a4 years later arrange Tiffany & Co.American luxury jeweler reopened its flagship store on New York’s Fifth Avenue to the public on April 28. At first glance, the grand unveiling seems decidedly badly timed. Hours earlier, the Bureau of Economic Analysis had reported that US nominal consumer spending barely grew in March. high inflation and a slowing job market.
But the flock of wealthy New Yorkers who lined up on opening day to enter the store, which Tiffany casually renamed “The Landmark,” alludes to a more nuanced story. As in the past, times of recession have relegated moderate means consumers to budget-friendly stores and products, boosting the performance of those businesses. , business catering to wealthy people is doing surprisingly well. This poses a thorny problem for companies that offer their customers neither frugality nor luxury, but something in between.
It’s been a rollercoaster three years for American consumers and consumer-facing companies. The covid-19 pandemic in early 2020 led to a sharp decline in spending, followed by a life of luxury (see Figure 1). Even low-income families joined in the fuss as companies raced to rehire waiters, clerks and others.
Then, about 12 months ago, consumers began to tighten their belts, albeit with significant fluctuations across income distributions, due to a spike in inflation. The sharp rise in food and fuel prices triggered by Russia’s invasion of Ukraine, combined with soaring rents, has hit low-income households particularly hard given the high share of spending on basic necessities. gave Through 2022, household inflation in the lowest income quintile will be one-fifth higher than that in the highest income quintile, according to bank Goldman Sachs. offset (see Figure 2).
Annual consumer price inflation in the US is starting to ease, falling to 5.0% in March from an average of 6.5% last year, but rising price levels are weighing heavily on the less wealthy, says Gregory Daco. said. stingray,consultant. Additional household savings accumulated during the pandemic have fallen from a peak of nearly $2.5 trillion in mid-2021 to about $1.5 trillion, now mostly in high-income households, according to Goldman Sachs’ Joseph Briggs. owned by the household. Wallets, which sit at the top of the income distribution, have been bloated by asset price spikes in recent years, said Paul Lejuez of another bank, Citigroup. Although the market has fallen from its frothy peak, S.&P. The 500 Index of large companies is up 26% compared to January 2020. Home prices are up 38% for him.
This heterogeneity in consumer economic health has had two effects. First, companies saving wallets at the price end won new customers. While the poorest households are cutting back on all non-essential spending, middle-end households (using larger shopping carts) are shifting to cheaper stores and brands. Already one of his banks, Morgan Stanley, said Sarah Wolfe.
Analysts said sales at discount department store Burlington were up 13.2% year-over-year in the first quarter of this year, while middle-class heavyweight Macy’s was down 4.2%. walmart growthFrugal-favorite blockbuster retailers are expected to post a hefty 4.9% in the US last quarter, while two mid-range supermarkets Albertsons and Kroger posted just 2.5% and 1.3%. is predicted. Each. A similar pattern can be seen with retailers. Walmart’s own brands are stealing sales from brands like Procter & Gamble and Unilever, which have raised prices to protect profits.
Consumers are looking for bargains beyond supermarkets and department stores. On April 25, cheap-calorie purveyor McDonald’s announced a better-than-expected first-quarter U.S. sales growth of 12.6% year-over-year. April 20th IKEAis a Swedish manufacturer of affordable furniture and home goods that has announced it is investing $2.2 billion to expand its presence in the United States. This was days before apparently middle-class rival Bed Bath & Beyond declared bankruptcy.
A second consequence of uneven consumer health is that price-point wallet-emptying businesses continue to thrive as wealthy shoppers continue to splurge on the finer things in life. . According to market research firm Euromonitor, the U.S. luxury goods market grew by a whopping 8.7% last year, well above inflation (see Figure 3). April 12 LVMH, the world’s largest luxury conglomerate and owner of Tiffany & Co. Hermès, a maker of eye-poppingly expensive handbags, didn’t slow down sales in the US in the first quarter. Patterns go far beyond designer wear. Data from Kerry Bluebook, another market research firm, show that sales of luxury cars have fallen for the second year in a row, hitting 19.6% of the overall market in January.
Since the financial crisis, the resilience of the luxury business has been underpinned by a shift in focus from the mere wealthy to the active wealthy, said Claudia D’Alpizio of consulting firm Bain. The penthouse floors of ‘The Landmark’ are dedicated to such ultra-high net worth shoppers. Aspiring buyers may jump for Gucci sneakers when the economy is good, but those at the top of the income distribution are reliable patrons even when the economy looks volatile. This has made luxury goods less of a cyclical business than it once was.
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As consumer spending shifts to price extremes, some businesses have already started repositioning. One strategy is to strengthen the high price range. On April 3, beauty giant L’Oreal, whose brands range from affordable Garnier to luxury brand Lancôme, announced it would acquire Aesop, which makes $40 hand soaps, for $2.5 billion.
Other companies are reducing their exposure to the precarious middle class. On April 14, Walmart announced it would sell mid-range menswear brand Bonobos for just $75 million.
A third strategy is to invest in budget-conscious products. Video streamers from Netflix to Disney have launched ad-supported tiers to weed out customers hesitant about rising subscription prices.
Investors should take note. Conventional market wisdom dictates that businesses should avoid “discretionary” spending categories (cars, clothing, and other non-essentials) in favor of “essentials” (essentials such as groceries) during tough economic times. is instructing. The new logic of consumption suggests that even when the economy worsens, hawkers of the most essential goods can still hope to do well. But so are very discretionary sellers. ■
https://www.economist.com/business/2023/05/02/the-business-trend-that-unites-walmart-and-tiffany-and-co Business Trends Bringing Walmart and Tiffany Together