Much of the growth in luxury goods consumption in 2009 is likely to come from outside the U.S. — notably China, India, Russia and Brazil — once volatile economies worldwide find their equilibrium, Boston Consulting Group is forecasting.
“Recent events are causing people to be reluctant and their spending is frozen,” Michael Silverstein, a BCG senior partner and managing director, said in an interview. “In Russia, India and China, stock markets have taken harder hits than [the U.S.], down 30 to 50 percent in major indices over the last year. In China and Hong Kong, there are unstable real estate prices and huge amounts of speculation.”
Despite such gyrations and the “vastly unequal wealth distribution” in these regions, where “the elite are still the elite,” consumer specialist Silverstein views the current scenario as a “short-term blip in long-term, tremendous growth of a large population of wealthy people who will emerge over the next decade and drive an enormous amount of luxury spending.”
With the financial crisis in the U.S. rocking Wall Street, Washington and Main Street, few Americans are likely to be trading up, near term, for fashion, travel or vacations, Boston Consulting is projecting. Shoppers in 2009 could spend 4 percent more in trading up for their luxury apparel purchases, Silverstein estimated, which would keep their spending flat versus 2008, in terms of real dollars.
Three-quarters of a representative group of adults told the Harris Poll earlier this month they think the U.S. “is on the wrong track,” one indication of the troubled economy’s impact on their sense of confidence. “Luxury consumers are newly resistant. They are saying ‘no’ where they used to say ‘yes,’” observed Pamela Danziger, president of Unity Marketing, whose most recent luxury consumption index for the U.S. had already sunk to 51 at the end of the first half of 2008, from 63.6 back in January. “So much of luxury spending is so easy to hold back on.”
In America’s premium fashion arena, trading down to less than the best items could spell spending decreases of 6 to 8 percent next year, or 2 to 4 percent in real dollars, Silverstein estimated. “Fashion is a vulnerable sector,” he said. “Even households that do most of the apparel spending have very crowded closets,” he added of the 20 percent of the population that accounts for 80 percent of luxury apparel purchasing.
Futurist Faith Popcorn, for one, has struck clothing from her near-term shopping list. “I’m not letting other people do my shopping anymore,” Popcorn said in an interview Tuesday, referring to one way she is economizing. “I’m doing my own shopping. I love the supermarket.”
After speaking with 1,200 affluent U.S. consumers, with average annual income of $209,000, during the first 10 days of October, Danziger found they were “shopping less often, shopping more strategically by making lists, comparison shopping and doing their research before venturing into the stores. These new shopping patterns are going to put additional pressure on struggling retailers who traditionally have looked to the upper-income shoppers to bolster their revenues.”
Consumer electronics is one standout that could buck the current spending pullback, with a big share of shoppers willing to spend more, or trade up, using funds they’ve saved by trading down on other things. But luring shoppers with something new and different is likely to get harder in this hot sector, too. The BCG managing director doesn’t expect many consumers to be drawn to the burgeoning HD radio format anytime soon, for instance, even as people upgrade to HDTVs.
Throughout the first half of the year, BCG asked 21,000 adults in 16 countries about their spending priorities for its just-published report, “Trading Up and Down Around The World,” and found the U.S. was the only locale among five of those regions where people were not planning to trade up this year or next for luxuries in fashion, beauty or personal care. (The four regions where people were willing to spend more for such things were Japan, China, Russia and parts of Europe — Germany, France, Italy, Spain and the United Kingdom.)
Apparel for one’s self is on the list of trade-ups people were envisioning in Russia, and high-end shoes were a target for those in Russia, Japan, China and parts of Europe. “In Russia and China, a major thing is [to wear] a visible brand as a badge of success,” Silverstein said, when asked why luxury apparel made trade-up lists in Russia. Premium hair care products were in the sights of consumers in China and Russia, while bath and body luxuries made the list for China.
“Newfound wealth in developing countries and younger ages [there] signal an inclination to be more material and buy more,” Danziger said of her luxury consumption outlook. China’s median age is 32, Brazil’s is 27 and India’s is 26, for example. By comparison, the median age in the U.S. is 36 and it’s 38 in Russia and 42 in Japan. “The higher ages in the developed world don’t bode well for luxury brands there,” Danziger added. “As you get older, you get less material.”
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