Affluent Households Will Increase Luxury Spending by 3%

Jim Taylor

PALM BEACH, Florida — Overall spending on luxury goods and services will rise by 3 percent in 2012 among those the top 10 percent of American households, led by the top 1 percent who will spend 4 to 5 percent more than the prior year, according to a recently released survey. This includes a slight increase in the sales of luxury jewelry and timepieces.

“It’s a very healthy increase and will likely be sustained well into the next year,” Jim Taylor of the Harrison Group said Monday at the American Express Publishing Luxury Summit, held at The Breakers.

For the sixth year, Taylor gave his entertaining talk on the state of the top 10 percent of U.S. households based on income in the Survey of Affluence and Wealth in America report. According to the survey, there are approximately 12 million households in 2012 with at least $100,000 in discretionary income that make up the top 10 percent. The study of 1,268 affluent and wealthy consumers tracks the attitudes, lifestyles, luxury category spending patterns and financial services participation in this demographic. Among its findings:

* The total discretionary luxury consumption market for 2012 will be approximately $375 billion and nearly two thirds of all luxury spending will be consumed the top 12 million families.

* The wealthiest consumers in the U.S. are sitting on approximately $6 trillion in savings that could balloon to $12 trillion by 2014, Taylor said during a sunrise meeting with journalists Tuesday. If the holders of these savings start spending, it could bring about “A capital boon in America the likes of which we’ve never seen.” On average, families in the study save 23 percent of their income, which increases to 34 percent among the one percent.

* The most likely investment for all of this money is real estate beginning in 2014 as it is one of the few places where there are still deals available. “A real estate boom is around the corner because there is nowhere else to put the money,” Taylor told the luxury summit attendees Monday.

* What’s stopping the wealthy from moving their savings is their pessimism about the economy. Among those surveyed, 78 percent believe the U.S. is in a recession and 52 percent believe that it will last for a least another year. “What’s driving these people nuts is the pronouncement that everything is okay,” he said.

* A secondary reason why the wealthiest Americans are saving is because they feel their success is under siege from the Occupy Wall Street movement and the political debate over the fairness of the increasing gap between the wealthy and the middle class. About 20 percent of consumers with discretionary incomes at $250,000 and about 25 percent of the one percent are worried about being disparaged for being financially successful. “It is clear that American entrepreneurs and successful people are nervous about the break out of an extraordinary kind of antagonistic class warfare as the election season unfolds,” Taylor said.

* Surprisingly, 75 percent of those surveyed favor a significant tax increase on income but not on their assets, Taylor said.

* Philanthropic spending is closer to home and family than it has been in the past: church, school, healthcare. “There’s a growing abandonment of environmental causes and social causes,” Taylor said. “We are seeing an inclination not to share.”

This complex picture of wealthy households affects how these households view luxury goods and services.

For example, the study is documenting a shift away from value-driven spending with more than 30 percent of respondents skeptical of the value of consumption itself. The survey has defined this as “The Worth Movement.”

“These families can be heard to say about a trip, a dress, an automobile, a piece of jewelry, or even an investment, ‘I know I spent more than I had to but it was worth it,” said Cara David, Senior VP at American Express Publishing, which co-produced the report.

Fundamental worth oriented shoppers (about 19 percent of respondents) are characterized by the following:

* A preference for stores that are elegant (78 percent);
* A desire for the experience of purchasing to be as pleasant as the experience of owning (83%);
* A greater likelihood of having close relationships with a select group of salespersons (36 percent); and
* A belief that it is worth paying more for the very best quality automobiles (76 percent), hotels (73 percent) and jewelry (63 percent).

“What people want is a company that shares their value system and this value system is expressed in the transaction, design and advertising and to the extent that it remains consistent is fluid over time,” Taylor said. “What we’re advocating is you got to find out what your brand means to you.… It’s not enough just to be different.”

Survey: Consumer Confidence Among the Affluent Drops Sharply

The top 20 percent of households by income are no longer feeling confident about economic conditions in the U.S. and are spending far less, according to a quarterly survey of the affluent consumers.

The Unity Marketing Luxury Consumption Index took its steepest quarterly plunge since the recession (between fourth quarter 2007 to first quarter 2008), falling 16.8 points to bottom out at 66 points. This is significantly lower than the previous period’s 82.8 points. The LCI currently stands close to the level attained at the onset of the 2007-2008 recession.

"Consumer confidence among the affluent (which account for 40 percent of consumer spending) has fallen sharply since the beginning of 2011,” said Pam Danziger, president of Unity Marketing, which runs the survey. “Not since the middle of 2009 has it been so low.”

The survey of 1,272 consumers with an average income of $301,000 and an average net worth of $856,000 was conducted July 6-13.

“If those at the top income levels feel stressed and unwilling to spend, imagine what it says about people living in middle-income households,” Danziger said. “We stand on the precipice of a double-dip recession, if the affluent consumer’s confidence doesn't turn up in the next quarter.”

Corresponding to the decline in luxury consumer confidence, the average amount spent by affluent consumers on luxury goods and services in the second quarter 2011 declined by 8.4 percent from the first quarter and dropped 18.4 percent over same quarter last year.

High net worth consumers (defined in the survey as having $1 million or more of investible assets and representing some 47 percent of those surveyed) have more to spend on luxury, as the high earners make do without. According to the survey, 42 percent of high net worth consumers expect to increase their spending on luxury goods as compared to 14 percent of high-wage earning affluents.

“The high net worth consumers in our sample feel significantly more confident about their financial status than those with lower net worth,” Danziger said.

“Market pundits have been telling us that the 2007-2009 recession has run its course, and that it was only a matter of time before this event would have diffused into the consumer economy. However, this is not the case, borne out by continued weakness in consumer sentiment,” said Tom Bodenberg, Unity Marketing's chief consumer economist. “On the other hand, the stock market has shown firm, almost counter-intuitive strength as many organizations report high earnings. The rise in the stock market translates into a rise in the investment portfolios of luxury goods consumers, which translates into greater discretionary spending, especially among the high net worth segment, as distinguished from the high earners who are holding their spending in check,” Bodenberg said.

Danziger added, “Increasingly income alone is not an accurate measure of a household's spending power. In the current economy many high-earning households are living pay check to pay check just like those in the middle-income brackets. Once the monthly expenses are met, the lower net worth affluents don't have much left over with which to indulge in luxury.”

Affluent Shoppers are Spending Less on Luxury

Affluent consumers continue to express pessimism when it comes to the U.S. economy and it’s affecting how they shop, according to Unity Marketing's Luxury Consumption Index.

The quarterly survey of 1,364 affluent luxury consumers (avg. income $298,300) dropped 6.2 points to 72.1 points in the third quarter with these high-net worth individuals spending 1.4 percent less than they did in the second quarter.

“Luxury consumers started 2010 with a feeling of optimism that the worst of the economic turmoil was over,” said Pam Danziger, president of the Steven, Pa.-based marketing research firm and author of the upcoming book, Putting the Luxe Back in Luxury. “But through the course of the year, reality hasn't lived up to those expectations, so we have seen a retreat of the LCI throughout the year. Lower levels of affluent consumer confidence are playing out in terms of reduced of spending on luxuries.”

Danziger said the survey reported declines in expenditures in most of the 22 categories of luxury goods and services.

Among the findings in the third quarter Luxury Tracking Study:

* Spending on luxury declined 1.4 percent overall in the third quarter, when compared to the second quarter. However, ultra-affluents (top 2 percent of U.S. households with incomes over $250,000) cut their luxury spending by 11 percent for the period. Luxury consumer spending dropped from $31,665 on average in the second quarter to $31,225 in the third quarter. “This pull back … will have the strongest impact on the heritage luxury brands at the high end of the luxury market,” Danziger said. “The good news for luxury marketers is that luxury consumers spent 33 percent more this year as compared with last year. But marketers should prepare for another tough fourth quarter as the affluent look once again for more bargains and discounts.”

* Personal electronics will be the most popular holiday present for these consumers. The only luxury goods category posting quarter-to-quarter growth was personal electronics, including laptop computers, GPS, cell phones, MP3 players and eBook readers.

* More affluent consumers purchased luxury in the third quarter, even though they spent less overall. Luxury goods and services categories that captured a greater share of affluent shoppers this quarter included luxury clothing and apparel, wine and spirits, fine dining, entertainment and travel. “What the data says about the third quarter is that in these five categories marketers attracted a greater share of customers, but they were not able to convert them into higher-spending customers,” Danziger said.

* Luxury consumers traded down to more mass brands in search of value. For example, more ultra-affluent shoppers frequented Costco (35.5 percent) and Target (36.1 percent) this quarter than Neiman Marcus (21.3 percent).  

* In the fashion boutique sector, Ann Taylor (17.6 percent), Banana Republic (16.6 percent) and Ann Taylor Loft (16.1 percent), were patronized more by ultra-affluent shoppers this quarter than traditional 'luxe' brands such as Chanel (10.8 percent), Louis Vuitton (11 percent) or Coach (11.8 percent).

Affluent Shoppers Will Not Alter Spending Despite Gloomy Economic Outlook

A new survey of the wealthiest 10 percent of U.S. households shows that the affluent have a relatively negative 12-month outlook for business conditions, the stock market and their personal household income. However, this hasn’t caused a major disruption to their shopping plans, according to a study by the American Affluence Research Center.

Among those planning to buy holiday gifts, about 3 percent said they will spend an average of 7.7 percent more than in 2009, according to the Fall 2010 Affluent Market Tracking Study #18. About 28 percent said they plan to spend an average of 14.9 percent less for holiday gifts than in 2009. The remaining 69 percent said they plan to spend the same as in 2009.

This represents a decline of 3.9 percent from the average of $2,399 that the respondents say they spent in 2009, according to the survey of 11.4 million households that account for about half of all consumer spending.

These numbers represent a slight improvement from the results of the fall 2009 survey, the Alpharetta, Ga.-based market research firm said. At that time, the survey indicated the affluent would spend an average of $2,370 or 5.4 percent less than in 2008.

The full report will be available October 14.