Gold News

Price Savvy: The New Chic?

How the luxury goods market hit the hard reality of falling home prices...

A LOT CAN HAPPEN in nine quarters, a mere 27 months, writes Rob Peebles of Prudent Bear.

   A housing boom can turn into a housing bust. A law and order governor can get caught with his scruples missing. And buyers of luxury items can decide it's time to do time at Costco.

   In nine quarters the "Luxury Consumption Index" fell from an all-time high to an all-time low. As of the fourth quarter of 2005, the index stood at 104.8. But by Q1 of this year, it came in at a measly 54.4.

   The index doesn't measure actual luxury purchases, such as $2,000 handbags that are almost guaranteed to be the real thing. No, the index measures how many goods luxury buyers have on their wish lists.

   And the lists are shorter than they used to be.

   A whopping 41% of those surveyed planned to spend less over the next 12 months on "luxury". A mere 13% of respondents – primarily lobbyists looking toward the congressional elections – planned to spend more. For the record, these buyers of luxury goods had an average income of $173,000 and an average age of 45.9, according to Unity Marketing.

   Put in more tangible terms, April saw same-store sales for luxury retailer Nordstrom drop 3.8% despite an additional shopping day. May's same-store sales jumped 11%, but June is expected to plunge 22%.

   So despite its high-end image, Nordstrom is taking a page from Stein Mart's playbook. In fact, LA Times reporter Sandra Jones notes that Nordstrom, Saks and Neiman's all are cutting prices and engaging in embarrassingly promotional behavior.

   How can this be? Aren't the rich recession proof?

   Well, while there may be more millionaires next door, lots of the millionaires' neighbors have been buying on credit. In fact, the creator of the Luxury Consumption Index – "luxury expert" Pamela Danziger – claims that there are "...more households in the luxury markets today than there used to be."

   But as Nordstrom now knows, more people wanting to buy luxury items is not the same as more rich people. And not by coincidence, the dollar amount of home equity loans granted of late has plunged like the price of women's apparel at Neiman's (a $200 gift card toward one regular-priced item of $500).

   Retail experts are a notoriously polite bunch. Rather than say that millions of Americans have been buying fancy stuff on credit and are now in a tight spot, they declare that today's consumers are more educated.

   So now, because they want to, Americans are just as prone to buy a designer label at Target as Saks. Savvy is the new chic.

   As broken down by Sandra Jones, the luxury market grew around 10% for several years running. But luxury spending rose just 2.8% in April '08, well below the 3.2% gain registered by total retail sales which includes the rest of us. Not only that, Neiman's isn't the only store struggling with prices.

   Prices at luxury retailers were flat in Q1 compared to a 7% increase as recently as 2006. And so Jones quotes an official of a New York consulting firm who studies consumer behavior, who says that for the first time in the study's 15 years, price is the primary driver of purchase decisions.

   How unfashionably practical.

Rob Peebles CFA was formerly managing editor of the excellent Prudent Bear website published by David W.Tice & Associates LLC.

See the full archive of Rob Peebles articles.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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