Wealthy Go Frugal

About two weeks ago, Cotton Timberlake wrote an article on Bloomberg that detailed the changing consumer habits of the wealthy.  I certainly found it to be interesting, and decided to write about it so many days later. Read the full article for all the tasty information.

The Details

The $94 billion U.S. luxury market is starting to feel a slowdown. High earners are planning on spending less on gifts.

Coach Inc., an American luxury leather goods company, has noticed a sharp drop in mall traffic last month. Nordstrom Inc., a fashion specialty retailer, predicted that fourth-quarter sales might grow less than half the previous years’ 6.1 percent. Tiffany & Co, Saks Inc., and Neiman Marcus Group Inc. are also feeling the downturn.

Two reasons for this drop in demand

  1. Wealthy shoppers question whether the record gains in the stock market are sustainable.
  2. The wealthy are experiencing shrinking bonuses—especially those who work for Wall Street Banks. Goldman Sachs, for example, allocated 39 percent of revenue for compensation, down 3 percent a year earlier.

There is a group of earners called “Henrys” –High Earners Not Rich Yet. Henrys earn $100,000 to $249,999 a year. The “two percenters” earn incomes equal to or above $250,000.

Typically, the two-percenters would outspend the Henrys by a multiple of at least four. Now, they are spending only twice as much as Henrys.

My Penny

The article would go on to say that the luxury consumer has woken up. They realize now that items that are 10 times more expensive than another are not necessarily 10 times better. Really now? I do not believe that could be the reason. It does not say much for the wealthy if they have come to realize this time. I have always believed that the wealthy would buy expensive things mainly because they were expensive—it adds to their status. Why else would Oprah consider buying a $38,000 handbag? What was that bag made out of—the fur of a nearly-extinct animal? Does it shoot fireworks, or something?

It is similar to the obsession with buying purebred dogs. Are they really that much better? Now, of course, you would expect an item to be of higher value if you pay more money for it. Still, anyone should realize that there comes a point of diminishing returns.

Meanwhile, the U.S. is facing a weakening middle class. Families are going homeless because they cannot afford rent. This is by no means an attack on the rich. It is just a funny observation. Is this truly the extent of their problems in this woeful economy? That they will not be able to purchase those extravagant diamond-encrusted sunglasses? The article stated that wealthy women are mixing the most expensive designer goods with less-costly alternatives. An example they gave was a $400 dress while carrying a $2,800 handbag.

Indeed, the wealthy are feeling the heat so badly that now they are heading for resorts that look more and more like slums. Well, that is only a half-truth. Apparently, luxury tourism agencies are creating fake shanty towns, and the wealthy seem to flock to them. Here is a quote from Emoya Luxury Hotel and Spa:

“Now you can experience staying in a Shanty within the safe environment of a private game reserve. This is the only Shanty Town in the world equipped with under-floor heating and wireless internet access!”

Need I say more? The wealthy are doing just fine.

It is also of interest to note that global wealth grew 4.9 percent from last year to $241 trillion. The U.S. accounted for the lion’s share—a whopping 72 percent. The wealthiest 10 percent of the world’s population owned 86 percent of the total global wealth. Wait, what? I thought the wealthy were feeling the heat? Maybe not so much.

This was originally reported by Cotton Timberlake from Bloomberg