Mon, May 31, 2010 page10

• IN FOCUS: Luxury market slowly regaining its luster

  • AFPW
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  The luxury goods market is rebounding from the slump caused by the global recession, but analysts say upscale sellers will be facing a hard slog due to changing demographics and lingering consumer caution.

  Global luxury goods industry sales are expected to grow 4 percent in this year to 158 billion euros (US$195 billion) after a painful 8 percent decline last year, according to the consulting firm Bain & Company.

  Much of that growth is expected in the first half of the year, with more sluggish trends returning in the second half, according to Bain’s Luxury Goods Worldwide Market Study.

  In the US, retail sales in the luxury segment last month jumped 15.5 percent year-over-year after a 22.7 percent surge in March, helped by comparison with weak sales a year earlier, according to MasterCard SpendingPulse.

  Upscale retailer Saks swung to a record profit in the past quarter after a loss a year earlier, with sales up 6.1 percent. At rival Tiffany, it was a similar story with global sales up 17 percent in the most recent quarter and profit up nearly fourfold.

  French luxury giants Hermes and LVMH also reported strong growth in sales in the first quarter boosted largely by rise in Asia, excluding Japan, as buyers snap up watches, jewelry and other upscale goods after months of economic gloom.

  However, it may be too early to break out the champagne for the luxury sector, analysts warn.

  In the US market, consulting firm Unity Marketing reports that much of the growth is coming from super-rich households with incomes of US$250,000 a year — the top 2 percent in the US. This group hiked spending by 22.6 percent in the past quarter.

  The so-called “aspirational affluents” with incomes between US$100,000 and US$249,999 increased their spending by only 1.9 percent from fourth quarter of last year to the first quarter of this year, the survey found.

  “The ultra-affluents are returning to spending at pre-recession levels, while the aspirational consumers are holding back,” Unity president Pam Danziger said. “But even with their exuberant amounts of spending, the ultra-­affluents can’t sustain recovery in the luxury market.”

  Danziger said the market for luxury cars, jewelry and other goods is now relying on a smaller slice of the ultra-rich population.

  Prior to the recession that began in 2007, this market had been boosted by the so-called wealth effect with rising home prices and stock prices fueling spending by the “HENRYs” (high earners, not yet rich). This is a large group of nearly 23 million Americans with incomes between US$100,000 and US$250,000 a year.

  These households “were feeling they had resources back in 2006 and 2007 — their stock market portfolios were stable, their home values were going up,” Danziger said. “There was a wealth effect. Now all that wealth is gone.”

  However, Danziger says that even if the stock market rebounds and the economy steadies, the luxury market will be hurt by the aging of the US population: The baby-boom generation that fueled the big surge in spending is entering retirement and “Generation X” is not a big enough group to pick up the slack.

  “The prime period for luxury goods is people who are 35 to 55 years old,” she said. “As people get older, their priorities change.”

  This suggests the luxury market is unlikely to regain its luster until around 2018 to 2020, when the “Millennials,” those born after 1997, start their spending sprees.

  “So this means we have almost a decade that will be a luxury drought,” she said.
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