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THE DIAMOND MARKET

WHILE INFLATIONARY CLIMATE WORRIES MASS RETAILERS,
WEALTHY CONSUMERS STILL SPENDING ON HIGH-END LUXURY

 

While concerns about the resurgent inflation rate are causing sleepless nights for many mass retailers, with the price of food and energy in up substantially from where they were last year, luxury brands seem to coping exceedingly well, and to a degree are disconnected from what is happening elsewhere in the market.

“None of us know what’s going to happen in the back half of the year with the consumer, but it appears that the luxury industry is quite robust and quite healthy,” said John Idol, the owner of Capri Holdings, which a set of elite fashion brands, including Versace, Michael Kors and Jimmy Choo, during an earnings call, as quoted by CNBC.

At Versace, quarterly revenue was up almost 30 percent to $275 million. Capri’s overall revenue increased by 15 percent to $1.36 billion during the same period.

It was not alone. Luxury car maker Ferrari reported record income of 1.29 billion euros during the second quarter, and airlines, such as Delta, noted good demand in the more expensive travel classes, like business class and premium economy.

RELYING ON THE TOP 20 PERCENT

In its article on the resilience of the luxury brands, CNBC suggested that the primary reason for the counterintuitive surge in luxury revenues is spending by high-net-worth individuals, who in many respects are untouched by the current situation.

The disposable income of wealthy consumers actually increased during the past several years, because less money was being spent on travel during the COVID crisis, stated Amrita Banta, managing director of Agility Research & Strategy, speaking to CNBC.

Banta said that there also is cultural shift, with high net worth consumers being less guilty today about spending in a slowdown. That, she said, is partly a reflection of people in developing countries, where wealth is growing.

According to Milton Pedraza, founder and CEO of Luxury Institute, a market research and business management firm, there is a spending slowdown among 80 percent of consumers who can be termed “nearly affluent,” but they only account for 30 percent of of sales.

The luxury brands, Pedraza told CNBC, rely mainly on the 20 percent of their customers who fall in to the ultra-wealthy and very wealthy categories, and they largely are inflation and recession-resistant, he said.

“The type of clients and the amount of sales they account for in true luxury brands makes them super resilient,” Pedraza stated. “Not immune, but super resilient.”

While sales increase of other products were driven at least partly by inflation, Mastercard noted that the higher value of jewelry sales in July “well outpaced sector-specific inflation.”

JEWELRY SALES STILL SURGING

The contribution of wealthier consumers may go some way to the explain the continuing buoyancy in U.S. jewelry sales, as reported by Mastercard SpendingPulse in August.

According to the organization, sales of jewelry were up 19 percent in July, when compared to the same month last year.

Spending was up generally in July, reported Mastercard, increasing by 11 percent from  July 2021 and 22 percent from July 2019, which was the year before the COVID pandemic. A portion of the climb could be attributed to inflation, but Mastercard said it also came because of promotional deals being offered by retails chains, so as to free up shelf space before the holiday season.

“As retailers grapple with excess inventory and supply-chain constraints, it’s likely that the promotional activity seen in July will continue to be an important strategy for retailers,” said Steve Sadove, a senior adviser for Mastercard.

While sales increase of other products were driven at least partly by inflation, Mastercard noted that the higher value of jewelry sales in July “well outpaced sector-specific inflation.” Only travel-related spending increased at a faster rate than jewelry.

Purchases of jewelry rose by 109 percent compared to the pre-COVID period in 2019.

“The latest retail trends place an emphasis on consumer choice and passion-driven spending — they’re hunting for deals, shopping across channels and ultimately still spending on experiences and goods that make them feel good,” Sadove stated.