COLUMN ONE : The Good Life Gets a Budget Cut : Many consumers are eschewing fancy cars and clothes. To keep customers, businesses are emphasizing quality and value.
BMW now sells a car for just under $20,000. L’Ermitage Restaurant in West Los Angeles has added a $15 entree to its menu of high-priced French cuisine. The five-star Wigwam Resort in Arizona is offering $59-a-night rooms.
What’s going on?
America’s debt-pinched upper-middle class is starting to think twice about splurging on luxuries, and some marketers who raked in business from free-spending baby boomers during the 1980s are cutting prices and scrambling to keep the money flowing.
So far, signs of a slowdown in luxury buying are not yet as common as gold cards, but they are popping up in all sorts of places. Even Sharper Image, a purveyor of trendy gadgets and once a shining symbol of conspicuous consumption, is losing customers and money.
What stands out about the emerging trend is that many luxury-goods merchants say they have never seen this happen before.
The very rich tend to spend freely in good times and bad. But in the 1980s, an unprecedented flood of people came into affluence for the first time, and the luxury-goods business took off. In particular, the so-called low end of the luxury market exploded, catering to professionals who felt they could indulge in fancy restaurants, fine chocolates and European cars, if not million-dollar homes.
A lot of the new wealth that fueled the spending, however, dried up with the string of disasters that have hit Wall Street, the savings and loan industry and real estate. Also, the confidence of affluent consumers has been eroded by months of downbeat economic reports and, most recently, the Persian Gulf crisis.
Traditionally, luxury merchandise has attracted “people who can really afford it,” said Kurt Barnard, publisher of Retail Marketing Report. “What is dropping off is the customer who went for luxury who couldn’t really afford it.”
Market researchers and economists sense that the mood of upscale Americans has swung away the glitz of the ‘80s. “We’re not dealing with that mad acquisitive state of mind any more,” said Susan Hayward, senior vice president with the Yankelovich Clancy Shulman research firm.
One sign of the times: A key measure of consumer debt, after hitting an all-time peak last year, has flattened. On average, consumers’ debt from credit cards, auto loans and personal loans now equals 18.5% of their after-tax income, down from 18.8% last year.
The aging of the American consumer also is playing a role in curbing spending. Many prosperous baby boomers have reached a point in their lives where they are married and having children. There are new demands on their time and money.
“When I was single, I used to go out to the West Beach Cafe or 72 Market Street. Now I just go home,” said Jeffrey Hirsch, 36, referring to a pair of trendy Venice restaurants. Hirsch, a marketing consultant, was married in February, and his wife is expecting their first child in December.
Consumers’ changing attitudes are crimping many businesses. On tony Rodeo Drive, high-end jewelers are said to be doing fine, but many other merchants are beginning to see their sales rise more gradually or even decline.
“There’s no doubt about it, the fabulous acceleration that occurred through March has slowed down, but there’s no recession on the street,” said Donald G. Tronstein, a property owner with 11 retail tenants on Rodeo Drive.
In Meccas of high living such as Southern California, the super wealthy and some other high-living consumers continue to spend. Even now, in the face of a nationwide slump in retail sales, customers are snapping up $3,000 handbags at the Hermes store on Rodeo Drive in Beverly Hills.
“They don’t think there is another way of spending money,” said Francine Bardo, manager of the leather goods and apparel shop. “They need something and they’re going to go to the usual store to buy it.”
But, even Hermes’ sales have leveled off this year, Bardo said, after rising sharply last year. She said some other Rodeo merchants, particularly the less well-known retailers, have complained of sales declines of as much as 20% this year.
Across the country, expensive restaurants have been pounded. According to the most recent figures from NPD Group, a market research firm, the number of meals served at fine dining establishments is off 4.2% from a year ago, while all other restaurant categories posted increases.
Customers at pricey restaurants may be getting fussier. “I’ll no longer spend $100, $150 or $200 for dinner unless the service is exquisite and it’s a wonderful dining experience,” said Sabra Lande, a fragrance firm executive in Beverly Hills.
Teresa Morris, a vice president with L’Ermitage, said there have been “horror stories” in the restaurant business. Aside from a slowdown in July, she said, L’Ermitage has been spared. Even so, it followed the lead of some competitors this month in adding the $15 entree of angel hair pasta, sauteed Italian vegetables and Parma ham. Before, its cheapest offering was $28 for such entrees as striped bass Viennoise.
In the auto industry, the luxury market remains relatively strong mainly because of the popularity of new, less expensive status cars such as Toyota’s Lexus and Nissan’s Infinity.
Over the first seven months of 1990, U.S. sales of cars costing more than $50,000 fell 1%. But sales of cars in the $35,000 to $50,000 range jumped 75%, and sales of models costing $25,000 to $35,000 climbed 10%.
“The better value is attracting people,” said Cynthia Certo, director of forecasting for the research firm Integrated Automotive Resources in Wayne, Pa.
Real estate prices are soft across the country, particularly in the badly slumping Northeast. But hardest to sell are houses in the pricey $300,000 to $800,000 range in California and East Coast communities, said Kenneth T. Rosen, chairman of the Center for Real Estate and Urban Economics at UC Berkeley.
“The people who bought them were stretching to get into them, and people aren’t willing to stretch that much now,” Rosen said.
Sharper Image’s stores and mail-order operation are finding it hard to attract eager buyers too. (Its latest catalogue still offers, though, many expensive nonessentials, such as a $1,995 reclining chair with massage rollers and a built-in stereo.)
The result: This summer the company announced a layoff of about 110 workers and a quarterly loss of $1.6 million, its worst ever.
Private country clubs are losing members, despite the booming popularity of golf. The percentage of households with annual income exceeding $60,000 that belong to a country club is 14.4%, down from 19% a year ago, according to a new national survey by Mendelsohn Media Research.
The same survey found that the percentage of $60,000-plus households spending more than $1,000 on fine jewelry over the past year declined to 14.9% from 17% the year before.
Apparently sensing a shift in the attitudes of upscale consumers, advertisers are beginning to stress quality--and even value--rather than luxury. One recent example: A magazine ad proclaimed that even though “Jack Daniel’s is priced above many whiskeys, a sip will prove its worth.”
Likewise, an ad for the four-star San Diego County’s Rancho Bernardo Inn trumpeted a special package deal: “One of the country’s fine resorts offers one of the country’s finest values.” For its part, luxury auto maker BMW this spring introduced its low-end 318 series, with prices beginning at $19,900.
Clothing designers, meanwhile, keep coming out with less expensive fashions, following the lead of such trendsetters as Donna Karan, who brought out her lower-priced DKNY line in the spring of 1989. “The freest-spending people of the Reagan era have now pulled back, and it’s being reflected (in slumping sales totals) at stores like Saks Fifth Avenue, Bergdorf Goodman and Neiman Marcus,” said Alan Millstein, publisher of Fashion Network Report.
Some analysts predict that the 1990s will bring a re-emergence of the so-called middle market, an area abandoned by merchandisers who went after upscale customers in the 1980s. Eric Miller, publisher of the Affluent Markets Alert newsletter, speculates that the trend will help retailers such as Sears, Roebuck & Co., whose stores have struggled in recent years.
Still, the luxury market is hardly on the verge of collapsing.
Makers of gourmet foods, for example, have come out with 2,592 new products so far this year, up 49% from 1989. Miller said the affluent also will continue to pay dearly for time-saving conveniences and experiences they deeply enjoy.
Maid and gardening services, for example, are still popular and despite a current slump in travel, many will be hard pressed to sacrifice long-planned trips.
What will suffer the most, Miller said, are frivolous purchases such as VCRs loaded with unnecessary options or accessories. “People are still going to want their electronic goodies,” he said, “but they’re going to want to buy ones that they use.”
Said Barnard, the retailing newsletter publisher: “People today no longer feel the need to show off, to show the rest of the world, ‘look at how rich I am.’ ”
