America Seen as Eldorado for Luxury Consumption
As counterintuitive as it might seem, luxury analysts see the United States as an emerging market — and one that’s likely to continue to lift the fortunes of Europe’s biggest players.
To be sure, recent rates of consumption have been staggering.
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According to Mastercard SpendingPulse, the luxury sector in the U.S. has been logging triple-digit gains since March, with July spending on luxury up 118 percent versus 2020, and up 54 percent versus 2019.
“Our base-case scenario for global luxury goods demand is benign, with probable further acceleration in Q3,” said Luca Solca, senior research analyst, global luxury goods, at Bernstein. “Consumer demand cycles don’t end abruptly. A demand wave like this could well last 12 or more months.”
And what a wave it has been.
In July, Kering said retail sales at its luxury houses soared by 263 percent year-on-year in the second quarter in North America, with brands led by Gucci gaining traction with all age groups. Likewise, LVMH Moët Hennessy Louis Vuitton saw Q2 sales in the U.S. more than double in the second quarter and 60 percent in the first half, almost equaling growth in Asia, excluding Japan, where revenues rose 70 percent during the first six months of the year.
According to observers, bulked-up savings, pent-up demand, stimulus checks and a robust economy all contributed to what some described as over-consumption of luxury goods in the U.S. in recent months.
“We’ve been very bullish on luxury goods,” said Oliver Chen, managing director and senior equity research analyst covering retail and luxury goods at Cowen. “There’s a certain degree of bifurcation in the market where luxury goods have been robust, and then consumers continue to look for value. Luxury is also doing a better job innovating with customers.
“The pandemic has given designers and creatives an opportunity to contemplate and innovate,” he added. “All the good momentum we’re seeing now should continue. Also, we might have the best back-to-school period we’ve ever seen in our lives – because everybody’s going back to school.”
According to Chen, luxury’s embrace of online selling, and casualization — along with a more inclusive, democratic and youthful posture —) are coalescing to drive the sector. “Luxury is on this journey of redefining itself, to modernize for new generations of shoppers.”
Erwan Rambourg, global head of consumer and retail research at HSBC, said the “K-shaped recovery described by the Biden campaign in 2020 has been a reality and consumers who were well off pre-COVID-19 are oftentimes even better off now and, as a consequence, have been spending on luxury for the first time or if not, indeed, spending more. We have seen some trading up and higher baskets.”
He noted that soaring equity markets, and the trend to “stay-cationing,” shifted spending toward goods over travel experiences and thereby supported consumption of personal luxury goods.
“As COVID-19 restrictions are lifted, consumers are eager to go back to life, and as they do, they spend money — both on experiences and products,” Solca agreed.
What’s more, “social media and KOLs have contributed to making consumers’ aspirations to luxury goods universal: Everyone wants to stand out and be at his or her best on Instagram,” Solca continued, also noting that “luxury brands have been able to embrace new product categories — like sneakers and T-shirts — that resonate with younger consumers.”
Mastercard SpendingPulse cited high demand recently for evening attire and formal wear in America given the surge of weddings, parties and reunions as pandemic restrictions ease.
“The U.S. consumer has come back… and luxury is at the top of the list,” said Steve Sadove, senior adviser for Mastercard and former chief executive officer and chairman of Saks Inc. “It’s the strongest sector out there.”
Sadove cited a high correlation between stock-market performance and spending by high-end consumers, but also pent-up demand. “I’ve been stuck inside and I want to express myself,” is how he described the general sentiment.
According to Mastercard data for July, spending on apparel is up 10 percent pre-pandemic, department stores are up 7 percent, and the brick-and-mortar channel 15 percent.
Recalling the shame around luxury spending after the financial crisis of 2007-2008, when some sheepish shoppers asked for brown-paper bags at high-end stores, Sadove remarked: “I think we’re in the reverse situation now.”
According to the most recent Amex Trendex survey, one quarter of consumers said they were already spending on luxury products at pre-pandemic levels; one-third said they now enjoy dressing up for social events and gatherings more than they did prior to the pandemic, and nearly half (48 percent) said they plan on putting more effort into their appearance.
“We’ve seen great demand for our premium products. In fact, in Q2 new card member acquisition was at a record high and retention rates remain above pre-pandemic levels,” said Rafael Mason, senior vice president, global premium products at American Express.
Pointing to an appetite for unique experiences, 80 percent of Millennials said they were interested in shopping at pop-up stores with novelty or limited-edition merchandise over standard retail, Amex Trendex data shows.
HSBC’s Rambourg certainly sees a deeper shift in the consumer mindset under way.
“If luxury demand were just about wealth, the U.S. would have already been much bigger, so recent financial incentives — strong equity markets, staycations, stimulus packages — may have had an influence, but the real shift is more psychological than financial there,” he said in an interview. “From a psychological perspective, the so-called guilt factor that was prevalent after 9/11 and again after the global financial crisis seems to have evaporated. The U.S. luxury market is still held back by a value-for-money culture, but a younger, more diverse, wealthy consumer is now a lot more willing to spend on high-end labels.”
In his view, as it becomes more acceptable in America to splash out on luxury goods and designer labels, the sector is bound to recruit more consumers, some of whom “could become loyal and influence others to enter the luxury pyramid. There is a generational shift happening with younger consumers more open-minded toward luxury, and a healthy boost provided by African-American, Hispanic, and Asian-American communities who tend to spend a disproportionate amount of income of premium goods and influence the rest of the market.”
Is there anything that could burst the buoyant mood?
Observers warn that further outbreaks of COVID-19 and the hyper-contagious Delta variant could impact supply chains and inventories, as well as diminish demand.
“U.S. discretionary demand and consumer feel-good is dependent on the health of the stock market,” Solca added. “So far, so good. Higher interest rates too soon, could dampen the recovery.”
On the plus side, Mastercard SpendingPulse noted that further stimulus payments bode well for the holiday period.
“Right now, we’re in a Goldilocks retail environment: the consumer is very healthy, they still have the cash, the markets are strong, back to school is trending really well. And you have the child tax credit,” Sadove said. “I’m not giving a forecast for Mastercard, but my own expectation would be that we’re going to see a very strong consumer demand through the holiday season, and very good full-price selling.”
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