Luxury Consumers' Confidence Goes into a Tailspin as They Feel the Pain of the Financial Crisis
Unity Marketing's Luxury Consumption Index drops to historic low of 63.6 points as more than two-thirds of affluent consumers believe the economy is in trouble
Conventional wisdom holds that affluent consumers are immune to economic downturns. But the current financial crisis is proving the conventional wisdom wrong. Luxury consumers confidence at the beginning of 2008 has never been lower, dropping 23.8 points from the third quarter to 63.6 points in the fourth quarter 2007, as measured by Unity Marketing's Luxury Consumption Index.
"Affluent consumers, just like everybody else, feel the pain this time around," says Pam Danziger, president of Unity Marketing and author of Shopping: Why We Love It and How Retailers Can Create the Ultimate Customer Experience, commenting on Unity Marketing's most recent survey of 1,281 luxury consumers (average income $155,700 and age 46.6 years) about their purchases and spending on luxuries in the fourth quarter.
"Since Unity Marketing began its quarterly tracking study in January 2004, luxury consumers have never expressed such a dismal view of their financial status, their feelings about the direction of the country as a whole and their plans for future spending," Danziger continues.
Luxury marketers are feeling the pain too, as luxury consumers hold back on spending
As a result, luxury consumers are holding back on spending in the purely discretionary category of luxury. Their spending on luxuries in the second half of 2007 dropped over 20 percent, from an average of $29,307 to $24,301 in the third and fourth quarter.
Danziger says, "Now the pain is starting to spread to the luxury retailers and marketers worldwide, many of which are reporting weaker than expected sales in the U.S. market in the vital fourth quarter period."
"The prognosis is not good in the short term, as witnessed by the concerns incorporated into the Luxury Consumption Index," says Tom Bodenberg, Unity Marketing's economic forecaster.
"The index was developed to both measure the level of luxury consumers confidence and to predict trends in the direction of the luxury market overall. A number of key factors that were in full swing last summer accelerated in the fall to erode luxury consumer confidence, and thus erode spending. The light, if any, at the end of the tunnel, could be the recent moves by the Federal Reserve to lower interest rates. Should inflation occur due to the relaxing of the money supply, consumers may look at certain luxury items, like jewelry, as 'investments,' or hedges against inflation." Bodenberg explains.
Five measures of luxury consumers confidence down sharply
In all five measures that make up the Luxury Consumption Index, luxury consumers express a guarded view. The index is based upon statistical calculations and is measured against a baseline from January 2004.
These five factors are incorporated into the index:
- How luxury consumers feel financially now compared to three months ago: The share of luxury consumers who feel their financial status is worse off now doubled from 3Q2007 to 4Q2007. In 3Q2007 only 12 percent felt their financial position declined; in 4Q2007 nearly one-fourth (24 percent) felt worse off.
- How they feel the country as a whole is now compared to three months ago: Over two-thirds (69 percent) of luxury consumers feel the country as a whole is worse off now than it was three months ago. Only 44 percent felt the same in 3Q2007.
- How they feel they will fare financially in coming twelve months: Just slightly more luxury consumers (43 percent) feel they will be better off in the next twelve months, as feel they will be the same (33 percent). But the share of luxury consumers who feel they will be better off retreated markedly from the 53 percent who were optimistic at the end of 3Q2007.
- Spending trends on luxury in past twelve months: Far more luxury consumers (37 percent) said they are spending less on luxury now as compared with those who said their spending had picked up (18 percent). This also retreated sharply from 3Q2007 when 29 percent said they were spending less and 27 percent said they were spending more.
- Spending trends on luxury in coming twelve months: Expectations of future spending is also grim. Some 39 percent said they will spend less on luxury in 2008, while only 16 percent said they would spend more. This compares with 27 percent who expected to cut spending over the next twelve months in 3Q2007 and 21 percent who expected to spend more.
Danziger explains, "Our goal is to help luxury marketers see over the horizon in order to realistically advise their investors about the present and future trajectory of the luxury market and to enable them to develop strategies that will help them manage their businesses in the near- and long-term environment.
"While all five factors in the Luxury Consumption Index dropped, the one that dragged the index down most is the poor view luxury consumers have about the country's leadership. We foresee a very competitive market ahead for the luxury industry at least until the 2008 Presidential election. The promise of new leadership in the White House will lift the spirits of the affluent, and hopefully encourage them to open their pocketbooks and wallets a little more," Danziger concludes.
Unity Marketing has prepared a white paper about the Luxury Consumption Index and predictions for the luxury market in 2008
For media: Charts, tables and graphs are available on request.
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