Rich rein in lavish habits amid drop in net worth
The rich are tightening their belts too. Even if it’s still a Gucci.
Faced with the sharpest decline in net worth in nearly 50 years, wealthy Americans are reevaluating their priorities and slashing their spending at a rate unseen in decades -- a move that could have dire consequences for luxury stores, high-end brands and the economy overall.
In response to the increasingly subdued shopping mood that began late last year, luxury brands are cutting their inventories, changing the assortment of products they offer and tweaking their advertising messages.
“Fewer, better things,” jewelry giant De Beers Group suggests in an ad campaign launched last month.
Sure, many of the ultrarich aren’t exactly scrimping. Some are still dropping $100,000 on a fur coat or $600 for a pair of shoes -- but increasing numbers who were never bargain-hunters are picking through mounds of discounted designer goods to save money in an uncertain time.
And why not? Deep discounts are making it a great time to stock up on high-end clothes and accessories, whether it’s a Chanel suit, a Prada bag or a $1,000 pair of Christian Louboutin shoes with their bright red soles.
But if conspicuous consumption was a hallmark of the luxury days of old, those still shopping till they drop are taking a more low-key approach, apparently in deference to the new breed of have-nots.
“I keep a stash of brown paper bags,” said Sara Albrecht, owner of Ultimo, a Chicago-based designer clothing boutique. “No one will ever know.”
Albrecht said she used to keep a few bags on hand for those who wanted to keep their purchases hidden from their husbands. But now she has a bigger pile in response to requests from shoppers hoping to keep their buying secret from friends and neighbors.
Still, the affluent clients who do come in are buying fewer items and choosing special pieces that are less flamboyant, she said. Albrecht said her shop has suffered a 20% drop in sales from a year ago.
Luxury sales overall declined 34.5% in the first week of December from the same period in 2007, according to SpendingPulse, a data service provided by MasterCard Advisors. They were down 23% in the five weeks ended Dec. 6.
Such behavior is dramatically different from even a year ago, when luxury shops couldn’t keep up with the appetite for extravagance. A-listers wanted $5,000 handbags, not the $500 versions they had bought in the past.
But the financial meltdown has deflated the demand that reigned for much of this decade, resulting in plummeting sales for many luxury purveyors. That has forced high-end stores like Saks Fifth Avenue and Neiman Marcus to offer sharp discounts akin to their downscale competitors.
The aspirational luxury shoppers, those whose average annual salary is about $150,000, began cutting back a year ago, said Milton Pedraza, chief executive of research firm Luxury Institute. That spiraled up the economic scale after the economy worsened.
Single-digit millionaires began pulling back sharply in March, when Bear Stearns Cos. collapsed and was bought by JPMorgan Chase & Co. in a fire sale, Pedraza said.
And the ultrawealthy with a net worth above $10 million -- who account for about 60% of sales and 20% of top luxury stores’ customer bases -- started cutting back in September, when the financial crisis ballooned, Pedraza said.
“This is no longer a state of mind, or what feels right,” said luxury consultant Robert Burke. “This is a reality of where people’s bank accounts and investment portfolios are.”
But he and others are also taking note of a fundamental change in shoppers’ psyches in what’s feared to be a deep and long recession.
The cutbacks by the wealthy are clearly different from the grocery-aisle economizing so many Americans are making. For one thing, the rich typically don’t trade down to lower-price brands and stores, luxury experts say. Instead of six pairs of Manolo Blahnik shoes at $700 each, they will buy two -- not browse the shoe department at JCPenney or shop at Nine West.
It may be hard to sympathize with such trade-offs given the sudden erosion of jobs in nearly every sector and increasing uncertainty about putting food on the table or paying the mortgage.
But millionaires saying no to that third pair of high-priced heels is worrisome for us all, economists say, because it deepens the trough consumer spending has fallen into. Michael P. Niemira, chief economist at the International Council of Shopping Centers, says the economy depends on spending by the wealthy because of their dominance in discretionary purchases such as boats and furs.