Wealth report: the rise or fall of luxury retail?

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By: Wise Marketer Staff |

Posted on November 16, 2005

Anxious luxury consumers suggest a sluggish holiday shopping season may be ahead for luxury firms this year, with two recent surveys showing that consumer caution threatens to slow their spending, according to the latest Wealth Report published by The Luxury Institute.

According to Milton Pedraza, CEO for The Luxury Institute, the latest quarterly Affluent Consumer Confidence Index (compiled by McDonald Financial Group) dropped 12 points in October (to 42, the lowest level since April 2003). And nearly one-quarter (24%) of the USA's most affluent consumers plan to spend less on holiday gifts this year (almost double the 13% who planned spending cut backs in 2004).

Similarly, the American Affluence Research Center's semi-annual Affluent Market Tracking Study also reported that more than one in five (21%) of the wealthy plan to reduce their holiday spending this year.

Luxuries well ahead
But despite the downcast spending outlook, luxury firms outshine other retailers. Sales at stores that have been open for at least a year grew at a surprisingly strong annual pace of 4.4% in October, according to the UBS-International Council of Shopping centres' tally of 69 retailers. But luxury firms posted even stronger gains: Nordstrom posted same-store sales growth of 6.4%, and Coach reported 25% growth. Standard & Poor's recently upgraded Tiffany to a "buy" and forecast same-store sales growth of 8% - 10% this year. Company analyst Jason Asaeda cited strong consumer demand for Tiffany's new designs, as well as an upturn in Japan (Tiffany's most significant overseas market).

Stop brand dilution
In a recent Luxury Institute survey of Americans with a minimum US$750,000 net worth and US$200,000 annual income, 40% said luxury firms should specialise only in luxury goods and services. Men and wealthy consumers under 40 are most inclined to believe luxury firms should not sell mainstream.

Indeed, it seems that brand dilution is becoming rampant. Three in five (63%) of these same wealthy consumers said that luxury brands are becoming a commodity - an opinion particularly noted among those with incomes between US$500,000 and US$999,999.

Stop the quality rot
Not only is brand dilution becoming an problem but the quality of luxury goods is also slipping, Pedraza says. Thirty-eight percent of wealthy Americans surveyed by the Luxury Institute say that the quality of luxury goods has decreased over the years, while only 31% say quality has increased. Furthermore, 39% of wealthy Americans say that luxury firms fail to meet their customer service expectations.

Superior service
But, according to the survey, levels of dissatisfaction generally decrease as income and wealth rise. Seventy-eight percent of consumers with US$1 million or more in income, and 69% of those worth US$10 million or more, said that luxury goods and services firms with whom they have been doing business for years recognise them as a valuable customer.

Luxury firms generally deliver service far superior than mass-market firms: More than half (57%) of the wealthy believe that service at luxury firms is superior. Interestingly, men are twice as likely as women (38% vs. 19%) to believe that the service offered by luxury firms does not differ much between mass-market companies and luxury firms.

National pride
American luxury consumers do not believe that European firms provide better quality than U.S. firms. Although more than a third (36%) of respondents in a Luxury Institute survey said European quality was superior, 30% disagreed, and 34% said they had no specific opinion either way.

In general, wealthier and younger Americans are most inclined to believe in the superiority of European firms' quality: 47% of the wealthy under 40; 40% in their forties; but only 27% of those 50 and older. Nearly half (48%) of individuals worth US$5 million and more say Europeans provide better quality products, but only a third of individuals worth less than US$5 million agree.

Stocks and faith
Even as stock markets rally, wealthy investor faith continues to fall. With fears over the economic environment and stock market conditions top of mind, investors with at least US$500,000 to invest grew gloomier still in October. The Spectrem Affluent Investor Index fell another 5 points to a level of -6. Spectrem's Millionaire Index also slipped 5 points to zero. Both readings are the lowest levels since Spectrem began the indices in February 2004, although readings between -10 and 10 are still considered "neutral".

Peer influence
For the wealthy, the opinions of experts and peers are more powerful than advertising messages. According to the Luxury Institute's recent survey of affluent consumer purchasing influences, 48% of wealthy Americans say the opinions of peers are their most trusted source of information when deciding to make a luxury goods or service purchase, while 34% cite the opinions of recognised experts. Expert opinions are more important (52% vs. 30%) for individuals earning more than US$1 million a year, while those percentages reverse for those with incomes below US$500,000.

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