We may be heading into a global recession, but there’s one group of people who just can’t stop spending – the world’s richest. While retail sales are generally down, and the stock market is down 20 percent last year, spending on luxury goods and experiences is the real deal. increase with roughly the same amount in 2022, as the rich release their animal spirits.
The data, which comes from a recent Bain & Company study of the luxury market, challenges much of the conventional wisdom about luxury spending and the wealthy in general.
For starters, last year’s boom in the €1.38tn market was driven almost entirely by Gen Z and Y, who dominate the personal goods market (including luxury clothing, bags, jewelry, etc.). “Excluding Gen Z and even the younger Generation Alpha will grow three times faster than other generations until 2030,” Bain said. So much for worrying the youth about the materialism of their ancestors.
Further confounding our assumptions, this luxury boom is not fueled by China, which has remained locked up for years, but by the US, which leads the market. And in America, New York doubles as the luxury capital of the world. Despite all the money of Wall Street and Silicon Valley moving to places like Miami or LA or Austin, the Big Apple is still the place to put big money in things like jewelry, watches, handbags and luxury tourism. (You should look no further than the opening of the new opulent Safe New York, where room prices can reach $15,000 a night).
I have to say, I wouldn’t expect much from this. I thought that even a high net worth individual would be somewhat more sensitive to the sharp fall in asset prices, given that these are usually people whose money comes mostly from assets rather than income. Maybe they will spend it, but not in a way that really reflects the decline in equity, just on the upside.
But luxury experts say there has been a lot of wealth created over the past two decades, despite a 20 percent correction in stock market prices as a minus for the top 5 percent of the market. And this is the top 5 percent that represents 40 percent of the overall luxury market sales, according to Milton Pedraza, CEO of the New York-based Luxury Institute.
“OK, let the market go down – maybe if I had a family office, the check sent in a given month would be $80,000 instead of $100,000,” said Pedraza, who analyzes the premium goods and services industry. But many families don’t blink, he said. “There’s still a lot of wealth there.”
And the rich have more time to spend, as they now live about ten years longer than their low-income counterparts, thanks to better health care, diet, nutrition and rest. Pedraza believes that the notion of rich people as workaholics is a myth. For him, he says, “it’s a sprint not a marathon. Maybe he works hard to close a deal, then takes a long vacation. He estimates the UHNWs he interviewed regularly work about six hours a day, “so it’s less stressful.”
Not only are the rich living longer, there are also more of them than ever before, as the asset class continues to grow in developing countries. And after half a century of turbocharged growth, there is also more intragenerational wealth, notes Bain partner Claudia D’Arpizio. “You’ve now got five generations” of luxury consumers who buy brands like Vuitton, Hermès or Chanel, who have actually come of age.
It’s brands like this that have been doing the best lately. They have managed this by remaining very upscale rather than trying to appeal to the larger but more economically vulnerable market segment, the lower 80 percent of consumers. “They’ve targeted mindsets, rather than demographics,” Pedraza said. And his thought pattern was “‘Grandma (or Grandma), can I borrow Kelly’s bag?'”
That found another reason behind the luxury boom – the growth of the secondary market. High-end vintage purveyors are everywhere in the city where clients live and where they vacation. But there are also mass-market online retailers, such as The RealReal, that provide a place for working professionals to resell second-hand items from clothing or jewelry.
One of the most interesting differences between the post-Covid luxury boom and the post-2008 market is that, at this time, there seems to be no concern about conspicuous consumption. Perhaps this is a hangover from the “good greed” of the Trump era. Or they may reflect a different policy response to the crisis. After the global financial crisis, the government bailed out the company. After the pandemic, American consumers got a $2tn stimulus. He had clearly thrown it.
Will this last? I suspect that as inflation (which also expands the luxury market in 2022 by increasing prices) starts to bite, you will see below 80 percent of luxury consumers fall off. They may be willing to buy a Chanel bracelet or Hermès scarf once a year, but they also have debt, which is getting more and more expensive.
As for the world’s richest people, money – and lifestyle – really represents the new Gilded Age. I can’t help but wonder when, and how, it will all end.
rana.foroohar@ft.com