Luxury Institute News

October 17, 2011

China Leads World in Luxury Spending

By Anthony DeMarco
October 14, 2011

Affluent consumers in the U.S. and much of the world are pulling back on their spending and attitude toward luxury. However, in China, affluent consumers are choosing luxury in every aspect of the lives, according to a seven-country survey of households earning at least $150,000.

About 57 percent of wealthy Chinese shoppers say that the economic environment has prompted them to spend more on luxury in the past year, and 50 percent plan to boost spending in the next 12 months, according to the survey by the Luxury Institute, a New York-based consulting firm. Restraint is more evident in the U.S., where 10 percent of the wealthy stepped up luxury spending in the past year and 6 percent plan to spend more in the next 12 months. U.S. consumers are twice as likely as those in China (32% vs. 16%) to have trimmed luxury spending last year.

Meanwhile, in Europe the currency crisis did not stop 14 percent of wealthy shoppers in France and 17 percent of those in Italy from boosting luxury spending this year, according to the survey, which represents the top 10 percent in household income. However, 38 percent of high-income shoppers in both countries plan to cut back in the coming year.

In Japan, the March earthquake and tsunami dampened enthusiasm for luxury shopping, with 7 percent of wealthy Japanese consumers reporting higher levels of spending and 34 percent cutting back.

The most widespread retrenchment comes in the U.K., where 38 percent of wealthy shoppers have pared back luxury spending, and 41 percent plan reductions in coming months. Germany shows more stability compared to other rich nations: Only 17 percent of wealthy German consumers say that they are spending less on luxury now and 29 percent plan to trim luxuries in the coming year.

Across all seven markets, luxury travel is the category in which most wealthy consumers anticipate stepping up spending, with China far and away showing the strongest appetite, according to the survey.

In China, 58 percent of the wealthy plan to spend more on leisure travel, followed by 28 percent in Italy and 22 percent in Germany who say the same. A total of 16 percent of wealthy consumers in the U.K., and 18 percent in the U.S., Japan, France and Italy, plan to spend more on travel.

Spending plans across the board in each of the 26 luxury categories were substantially higher in China than in Europe and the U.S., with some of the biggest disparities showing in apparel, watches, jewelry and gifts where Chinese consumers were six to seven times more likely to boost spending, according to the survey. Also strong in China are luxury auto sales, with 43 percent of the wealthy planning to spend more on cars, compared to 11 percent in the U.S., U.K. and Japan.

Attitudes towards luxury are far more positive in China than they are in other rich nations, with 78 percent of those surveyed saying that luxury goods and services are more important in today’s economy. The reverse is true in the U.S. where 80 percent of wealthy shoppers say that luxury has become less important.

More than 75 percent of Chinese say that luxury expenditures are prudent purchases, while 78 percent of wealthy consumers in the U.S., U.K., and Germany find them to be an extravagance. Similarly, 78 percent of China’s wealthy shoppers say that luxury goods and services are an important part of their lifestyle in today’s economy, compared to 25 percent in U.S. and Germany and 20 percent in France who agree that luxury remains central in their lives.

Wealthy Chinese consumers are also highly inclined to place a premium on exclusivity and quality, and discounting turns them off. More than half of wealthy Chinese and 49 percent of Japanese say that brands that discount their merchandise are not truly luxury brands. In the U.S. and Germany, one-third of wealthy consumers share the same dim view of discounting, as do 40 percent of wealthy shoppers in the U.K, Italy and France. Despite the dour attitude towards discounting, 56 percent of wealthy Chinese say that discounting has increased their overall spending on luxury and 50 percent plan to spend more on discounted luxury items in the coming months.


October 13, 2011


By Hedda Schupak
The Centurion
October 12, 2011

New York, NY—Despite burgeoning sales for 2011, most luxury brands have an appallingly low customer retention rate, losing between 80% and 90% of their customers in any given year.

No, that’s not a typographical error. Most luxury brands are deficient in retaining even half of their top customers, says Milton Pedraza, CEO of the Luxury Institute, a global luxury consulting and research firm. These figures are the central focus of the Luxury Institute’s most recent white paper, Wealth and Luxury Trends 2012 and Beyond: Raising Customer Loyalty in the Midst of an Uncertain World. (The Luxury Institute data is aggregated from all its clients; it doesn’t release individual company figures.)

“Nobody likes to publish those numbers because they’re not pretty,” Pedraza said in an interview with The Centurion this week. “But 80/20 doesn’t have to be the rule.”

Contrast those grim metrics to non-luxury e-tailer Zappos’ customer retention rate of 75% (the company does release figures) and it’s clear there is much opportunity for luxury brands that create customer-centric cultures, both in-store and online.

Luxury brands really fall down when it comes to customer relationship management (CRM), an area one would most expect them to shine, says Pedraza. Very few have a truly customer-centric culture, very few do proper clienteling, and many have surprisingly poor service for what’s supposed to be a special experience.

The good news is that customer retention figures for multi-brand luxury retailers—like jewelers—typically are a good bit higher than for single-brand shops. And the other good news is that most luxury brands and retailers already have the tools for increasing customer retention; all they need to do is use them.

Creating a customer-centric culture starts at the top, and assuming staff compensation is competitive, comes from three things: being expert at what you do, earning the trust of customers, and having a pleasant personality. Luckily, luxury jewelers excel in these areas, but Pedraza says it’s essential to ensure your employee compensation isn’t counterproductively holding you back.

“If you pay a low salary and expect sales associates to ‘eat what they kill’ as many luxury retailers call it, your customers are going to be attacked by sharks.” Better, he says, is to set commissions based on group sales and include customer relationship building goals as part of the total package.

Get social—or don’t. One of the biggest misconceptions about social media is that it’s the greatest marketing development since ads for sliced white bread. Yes, luxury consumers are online and on Facebook. And, yes, many luxury brands have millions of fans that “like” them on Facebook. But despite the fact that Facebook regularly tries new ways to influence purchases online, the Luxury Institute says there’s no evidence that having millions of fans has helped luxury brands acquire new customers or build business significantly.

But CRM metrics have shown that customers who have a human relationship with a brand ambassador (be it owner or sales associate) typically buy double from that brand and stay loyal for a longer period of time. The long-term success of the brand depends on the individuals who interact physically with the customers. This means both minimizing staff turnover, and doing a lot of old-fashioned legwork: knowing the customer’s likes and dislikes, calling when something special comes in, sending handwritten notes, knowing their special dates and life milestones, and so forth.

“I don’t mean that social media isn’t good. Does it build awareness? Yes, and that’s good. Does it build relationships? It might, but clienteling is better,” Pedraza told The Centurion. Social media is appropriate for most luxury brands—but not all. For an upscale community jeweler who uses it to have an ongoing conversation with customers, it’s wonderful, but for a super-high luxury brand whose cachet is extreme exclusivity, customers don’t want it to be where “everyone” has access to it.

Ironically, one brand that still uses mainstream advertising—TV, print, and even billboards—more than social media is Apple. And while its legendary in-store retail experience is central to Apple’s image and success, Pedraza thinks the brand could do even better if it would follow up after sales, an area where it’s surprisingly lacking. He says he’s never been contacted by an Apple associate following any of his purchases. (Editor’s note: We own two Apple computers, two iPhones, and countless iPods, but we haven’t ever been called for follow-up, either.)

Luxury predictions for 2012. While 2011 was the year luxury came back—indeed, a banner year that topped even 2007 sales figures for many brands—next year growth is likely to slow down, especially on a global scale, says Pedraza. He predicts there will be modest single-digit growth for luxury in the United States—in the area of about 5%—but that growth may be driven by price increases, not volume.

“The top 20% of consumers are doing well. In the intermediate term, we will see the affluent continue to buy,” he said, but cautions that the continued bifurcation of the U.S. consumer marketplace is not healthy for the long term. Furthermore, while the affluent are somewhat insulated from economic ups and downs, they’re not immune.

“For long-term [economic] success we need a strong middle class,” he told The Centurion.

Much of the pre-recession growth in the luxury market came from just such middle class spenders, sparking the proliferation of aspirational, “mass luxury” items to target a wider audience. Then, during the recession, luxury retailers, including many jewelers, found that lower-priced items were the saving grace that kept the doors open.

But with the big spenders coming back, is it now time to reassess? Have too many luxury retailers abandoned the market that made them in the first place? Or is it too soon to cut the affordable-product lifeline?

“Those who serve the ultra-wealthy can have extremely high priced product, but it’s not scalable,” says Pedraza.

“The brands that are most resilient are the ones that have diversified. Tiffany sells both a $250 bracelet charm and engagement rings starting over $10,000,” he says. And they do it very well, he emphasizes. Louis Vuitton is another brand he says has been able to successfully serve mass without losing class.

Achieving the right mass-to-class balance is both an art and a science—and a very fine line that’s often invisible until you’ve crossed it, warns Pedraza. Too much logo, too much bling, and you get too many of the customers that really aren’t your market while alienating those that are.

Even if the price point stays high, straying too far from a brand’s point of view isn’t healthy either, as evidenced by this recent Harper’s Bazaar article detailing the Italian fashion house Bottega Veneta. The brand, famous in the 1970s for its costly but low-key woven leather bags and advertising “when your own initials are enough,” had become a caricature of itself. From the epitome of refined, restrained elegance, by the late 1990s it was sporting hot-pink punk and leopard spots. In 2001, its new creative director Tomas Maier stripped away the wretched excess and restored the brand’s core aesthetic of restraint, till once again it became a brand sought by the world’s tastemakers.

How to reach down successfully?

“The key is in how you define your entry level,” says Pedraza. “You don’t want to go so far down that you make your customers uncomfortable, but having entry level product was a Godsend for many stores [in the recession].”

But diversification is a better strategy than discounting. The fire-sale prices offered by panicked luxury retailers in 2008-2009 may have cleared out inventory, but they also retrained customers to expect a discount every time.

“It makes it very difficult to raise prices [afterward]”, Pedraza told The Centurion.

October 10, 2011

Stocks Tumble; Wealthy Keep Shopping

By Cotten Timberlake
October 7, 2011

When stock markets tumble, wealthy U.S. shoppers typically cut back their visits to such luxury emporiums as Saks Inc. (SKS) and Nordstrom Inc. (JWN) Yet even as the markets have seesawed, they’ve kept right on spending.

Exhibit A: Saks and Nordstrom yesterday reported September sales that exceeded analysts’ estimates, while luxury retailers as a whole outpaced all other segments except gasoline-selling wholesale clubs.

Affluent Americans aged 24 to 49 who have a yen for high living and bling are helping drive luxury sales, says Unity Marketing, which conducts quarterly shopper surveys. One cohort, called the “X-Fluents” — for “extremely affluent” — are responsible for 23 percent of luxury sales in the U.S., up from 18 percent in 2007, the Stevens, Pennsylvania-based firm said in a Sept. 14 client presentation it provided to Bloomberg News.

“The U.S. marketplace is more concentrated among young people,” said Unity President Pam Danziger. “They are more predisposed to luxury indulgence and represent more promising targets to luxury brands.”

X-Fluents were out in force again last month, she said.

Another group that Unity has dubbed “Aspirers” are also spending more on luxury, according to Danziger. They favor “flash, bling and status” and now account for 18 percent of luxury sales compared with 16 percent in 2007, she said.

Wealth Effect

In the past, affluent shoppers’ willingness to buy baubles has been tied to the stock market because its performance affects the perception of their own wealth — the so-called wealth effect. Luxury was the hardest hit retail segment during the financial meltdown three years ago; sales in the U.S. plummeted 9.1 percent in 2009, according to theInternational Council of Shopping Centers.

This time is different. Though the Dow Jones Industrial Average swung by 4 percentage points daily for an unprecedented stretch in August and consumer confidence stagnated near a two- year low in September, luxury sales may outpace the overall industry this holiday season.

Sales at luxury stores open at least a year will climb 7.5 percent, faster than the 6.7 percent increase in November and December of 2010, predicts the ICSC. Other retail segments will see slower or unchanged sales growth, the New York-based trade group said.

Unity, which sells the results of its surveys to such retailers as Neiman Marcus Group Inc. and Tiffany & Co. (TIF), has been asking luxury shoppers questions since 2002.

Survey Questions

Respondents are asked to agree or disagree with such statements as: “Luxury is defined by the brand of the product, so if it isn’t a luxury brand it isn’t a luxury.” Or: “Once you experience luxury in your life, you never want to go back to the ordinary.”

The firm devised five personality groups based on income and spending patterns.

X-Fluents are the most highly indulgent, spending more, buying the most frequently and dedicated to maintaining a deluxe lifestyle. Aspirers like to buy and display brands.

“Butterflies” are on average are over 47, mostly female and enjoy luxury experiences such as travel. “Cocooners,” also over 47 on average, express their luxury identity by spending on their nests. “Temperate Pragmatists” — average age 45 — have a take-it-or-leave it attitude towardluxury goods and the lowest income of the five.

X-Fluent Incomes

X-Fluents laid out an average $253,960 on fashion accessories, cars, home furnishings, travel and dining last year, up almost a third from 2009. X-Fluents’ income averages $410,152 before taxes, and they are the youngest, or 42 on average, with a majority 40 or younger.

Some of the purchases they reported were paid for with financing and others by tapping net worth. The averages were pulled upward by the super-wealthy respondents.

The younger luxury consumers are, the more concerned they are with “bragging rights,” the Affluence Collaborative, a New York market research firm, wrote in a July research report.

Aspirers have an average age of 43.5 and income of $303,057, with a minimum of $100,000 to qualify, Unity says. They have not achieved the level of luxury to which they aspire and are the most materialistic, according to the firm.

After pulling back for the past two years, aspirational consumers have returned to the stores to sate their pent-up demand, says Milton Pedraza, chief executive officer of the Luxury Institute, a New York-based research firm.

Stock Options

Their wherewithal stems from job security, bonuses and stock options, Pedraza said. Many are clustered in financial services and Silicon Valley, removed from the economic challenges other Americans face.

“Right now people continue to want luxury,” Neiman Marcus Chairman Burton Tansky said in an interview.

The Dallas-based retailer has been actively courting younger, affluent customers, Wanda Gierhart, senior vice president, said in a Sept. 30 phone interview.

It is updating its contemporary fashion department — which sells such brands as Diane von Furstenberg and Alice + Olivia — to give it “a different edge” than the rest of the store, Gierhart said. Six months ago, Neiman Marcus for the first time started allowing sales associates in that department to wear denim to work.

The retailer shifted “a lot” of its advertising spending to digital ads this past year, so customers know they can shop at Neiman Marcus whenever and wherever they want to, Gierhart said. It has ramped up its social media efforts and modernized the aesthetics of its publications, she said.

‘Emerging Customer’

The “emerging customer” likes to mix fashions according to her own taste, Gierhart said, which differs from a more traditional head-to-toe look in European brands, she said.

A greater concentration of X-Fluents does not necessarily bode well for the industry long term, Danziger said.

Since the recession, many former luxury buyers have dropped out and once again view themselves as middle-class, Danziger said. While many of these had spent significantly less on luxury goods individually, they together had accounted for a lot of purchasing, she said.

“Where is the growth going to come from?” she asked.

October 5, 2011

Time to check out Saks, Tiffany?

The economy is slowing, and most consumers are cutting back — but it looks like the well-heeled have barely noticed. That means the stocks of luxury retailers may be in for lift.

By Michael Brush
MSN Money
October 4, 2011

…And I hear a similar tale from the Luxury Institute, based in New York, which conducts regular surveys of wealthy consumers, those with annual incomes of $150,000 or more and median net worth of $1.2 million. Surveys done since the market meltdown started this summer found that despite such weakness, significantly fewer wealthy consumers say they will cut back on luxury-goods spending, compared with the previous two years. “They are feeling a little bit of the pain, but it is not dramatic,” says Milton Pedraza, Luxury Institute’s CEO…

Click the link to read the entire article:

October 1, 2011

Does Your iPad Put A Spell On You?

By Quentin Fottrell
September 30, 2011

Apple’s iPad 2 ads have called the tablet “almost magical.” Now research suggests one of its best magic tricks is encouraging users to shop…

Click the link to read the entire article which includes a quote from Milton Pedraza, CEO of Luxury Institute: