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Up until the 2008/2009 Great Recession, conventional wisdom held that affluent consumers were immune to economic downturns. The assumption was their higher levels of income and wealth sheltered them when prices rise and the economy tanks.
But during the last recession, that conventional wisdom didn’t hold. Luxury consumers felt the pain and reacted just like everybody else.
Take the global personal luxury market as an example. It retreated nearly 10% from $172 billion in 2007 to bottom out at $157 billion in 2009, according to Bain’s luxury study.
It recovered quickly in 2010, but those two years were the only significant decline Bain tracked since 1996. Another major decline hit in 2020 with the pandemic and this time too it recovered in only a year.
But now more economic troubles are brewing. A May survey among 750 CEOs conducted by The Conference Board found more than 60% CEOs say they expect a recession in their primary region of operations before the end of 2023 or earlier. And 15% say their region is already in a recession. Notably, this survey was conducted before the Federal Reserve upped interest rates by 75 basis points, which added to recession fears.
Should the inevitable happen, brands that cater to the high-earners need to learn from the past and prepare for rough roads ahead.
“Everybody is seeing and feeling the inflation,” explained Stephen Rogers, managing director, Deloitte Insights Consumer Industry Center drawing on findings from the center’s latest consumer tracking study. “When it comes to high earners’ feelings of financial wellbeing, they are tracking pretty evenly along with those who earn less.”
Financial wellbeing is declining
For example, about half of lower and middle-income Americans believe their financial situation will improve over the next three years. High-income consumers are only about ten points higher; however, the gap between them has narrowed over the past few months.
A recent McKinsey study confirmed that finding reporting that the steepest drop in consumer sentiment was among the high-income consumers.
In addition, Deloitte found six in ten Americas overall are concerned about their savings level, compared to four in ten a year ago. High-earners remain in the four out of ten range regarding savings but it is creeping up.
In addition, one in three high earners are concerned about their level of credit card debt and four out of ten said they are delaying large purchases, such as cars and couches. Lower-income consumers come in higher on both measures, but for all consumers, their concerns are measurable.
Rising prices erode consumer trust
One area where both high earners and lower-income consumers are in complete agreement is in their perception that companies are taking advantage of the situation to increase prices above what is required.
“Call it profiteering or price gouging, six in ten folks believe companies are unfairly raising prices and that correlates to weaker spending intentions in some categories,” Rogers continued. Specifically, high-income consumers have lowered their spending intentions on clothing, travel and personal care.
He further cautions that the moment will come when consumers no longer blame the pandemic, supply chain and the war in Ukraine for inflation. When that occurs, they will turn their indignation onto the companies.
“The data suggests demand and consumer retention are at risk – particularly for products and services consumers may feel they can ‘do without,’” he stated.
That makes luxury brands particularly vulnerable. Throughout the pandemic, many luxury brands, including Louis Vuitton, Hermès, Gucci, Chanel, Bulgari and Christian Dior, very visibly raised prices.
Up till now, the brands’ sales didn’t skip a beat, but luxury consumers may be reaching a tipping point where the brands’ prices become too high, even for them.
Turning the cognitive switch
“If consumers believe that companies are pricing unfairly, luxury brands could bump up against a cognitive switch where the high-income consumers are not willing to go, even if they can afford to pay the higher price,” Rogers said.
Consumers have embedded in their psychology a range of prices they expect to pay for the various products that they buy. When the price goes above that acceptable price range, they have to do the math to determine whether to pay up, make a switch to a lower-cost alternative or forgo the purchase entirely.
“For high-income consumers, it’s not going to be the financial cost that catches brands but consumers’ perceived cognitive switching costs,” he explained. “Lower-income consumers make these trade-offs, trade downs and switches all the time for financial reasons. But high-income consumers are not immune to making the same switches, but for different reasons.”
Rogers said the tide in consumer sentiment began to turn back in September and has picked up steam since then. Middle and lower-income consumers were on the leading edge as inflation began to take its toll, but now the higher-income consumers are starting to feel the pinch and respond accordingly.
Luxury purchases are the most discretionary of all discretionary expenditures, putting luxury brands at risk when consumers’ cognitive switch turns off.
Looking ahead, Rogers warned, “Luxury brands are likely to bump up against these cognitive switching costs where even the affluent will find a new store or new product that fits closer to the margins they carry around in their heads.”
About Pam Danziger: Pamela N. Danziger is an internationally recognized expert specializing in consumer insights for marketers targeting the affluent consumer segment. She is president of Unity Marketing, a boutique marketing consulting firm she founded in 1992 where she leads with research to provide brands with actionable insights into the minds of their most profitable customers.
She is also a founding partner in Retail Rescue, a firm that provides retailers with advice, mentoring and support in Marketing, Management, Merchandising, Operations, Service and Selling.
A prolific writer, she is the author of eight books including Shops that POP! 7 Steps to Extraordinary Retail Success, written about and for independent retailers. She is a contributor to The Robin Report and Forbes.com. Pam is frequently called on to share new insights with audiences and business leaders all over the world. Contact her at [email protected].