By Barbara Thau
NEW YORK–It turns out the luxury sector is not immune to the economic downturn after all—nor are luxury home goods at retail.
After outperforming much of the retail sector in recent years, sales have been softening at upscale merchants such as Neiman Marcus and Tiffany.
At the same time, the housing slump and recessionary climate is conspiring to dampen consumer spending on home goods by affluent consumers—particularly the “single-digit millionaires.”
“The fact that there is a decline in the amount of pure demand for new homes has affected [sales of] furnishings and home appliances,” Milton Pedraza, chief executive officer of The Luxury Institute, told HFN. And among more upscale consumers, “The second factor which is holding back [home] spending is the buying of second homes, or any multiple homes,” he said. “A lot of wealthy people are buying fractional resorts as opposed to buying a second home.”
Retailers such as Saks Fifth Avenue, Nordstrom and Tiffany posted less-than-stellar holiday sales.
Saks Fifth Avenue, which carries home in 28 of its 54 stores, and Tiffany, which sells upscale tabletop, both warned of the trend continuing.
“The company continues to experience a more challenging macroeconomic and competitive environment, and consistent with trends commencing in the third quarter, customers have continued to shift more of their spending to promotional events,” said Saks Fifth Avenue in a statement on January sales.
“Generally speaking, we are planning our U.S. businesses cautiously for the first half of 2008,” Michael Kowalski, chairman and CEO of Tiffany, said in a statement outlining the company’s fiscal-year plans.
“The bonus pool on Wall Street is [pressured],” Jim Gold, CEO of Bergdorf Goodman, said during a conference held by Financo, the boutique investment firm. So the affluent consumer is in less of a buying mood than usual, he said. That’s why the retailer is taking a “cautious” inventory stance this year.
Still, the tony store will not resort to playing the price game, Gold said. “We do not use price promotions as leverage,” he said. “If times get tough, we focus on the most special [merchandise] as opposed to basics.”
Bergdorf Goodman, a division of Neiman Marcus, declined comment on how the economic malaise has affected the sale of home goods. Saks Fifth Avenue also declined comment. Gold added that the most expensive merchandise sold the best at Bergdorf, giving credence to the premise that moderate—as opposed to super-affluent—consumers are the ones tightening their purse strings.
“We’re seeing a lot more people opting for lower price points within luxury brands,” such as Waterford, Dave Vernon, executive vice president and general merchandise manager of home for Fortunoff, told HFN. The trend didn’t start to crystallize until the fourth quarter, he said. “They still want the [upscale] brands out there, but with a more perceived value equation.”
There appears to be something else at play nudging the slowdown of luxury fare.
Conspicuous consumption seems particularly vulgar these days, suggests Pedraza.
“There is a psychological factor,” Pedraza said. “When you see dramatic excess when others are hurting at the bottom [more well-off shoppers think], ‘I won’t be seen as ostentatious,’ ” Pedraza said. And at retail, affluent shoppers are saying, “‘I won’t be seen as the piggish consumer in the middle of a recession.’”
What’s more, consumers have more environmental and philanthropic concerns, he said.
But while the economic downturn has begun to rub off on high-end shoppers, they will remain largely cushioned from market conditions in a way their moderate and bargain-hunting counterparts are not.
“Over the past 20 years, the distribution of wealth in the U.S. has become increasingly polarized,” according to Deborah Weinswig, Citigroup broad-lines retail analyst, in a research note.
In 2006, the Survey of Consumer Expenditures found that the top-earning 20 percent of consumers generated half of total after-tax income and approximately 40 percent of spending, the note said. “We believe that the high-end consumers’ earning power and net worth position will isolate them from the macro concerns … and we expect spending amongst this group to remain strong,” Weinswig said. “In 2008, we expect business at high-end retailers to remain robust.”