Luxury Recession? Bright Spots Amidst the Gloom
The financial news is grim, but there are opportunities for companies that keep their eye on the prize -- the newly cautious and conservative luxury consumer
Every passing day seems to bring more dismal news on the economic front. Whether the economy is actually in a recession or simply slowed down, most people agree 2008 will be a challenging year for marketers and retailers across the board. This holds for many luxury brands as well, based upon research among affluent consumers and their trends in spending conducted by Unity Marketing.
Pam Danziger, president of Unity Marketing and author of Let Them Eat Cake: Marketing Luxury to the Masses – as well as the Classes, says, "Luxury companies will face a new, more competitive market this year, one unlike any they have confronted in the past. The conventional wisdom holds that the affluent market is unaffected by the economic ups and downs that hurt the middle-income consumer. But today the affluent consumer 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 types of luxury consumers."
Danziger continues, "Luxury marketers and retailers, now more than ever, need to stay focused on their customers in order to anticipate the inevitable shifts and changes in the luxury market that are brewing. Gains will come to marketers willing to make adjustments to strategy based upon the new realities of a more cautious, conservative luxury consumer mindset. A newly cautious and careful affluent consumer who is diligent to find value is in the lead and luxury marketers must be willing to follow."
There are pockets of opportunity in the current luxury market
While the financial news is mostly doom-and-gloom, Danziger says there are bright spots for savvy luxury marketers who are willing to look for the silver linings in the clouds of the economic storm.
Luxury Consumers Will Focus on Domestic Travel Opportunities versus Traveling Overseas (with Exception of Cruises)
With the dollar losing ground against foreign currencies, American luxury consumers will keep their travel dollars at home this year. This trend away from foreign travel started to gain traction in the third quarter 2007, grew even stronger in the fourth quarter and is expected to continue throughout 2008.
While foreign travel declined at the close of 2007, domestic travel spiked. Some 89 percent of luxury consumers reported some luxury travel stateside in the fourth quarter 2007, the highest level seen throughout 2007 and 2006.
Luxury cruises will be one notable exception to the trend toward less foreign travel. More luxury consumers will look to the cruise lines as their primary foreign travel opportunity in 2008, owing to the fact that cruise experiences are paid in advance, and thus are a hedge against further inflation and continued decline in the dollar. They also are paid in U.S. currency so people won't feel the pain at the exchange counter.
Luxury Consumers Will Opportunistically Buy Imported and Higher-Priced Luxury Goods
Throughout 2008 Danziger predicts there will be more opportunistic buying of imported and higher-priced luxury goods, especially among the most highly-affluent consumers (household incomes $150,000 and above). They will be encouraged to buy premium imported luxury brands now rather than wait, in order to get out in front of inflationary trends. Luxury retailers, especially the most upscale boutiques, may see sales rise at the start of each selling season this year as luxury consumers decide to pick up the latest fashions, rather than wait till they get even more expensive.
The jewelry sector could benefit from similar opportunistic purchases. With the cost of precious metals rising even faster than the value of the dollar is falling, luxury consumers will be encouraged to make jewelry purchases sooner, rather than later to avoid further inflation. Jewelry is also unique among luxury goods because it offers the customer perceived inherent value.
Luxury Consumers Will Invest in Houses and Their Own Homes
With housing prices on the decline and foreclosure rates on the rise, more luxury consumers with ready cash will turn to buying investment properties. They will buy low with the expectation that in a year or two they can turn around and sell high, or at least higher.
Likewise they are likely to take capital and invest it in strategic improvements to their own homes, especially in rooms and areas where there is an expectation of a good payback when they ultimately sell their home. That means more remodeling in kitchens and bathrooms, improvements to household systems, like heating, cooling, redecorating projects and pick-me-ups to the highly-visible outdoor areas. Luxury consumers will be making big-ticket home investments in order to enjoy a more pleasant living environment in the short term, as well as helping to maintain or increase the value of their home in a challenging housing market over the long term.
Realtors, contractors and marketers that sell to the luxury consumers and their home improvement needs should fare well in 2008 if they recognize they are selling to a more cautious and conservative and less extravagantly-indulgent type of customer. These consumers will be looking for real value, not necessarily 'bling.'
'Trading Up' Luxury Consumers Will 'Trade Down' from the Luxury Market in 2008
The less affluent luxury consumers, those with incomes under $150,000, will be considerably less active 'trading up' for the more expensive luxury goods and services in 2008. Many luxury and near-luxury brands have seen much of their growth in the past five years generated by 'trade up' spending among less-affluent consumers. These will be the brands that take the biggest hit in 2008. On the other hand, luxury brands that have built their business on the super-affluent market (HHI $150,000 and above) will likely not experience a down turn on their balance sheets.
But while the 'trading up' consumers will stop buying the premium luxury brands, they have developed and nurtured a taste for luxury in their life that they are not going to give up easily. That means they will turn to the pleasures they derive from 'little luxuries,' rather than indulging in big-ticket luxury spending. So for example, instead of buying a new Gucci handbag, they will get their Gucci thrill from the latest perfume. They will shop sales and discount ranks more aggressively, frequent designer outlet malls and turn to the Internet to find websites that offer luxury fashions for less.
The rapidly expanding market for 'cheap chic' will also prosper this year selling to the 'trading down' consumer who craves fashion for less. Vera Wang in Kohl's, Nicole Miller in J.C. Penney's, Proenza Schouler at Target, H&M, Zara and the rest will draw newly budget-conscious affluent shoppers looking for a fashion pick-me-up.
In the experiential realm, they will opt for drinks and appetizers at the latest 'in' restaurant, rather than ordering a full meal and they will take short-break domestic luxury vacations, instead of a week long stay.
Unity Marketing has prepared a white paper about the Luxury Consumption Index and predictions for the luxury market in 2008
Unity Marketing, the historic lead in helping marketers understand and target the luxury consumer, is poised to assist marketers prepare for the new economic realities of luxury.
For media: Charts, tables and graphs are available on request.
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