private consumption since 1990. From 2000 to 2007, US household debt grew as much, relative to income, as it had during the previous 25 years. It's not so much a new game but a return to an old one, and those who interact with it correctly stand a chance.
We are way ahead if we just stop to gain a coherent point of view about what has broken and what forces are now involved in determining the future business field, and to identify the new patterns. Take it from there in order to know what to do.
The good news is that most jewelry industry firms have flexibility to reform. The major lux brands (including America's oldest and largest), constrained by their defense of their erstwhile brands are only cutting costs and hoping the structural economic change will fade away before they run out of liquidity. That model waits for the return to the "shop till you drop DNA consumer."
Actually, spending in some sectors such as education and reading materials has increased. Clothing purchases, eating out and JCK’s wonderful industry have gone way south. Instead of accepting the crisis as opportunity, wishful thinking turns otherwise competent pros away from the real challenge.
Homer:
People, especially Americans for whatever reason, have a tendency to live in the present yet project that to the future. Times are still tough, and luxury is still, well, a luxury for most. But if the money comes back, people will start spending again.
I would be more concerned about whether, as some pundits think, there has been a sea-change in the American economy and the middle class will never again see the affluence it experienced during the 90s and 00s. If *that's* the case, then our industry is going to see some substantial contraction - but I'm not yet convinced this isn't just another recession we'll pull out of eventually. Times will tell.
