Luxury Marketers May Face Leaner Second Quarter

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Cartier store, Fifth Avenue, New York

Stevens, PA–Unity Marketing’s Luxury Consumption Index (LCI) fells 9.3 points in April as affluent consumers focus on saving, rather than spending in the coming months. The LCI dropped back from 86.9 points, the highest level reached since September 2007, to 77.6 points.

Pam Danziger, president of Unity Marketing explained that the previous rise in the LCI’s January results was due to optimism about 2010 and a rebounding economy. “Even though the index dropped 9.3 points in April, it is still higher than it was in October 2009,” Danziger says. “Thus, there is every indication that the recovery as measured by luxury consumer confidence is slowly but surely on track. Yet the decline does predict a slow down in luxury expenditures.”

The LCI is calculated from the results of Unity Marketing’s quarterly Luxury Tracking Survey, conducted April 6-10, 2010 among 1,245 affluent luxury consumers (average income $331,500; age 45.6 years; 42% men/58% women).

Split Along Income Lines

The survey results highlight important structural changes taking place in the luxury consumer market. “Affluent consumer confidence is splitting according to income,” adds Danziger. “Those with incomes of $250,000 or more, the ‘ultra-affluents’ (which represent the top 2% of U.S. households or about 2.5 million households)  increased their spending on luxury by 22.6%, while the lower income ‘aspirational’ affluents with incomes between $100,000-$249,999 increased their spending by only 1.9% from fourth quarter 2009 to first quarter 2010.”

“The aspirational affluents which make up some 21 million households are going back to acting like middle-class rather than luxury class consumers. This shift will have significant impact on luxury marketers and retailers revenues over the next six to nine months,” Danziger says.

“The latest luxury tracking survey shows that the ultra-affluents are spending at pre-recession levels, while the aspirational consumers are holding back.  But even with their exuberant amounts of spending, the ultra-affluents can’t sustain recovery in the luxury market alone. In order to generate real growth in the luxury market, marketers and retailers are going to have to entice the aspirationals back to spending.  So far aspirationals are holding back.”

Commenting of the latest survey results, Tom Bodenberg, Unity Marketing’s chief consumer economist, says, “Right now the luxury market is at a pivotal point. On the positive side is the recent good performance of the stock market which reflects an underlying optimism of the future prospects of the economy.  On the other hand, luxury consumers are more committed than ever to saving over the next 12 months. Some 46% of luxury consumers say they will save more, as compared with only 29% who expect to spend more on luxury in the next 12 months. Unless affluent’s incomes rise, more saving will mean less money to spend on luxury goods and services.”

Danziger adds that while there’s valid reasons to be optimistic, marketers would do well to be caustious about their prospects in the next two quarters. “After all only 22% of the affluents surveyed believe the recession is over, so affluents are still exerting discipline over their spending.”

Mixed Messages at Retail

In its report released Tuesday in San Francisco, MasterCard Advisors SpendingPulse reported luxury retail sales (excluding jewelry) had a 15.5% increase in April, which fell below the 22.7% growth in March and 22.7% rise in February. The report found mixed results in a range of categories signaling that still-cautious consumers kept retail sales below 2008 levels.

“Have we bounded off the bottom? Yes, we definitely bounced off the bottom,” says Mike Berry, director of research for SpendingPulse. “But are we back? In most segments the answer is no.”

Since the 2009 holiday season when luxury consumers returned to spending after a period of austerity, many thought that luxury business had indeed rebounded. Noting that March results seemed to support the rebound theory, Berry adds, “but with these April results, that has tempered enthusiasm a little bit although some was due to an earlier Easter.”

MasterCard Advisors’ SpendingPulse bases its data on aggregated sales activity in Mastercard payments networks, together with estimates for payment forms like cash and check.