Luxury Market Faces the 'Morning After'

Furniture World Magazine

The flood of bad news on the luxury front has taken a lot of people by surprise. Luxury leaders, like Tiffany & Company, Nordstrom and Saks Fifth Avenue, have reported weaker than expected results for the vital holiday shopping season. Even American Express said that beginning in early December their mostly affluent card holders cut back on spending. This dramatic downshift in luxury spending was not news to Pam Danziger or her clients. As president of Unity Marketing, Danziger's market research company saw it coming and advised her clients to get ready as research indicators predicted a downturn on the horizon. There was bad news for manufacturers and retailers of luxury goods. In the third quarter, luxury consumers cut their spending on luxury goods, while spending more on experiences The third quarter luxury tracking survey found that spending was particularly weak in personal luxuries -- especially fashion accessories, jewelry and watches -- as well as in key home luxury categories, notably home decor fabrics, window and wall coverings, kitchenware and linens and bedding. But while luxury consumers spent significantly less on luxury goods, their spending on luxury experiences actually rose 11 percent. "In the face of declining luxury consumer confidence and a cut back in spending on material goods, luxury consumers chose to indulge in experiences, notably travel, dining and spa/beauty services, that give them more meaningful gratifications than comes from buying a consumer good like a handbag. Let's face it, a purse is only a purse, but a luxury experience is something to remember," Danziger says. The affluent consumer with lower levels of income were the one's most impacted by declining confidence Income played a deciding role in how much luxury consumers' cut back on their luxury spending in the third quarter. Only the upper-middle-income (HHI $75,000-to-$99,999) and lower-upper-income consumers (HHI $100,000-to-$149,999) cut back their spending, while the super-affluents (HHI $150,000 and above) spent about the same as they did in the second quarter. This trend will have the greatest impact on luxury marketers that are most highly dependent upon the spending by the 'trading up' consumers, Danziger cautions. "If consumer confidence continues to weaken among the ranks of the affluent, it will be a testing time for luxury marketers and brands. Many luxury brands are going to discover just how dependent they have become upon consumers' penchant to 'trade up' to more luxurious offerings than they otherwise could afford. On the other hand, luxury brands that have built their business on the super-affluent market will likely be immune to this trend," Danziger says. "The conventional wisdom is that the affluent market is unaffected by the economic ups and downs that impact the average consumer. But today the affluent market is far more diverse and stratified than it historically ever has been. That means luxury marketers need to understand the segments within their target market and develop marketing strategies that clearly differentiate the priorities and passions of these different segments," Danziger concludes. "Unity Marketing's proprietary Luxury Consumption Index, which declined sharply for the last two quarters, is a powerful gauge predicting future trends in the luxury market. Based upon a number of variables that measure affluent consumer confidence, it is also tied to their actual spending, so its predictive power on future spending is unparalleled," Danziger explains. The most vital question on luxury marketers' minds going into 2008 is how to get the luxury consumers, especially the 25 million mass affluent consumers (incomes less than $150,000) who have put a tight rein on their luxury indulgences, to begin buying again. Unity Marketing offers consumer insights to help marketers find new strategies that will work in a face of the changing luxury market. New research results will be released shortly. For more information contact pam@unitymarketing.com.