The Vagaries of Today’s Luxury Market

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Over the last three years, the luxury market has experienced a whirlwind of change. In the lead-up to the pandemic, the personal luxury goods market grew 7 percent in 2019, reaching $300 billion globally. Then in 2020, it suffered a sharp decline, dropping an unprecedented 22 percent to $235 billion, followed by a remarkable rebound in 2021 to $302 billion, according to the Bain-Altagamma Luxury Study.

Throughout 2022 the personal luxury goods market continued its meteoric post-pandemic rise, advancing 24 percent to $376 billion, and the Bain-Altagamma analysts expect the good times to keep rolling in 2023. “The personal luxury market is projected to see further growth of at least 3-8 percent next year, even given a downturn in global economic conditions,” they predict.

For affluent consumers, luxury is a privilege, not a right, and as they look at the challenges they face this coming year, they are signaling a willingness to trade off excess spending on luxury. Many plan to batten down the hatches and ride out any potential economic storm, as they did in the Great Recession of 2008 and 2009.

But, Not So Fast

A look back at what happened during the Great Recession of 2008 and 2009 suggests a different forecast. And although the past is often the best predictor of the future, it may not be relevant today. Global personal goods luxury sales dropped 9 percent from 2007 to 2009, disproving the conventional wisdom that the luxury market is immune to economic downturns. What will the past predict for our future in 2023?

Whether the economy takes a slight tumble or a big fall in 2023, economists are warning about a potential economic decline. “Going into 2023, we have a broad-based slowdown in the global economy,” said International Monetary Fund’s Gita Gopinath at the Wall Street Journal’s CEO Council Summit in December. “The possibility of avoiding a recession is really narrow for the U.S.,” and she added that the outlook is even more challenged in Europe and China.

Heeding advice from motivational writer and speaker William Arthur Ward, “The pessimist complains about the wind; the optimist expects it to change; the realist adjust the sails.” Luxury brands should set their sails for the growing economic headwinds.

And to adjust their sails, luxury brands need to get out in front of the consumer, understand what they are looking for today and prepare for changes to come tomorrow. A new study among 2,000+ affluent consumers – Research the Affluent Luxury Tracker – provides a forward look at how the affluent will adapt their spending and purchase behavior if the economy falters, which these consumers fully expect it will.

Change Is Coming

“Affluent luxury consumers are the most highly-educated and well-informed consumers, and some 69 percent see a recession coming within the next six months, if it isn’t already here,” said Chandler Mount, the study’s lead researcher and founder of Washington, DC-based Affluent Consumer Research Company following ten years heading up YouGov’s Affluent Perspective research practice.

“Anticipating the worst, the affluents aren’t waiting for the other shoe to drop. Nearly half (48 percent) surveyed said, ‘Now is a good time to limit my purchasing,’” he continued, noting that the survey sample was skewed heavily toward high-net-worth-individuals (HNWI) with $1+ million net worth (excluding their primary residence), a notoriously difficult consumer segment to survey. HNWI made up 70 percent of the sample and the remaining 30 percent were high-earners-not-rich-yet (HENRYs) with less than $1 million net worth. All, however, are categorized as affluent.

Not unexpectedly, the HENRYs were more inclined to cut back (52 percent). But even 46 percent of the HNWI are lining up to reduce their purchasing. This will pose significant challenges to luxury brands that depend upon the HNWI’s greater spending power if they do pull back.

In addition, affluent millennials, who represent the largest consumer segment for luxury brands now and in the future, are the most likely to feel that cutting back is a good idea. Some 59 percent of millennials (aged 26-41 years) agreed with that statement.

Hope Rests with the Millennials

Millennials are far and away the most luxury-indulgent generation, with 54 percent saying they most often choose the luxury option, compared with 29 percent of GenXers (aged 42-57) and 17 percent of Boomers (58-75+ years).

Mount explained that the survey includes 29 different luxury purchases across five major categories:

  • Consumable Luxury Goods, such as gourmet food, fine wine, luxury spirits and beauty/cosmetics.
  • Personal Luxury Goods, including luxury clothing, fashion accessories/leather goods, jewelry, and watches.
  • Experiential Luxury Goods, notably autos and recreational vehicles.
  • Home Luxury Goods and Services, such as furniture/home decor, luxury major appliances and interior and exterior renovations.
  • Luxury Experiences, including luxury hotels/resorts, premium cabin seating, luxury beauty services, cruises, and yachting vacations.

He observed, “Overall, millennials have the highest probability of purchase in ALL luxury categories tracked, followed by GenZ and GenX, though GenZ is a much smaller segment in the survey sample.”

And he added, “Boomers, while a sizable segment of the affluent, are significantly withdrawn from the luxury market. Their overall average across categories is just 10 percent probability to purchase luxury in the next three months.”

Since millennials are the primary consumers doing the heavy lifting in the luxury market, luxury brands will feel the sting if they put their luxury spending on hold. And millennials may be forced to cut back out of necessity as job cutbacks continue to roll across the high-paying technology and banking/investment sectors.

Narrowcasting Rather than Broadcasting Spending

Overall, HNWI consumers (46 percent) are the most inclined to say they will keep buying high-quality products even in times of financial uncertainty. But given that almost half of HNWI said now is a good time to limit purchases, they will likely become more selective in their luxury purchases.

Rather than spread their spending across a wide range of brands and categories, they will narrowcast purchases across a smaller set of trusted brands and indulge in luxuries where they gain the greatest return on investment. As a result, brands that have won their loyalty will gain, and those that haven’t will lose.

Cutting Back not Spending More

Another cautionary sign revealed in the survey is that more luxury consumers (35 percent) expect to spend less on luxury purchases over the next twelve months than those who plan to spend more (27 percent). While the HENRYs are more likely to be members of the spend-less group, nearly 30 percent of HNWI said they are also likely to spend less on luxury over the next twelve months. “What’s more troubling is that luxury consumers’ negative perspective increased in our December 2022 wave with 41 percent of luxury consumers expecting to spend less,” Mount noted.

The Narrower Shopping List

Topping the list of luxuries affluents plan to buy over the next three months are “little luxury” consumables, such as gourmet food, fine wine, beauty products and chocolates. Also high on their list are fashion accessories/leather goods and luxury-brand fashion apparel. On the other hand, high-end jewelry and timepiece purchases are further down their list.

On the experiential front, luxury travel, including hotels and premium airline cabin seating rank high, as do luxury beauty services, including injections, laser treatments, etc. At home, they plan to continue to lean into interior home renovations but are less motivated to buy furniture/home decor and exterior home renovations.

Trading Down?

Goods, services, and experiences cost more when the luxury label is attached to their name. While higher price doesn’t define luxury, people do expect to pay a premium for what they consider to be luxury. The consensus among half of the luxury consumers surveyed is that luxury just costs too much. However, Mount observed, “How much is ‘too much’ is relative, so we asked affluents to evaluate which of the products, services ,and experiences were ‘more expensive than they should be.”

At the top of the list of luxuries that are judged to cost too much are related to home, including interior and exterior home renovations, kitchen appliances and furniture/home decor. These are categories where brands may experience growing price resistance, and these are also categories where consumers might opt to trade down.

RH is already feeling the pain, with third quarter 2022 revenues down 14 percent from last year, CEO Gary Friedman sees things getting worse before they get better. “We expect our business trends will continue to deteriorate as a result of accelerating weakness in the housing market over the next several quarters,” he said in a statement.

But in an earnings call, he was less measured. “From the housing point of view, there is no soft landing. It’s looking more like a crash landing in the housing market. It’s looking like 2008, 2009.”

Changes in 2023

“For affluent consumers, luxury is a privilege, not a right, and as they look at the challenges they and the world at large face this coming year, they are signaling a willingness to trade off excess spending on luxury. Many plan to batten down the hatches and ride out any potential economic storm, as they did in the Great Recession of 2008 and 2009,” Mount added, “Of course, what people say they are going to do in surveys and what they actually do are two different things.”

Nonetheless, economic uncertainty is growing, and it will surely impact the luxury market just as in the 2008-2009 recession. The luxury brands that have captured the imagination, trust and loyalty of luxury consumers are expected to continue to thrive, while those which haven’t built effective connections with their customers and potential customers will face increased challenges to maintain relevance, sales and revenues.

A recent Deloitte study among the leading 100 companies in the luxury industry confirms this. The research showed that the strong keep getting stronger as the smaller companies have grown weaker since 2018. Specifically, Deloitte found that only ten companies at the top of the luxury market pyramid generated some 56 percent of luxury goods revenues. The longtail 90 companies underneath got only 44 percent of the total market share. Further, the top ten companies contributed 81 percent of the year-over-year growth and 85 percent of the net profits among the top 100 luxury goods companies. The top ten luxury companies are sitting pretty and will weather an economic storm, while many others are at risk of falling by the wayside.

Caution Ahead

Affluent consumers are cautious about their prospects should an economic downturn occur. High-net-worth consumers are watching their investment portfolios closely, which some 46 percent rely upon as a primary source of income. HENRYs are more dependent upon their wages and salaries, so they could be impacted as more layoffs occur in high-paying employment sectors.

Three factors are lining up for luxury brands to prepare for:

  1. The last global recession proved that the luxury market rises and falls in an economic downturn just like other markets.
  2. The rich don’t get rich by spending all their money, so they will hold tight to their cash and be prudent in their spending.
  3. The less financially secure millennial HENRYs may decide their extravagant spending post-pandemic will suffice for awhile.

For 2023, luxury brands are advised to follow the widely quoted maxim, “Hope for the best. Plan for the worst.”

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