By Ylan Q. Mui
Washington Post Staff Writer
Wednesday, September 9, 2009
In this new era of frugality, well-to-do shoppers have gone into hiding and stowed away their splashy logos. But they may hold the key to a consumer recovery.
Affluent shoppers are the most important segment of consumer spending, which in turn drives the national economy. The top 20 percent of the nation's households -- with income of at least $150,000 -- account for 40 percent of all spending, according to government data. That makes them a crucial spoke to any turnaround.
"Unless these people turn up, a lot of companies won't turn up," said Milton Pedraza, founder of the Luxury Institute, a consulting firm. "When they are not spending, it definitely impacts all of us in a negative way."
Conditions are beginning to improve for the well-to-do. The recent runup in the stock market and signs of stabilization in real estate prices -- the two sectors with the most influence over wealthy consumers' balance sheets -- are setting the stage for their return. Already, wealthy shoppers say they are cutting back less and don't worry about money as much as other demographic groups, according to a recent Gallup report.
But the dollars have yet to start flowing. Last week, luxury department stores reported a 12 percent decline in August sales at established stores from the previous year. And retail experts caution that it could be years before affluent shoppers return to the heady days of $6 lattes and $300 jeans.
All consumers continue to be more cautious, guarding their pocketbooks in ways that may please personal finance gurus but frighten retailers. The amount of revolving consumer credit outstanding, which is made up primarily of credit card charges, dropped $6.1 billion in July to $906 billion, an 8 percent decline at an annualized rate, according to government data released Tuesday. The drop is steeper than in June, but less dramatic than the plunges seen earlier this year.
Part of the decline has been driven by tough new lending standards following the recent spike in credit defaults. But shoppers are also shying away from debt, paying off loans and thinking twice before pulling out the plastic. The personal savings rate jumped to 5 percent of income during the second quarter, the highest rate in about a decade.
In the big picture, economists say, consumer spending is unlikely to improve until the unemployment rate begins to fall -- and that is not expected to happen until next year. On Friday, the Labor Department reported that the unemployment rate in August rose to 9.7 percent.
But affluent shoppers are motivated by a different set of numbers. Housing values play a significant role in their net worth. And according to research released this year by two professors at Northwestern University, more of their wealth is concentrated in the stock markets and privately held businesses than that of other income groups. The pair, who examined the top 10 percent of households, also found that their work income is more cyclical than those of the less affluent.
That made the wealthy particularly vulnerable to the financial crisis last fall. The Northwestern study found that a 1 percent decline in GDP resulted in a roughly equivalent decline in spending by most demographic groups. But for the top 10 percent of households by income, spending dropped 5 percent.
That wealth distribution may be playing in the favor of affluent shoppers now. Stock markets tend to be a leading economic indicator, and the Dow Jones industrial average has shot up 42 percent since hitting a 12-year low in March. Construction spending on residential real estate rose 4.5 percent in August and pending home sales increased for the sixth consecutive month.
In addition, a recent survey of wealthy consumers by market research firm Unity Marketing showed their confidence in the economy during the second quarter jumped by the largest amount since the firm began tracking the data.
"It's not that they don't want to spend the money," said Joyce Neave, a personal shopper based in Bethesda. "They just don't want to spend it wrong."
That's the conundrum facing retailers that cater to an affluent clientele. The trickle of shoppers back into stores has been slow, and the recovery is likely to come in baby steps. Many shoppers simply felt less wealthy as they watched their stock portfolios and 401(k)s plummet, even if their daily budget didn't change. Those who had discretionary income have been hesitant to spend. The strongest retail sales in this recession have belonged to stores that deal in necessities, such as wholesale clubs and drug stores.
"The affluent customer does not really need anything," Neiman Marcus chief executive Burton Tansky told investors on a recent conference call. "She has always shopped for want."
Take the case of Shannon Cusello, a costume designer and the fashionable manager of high-end downtown salon One80. She has been known to spend upward of $300 on a tulip-skirted midnight blue frock from BCBG.
But on a recent night out at the W Hotel in downtown Washington, she wore a cocktail dress borrowed from her roommate. She had spent three hours the previous weekend scouring Georgetown for an outfit for the party. But Cusello said she couldn't justify spending the money.
"I just feel like right now, I just can't do it," Cusello said.
Saks Fifth Avenue chief executive Steve Sadove said his customers have been reevaluating what they are willing to pay over the past year -- and frequently, it's a lot less than the asking price. He acknowledged that luxury retail prices had become inflated during the boom times and said the company has worked to bring down price tags.
The department store chain has increased products at entry-level prices and scaled back its highest-end pieces. Sadove said shoppers are still buying expensive items that are exclusive and high quality -- $2,000 Christian Louboutin booties are sold out, for example -- but they are no longer buying for entertainment or on impulse.
"There's a cautiousness on the part of the customer as to whether or not [the recovery] is for real," Sadove said.
Despite the recent gains, the stock markets remain more than 30 percent off the recent highs of 2007. Gallup's index of investor confidence clocked in at 9 last month, the highest reading this year and the first time it has been positive since June 2008, but far below the peak of 178.
Kirsten Brecht, 39, who splits her time between the District and Los Angeles, said she has had to rein in her spending as her real estate and construction business took a hit in the downturn.
But she said she is still willing to shell out for a deal, like a $1,200 Dolce & Gabbana dress she found at the members-only shopping site Gilt Groupe for $200, or for an investment piece.
"For me, in times like this, the secret is quality," she said. "Investment is longevity."