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Who’s Got The Money

We know where the richest people live and how much they are worth. But are they buying luxury products?

By Karolyn Schuster

   The number of high net worth individuals (HNWIs) globally is increasing, but their investable fortunes are slipping a bit in value and their geographic home bases are shifting as well. That’s the conclusion of the “World Wealth Report 2012,” as prepared by Capgemini and RBC Wealth Management.
   The report defines HNWIs as those who have $1 million or more at their disposal for investing and further separates them into three wealth bands of $1 million to $5 million,
$5 million to $30 million and those with $30 million or more. Issued annually, the report
is a well-respected, widely reported gauge of the performance of world economies, as measured by the personal wealth amassed by individual citizens in different countries
and regions.


The highlights of the 2012 report are:
  • After witnessing robust growth of 8.3 percent in 2010 and 17.1 percent in 2009, the global HNWI population grew only marginally by .8 percent in 2011 to 11 million individuals. Most of this growth was in the lowest wealth band, which grew by
    1.1 percent and represents 90 percent of the global HNWI population.
  • HNWIs’ aggregate investable wealth declined by 1.7 percent to $42 trillion, the second drop in four years, after gains of 9.7 percent and 18.9 percent in 2010 and 2009, respectively. 
  • The number of HNWIs in the Asia-Pacific region rose 1.6 percent to 3.37 million individuals in 2011, surpassing North America for the first time. Despite the fact
    that Asia-Pacific now has the greatest number 
    of millionaires, North America’s millionaires hold more investable wealth, with the largest regional share of
    $11.4 trillion. 
   In explaining the slight decline in overall global HNWI wealth, the report said the euro zone debt crisis was clearly a factor because it increased market volatility and slowed economic growth across many regions. “It was the euro zone debt crisis — or, rather, the seeming lack of consensus on how to resolve that crisis — that proved to be the single most unsettling force for the global economy,” said the report.
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Luxury Spending Worldwide
The global luxury market generally is estimated at approximately $250 billion. Global Industry Analysts, Inc. projects it will reach $307 billion by 2015. The company noted that luxury goods are “extremely cyclical,” with a high correlation to a country’s gross domestic product (GDP), declining rapidly when GDP declines and soaring quicker and higher when it rises.
   Bain & Company’s annual “Luxury Goods Worldwide Market Study,” published in October 2012, reported the market grew by 10 percent globally and by 13 percent in the Americas in 2012. The 10 percent overall growth represents the third straight year following the “great recession” in which luxury goods sales increased by double digits. Asia-Pacific sales, driven by China, were projected to have grown by 18 percent in 2012. Jewelry revenues for 2012 are estimated at $14 billion, a 13 percent increase year on year, and watches, $45 billion, a 14 percent increase, according to the Bain study.
   Bain further projected that the luxury goods market will grow in real terms by 4 percent to 6 percent annually between 2013 and 2015, pushing the market to total revenues of approximately $300 billion to $320 billion by the middle of the decade, in line with the Global Industry Analysts forecasts.
   Key ingredients in the luxury market gains globally, according to Bain, are the following:
  • “Chinese consumers have transformed the luxury market, with growth in domestic sales and continued voracious spending as tourists,” the report said. “Greater China has bypassed Japan as the sector’s second-largest market, behind the U.S. Chinese consumers now make half of the luxury purchases in all of Asia and nearly one-third of those in Europe. Globally, one in four purchases of personal luxury goods is by a Chinese consumer.” 
  • The report cited growth at two ends of the spectrum as contributing to luxury sales totals: ecommerce, which is growing at 25 percent annually, and sales at discount outlets, which are growing by 30 percent. Bain said these two segments of the luxury market account for approximately $25 billion.
  • A demographic and demand shift in the market, according to Bain, “as young consumers seek significantly different experiences from luxury consumption,
    seeking uniqueness over heritage, 24/7 access over exclusivity and entertainment over mere shopping.” 

The Big Picture
   In a year of continued global economic turmoil that roiled currencies, GDP numbers, equity markets, employment statistics, political stability and debt levels, it is no surprise that the World Wealth Report found modest improvement and widespread declines in various economic indicators for a wide range of countries. Here are some specifics.

China: Land of Potential
   China is the undisputed darling of luxury analysts worldwide. The country has everything: strong domestic economic growth that leaves every other country in its dust, an exploding middle-class population salivating to become luxury consumers and a deeply ingrained cultural passion for luxury goods.
   To Chinese consumers, luxury goods represent a great many things and they flaunt
these items as a symbol of their economic success, their sense of style and their impeccable taste. Consider, for a moment, a recent study cited by China Daily newspaper that found Chinese consumers spend about 40 percent of their yearly income on luxury goods, while those in the West spend an average of only 4 percent. This is a country where a twentysomething office worker earning $1,500 a month saves up for four months to buy herself a Gucci handbag.

   Jeff Lotman, founder and chief executive officer (CEO) of Global Icons, a brand licensing agency, said his licensees sell “carbon fiber bicycles priced at over $5,000 to young male consumers who don’t even ride them. They hang them on their walls. In what other country would you find young people doing that?” Lotman said the Chinese luxury market is very male focused “but the female entrepreneur is becoming more significant.” Both groups, he said, buy luxury products “because they show the world you’ve made it and showing the world you’ve made it, in turn, makes you feel good.”
   Noting the status cachet of branded items, Lotman said “the bigger the logos, the better. In other markets, it might seem ostentatious — almost in your face to us. But in China, they want the product covered in logos.”

GDP Growth
   “China is at an historic turning point,” said a McKinsey & Company report entitled “Meet the 2020 Chinese Consumer.” The company projected that the country’s GDP will continue to grow at an annual rate of 7.9 percent over the next ten years, compared to
2.8 per-cent growth in the U.S. and 1.7 percent in Germany.

   “The difference is that consumption rather than investment will be the driving force of that growth,” the company said, noting the variety of government initiatives undertaken specifically to promote private consumption as a vehicle for more sustainable growth for the country. For luxury goods, that means more affordable products available to more consumers with higher disposable incomes.
   “We see signs of a new wave of luxury collecting and connoisseurship, which…is particularly evident among the wealthy in tier two and even tier three cities,” KPMG reported in a 2011 study entitled “Luxury Experiences in China.” The company said
its findings confirmed that “China is continuing its march toward becoming the largest luxury market in the world, buoyed by extremely favorable attitudes toward brands, particularly those of Western origin, increasing levels of wealth …and a continued confidence in future economic prospects, which has been somewhat lacking in many Western markets since 2008.”

They’re Rich and They’re Young
   Two other factors are critical in assessing the luxury market in China. First, it is
churning out millionaires. The Huron Report, which specializes in tracking the country’s millionaires, reported that China has 2.7 million millionaires, as measured in U.S. dollars, and the number of multimillionaires exceeded 1 million as of the end of 2011. That wealthy population may have seen their wealth decline in the first six months of 2012, as the country’s double-digit growth slowed to single digits — a result of the country trying to
rein in inflation — but they are still millionaires.

   The second factor that bodes well for the future of the luxury market is the age of luxury consumers, which has dropped from 35 in 2007 to 25 in 2010. Even on modest incomes, said China Daily, they can afford luxury products because many receive family support or have subsidized housing or other benefits after they start working.

U.S. Still a Formidable Force
   “2012 is a magical year in the life of America’s successful families,” reported the
“2012 Survey of Affluence and Wealth in America” prepared by American Express Publishing and the Harrison Group, a YouGov market research and strategy consulting firm headquartered in Waterbury, Connecticut. Introducing the survey, Cara David of American Express and Dr. Jim Taylor of Harrison Group wrote: “First, their balance sheet has been restored; nearly $7 trillion in savings liquidity rests safely in their bank accounts. Second, they perceive the beginning of the end of the recession in terms of jobs, if not in optimism. Third, they’re looking at purchasing categories that were forestalled by the recession.” The survey polled 2,897 households with discretionary income of $100,000 plus, considered
the wealthiest 10 percent and representing 12 million households.

   Released in October 2012, the seventh annual survey of the affluent in America found that this top 10 percent spent the recession paying off debt, including home mortgages, and stockpiling cash. “Those asset-based families that lost 37 percent of the value of those assets during the recession have now fully recovered,” explained Taylor. “Those families that held tight during the downturn have been rewarded — they have had their assets fully restored. And they are stockpiling cash at a rate never before seen in our lifetimes.” In fact, Taylor said that 61 percent of the top 1 percent of the demographic surveyed, those with annual household income in excess of $450,000, are squirreling away 25 percent or more of their income. He described those easily accessible “cash barrel portfolios” containing almost
$7 trillion as “locked and loaded” and just waiting to be spent.

   Taylor said the fact that a stash of $626 billion (see chart above) is being held in checking accounts and not investment accounts “suggests that people are getting ready to spend it.” He noted that the cash is getting to a level where these top 1 percent are going to begin considering what luxuries they might want to spend it on and start looking at second homes and luxury automobiles.

Confidence a Concern
   The dramatic disconnect for the population represented in the American Express/Harrison survey occurred when the respondents compared their evaluations of their own financial positions and sense of personal well-being with their opinions about the world beyond themselves. “Public issues fuel anger and private issues fuel confidence,” explained Taylor. Fifty percent or more of the top 10 percent are “angry” about the high cost of health care, the quality of public education, the national debt and high unemployment.
   While 51 percent said they were “extremely” or “very” optimistic about their own future and 45 percent were similarly optimistic about their children’s future, only 19 percent reported being extremely/very optimistic about America’s future and only 15 percent expressed confidence about the world’s future. As recently as 2005, 93 percent of that same group of high-income survey respondents were extremely/very optimistic about their own and their children’s futures and 60 percent had positive feelings about the country’s future. Of the top 10 percent, 65 percent responded that they felt the country is generally headed in the wrong direction.
   Consumer confidence, along with GDP, has long been a critical component in the public’s willingness to spend, especially in high-ticket luxury categories. This reported lack of confidence is not promising for the short-term future of luxury in the U.S. Still, there are signs that confidence just might be returning. In early November 2012, the Thomson Reuters/ University of Michigan index of consumer sentiment and consumer expectations rose to its highest level in more than five years, even higher than economists’ expectations.

India: A Young, Untapped Market
   The luxury market in India is relatively young — really only about five years old —
and represents only 1 percent of the global luxury market, but the potential for growth is staggering. India luxury is projected to grow threefold by 2015 to reach $14.72 billion, according to a recent report by AT Kearney India.

   In India, jewelry is extremely popular and reigns as the preferred show of wealth for women versus automobiles for men. In 2010, jewelry had the highest annual growth
rate — 30 percent — and represented 36 percent of India’s $5.7 billion luxury market. Automobiles, while they represent a larger $2.8 billion share of this market, were growing at a slower rate of 25 percent.

   The traditionally wealthy in India have always loved — and bought —luxury products, they are highly aware of luxury brands and both young and older members of this demographic spend significantly on luxury goods. But there are virtually untapped market segments within the country that are likely to fuel growth in the future, including entrepreneurs and business owners and people living outside the major cities.
   Despite the fact that India’s HNWI population had a significant decline of 18 percent in 2011 — owing largely to short-term value declines in currency and equity markets —
it didn’t affect luxury market sales, which have continued to grow by double digits.

   “Growth in sales of luxury goods has been around 20 percent on average in recent years,” Neelesh Hundekari, of AT Keanery, said in a recent interview with Rapaport Magazine. “Significant latent demand still exists. There is a supply-driven awareness of luxury products with more stores and new brands, and international travel has exposed more people to luxury products and luxury brands.”
   Hundekari estimated the current luxury jewelry market at around $1 billion and said it is growing at 30 percent annually. “Status and showing off wealth and status are the biggest motivators,” he said. “Weddings are a big occasion for showing wealth in India and they are financed from either savings or debt so are relatively immune to economic ups
and downs.”

   Branded products are very important to the India market. “Product brands and retail brands are driving higher margins for retailers,” said Hundekari. “Brands are growing faster and branded sales are more profitable than traditional unbranded jewelry.”

The Losers
   The highest wealth band — with more than $30 million to invest — tends to invest in higher-risk, less liquid assets, so stands to have larger-than-average losses. That fact had special impact on Latin America, where ultra-wealthy individuals dominate the small HNWI population. There, HNWI wealth declined 2.9 percent though the HNWI population grew by 5.4 percent. For Europe’s 3.17 million HNWIs, battered by the euro zone crisis, wealth was down 1.1 percent to $10.1 trillion. The HNWI population in
Hong Kong declined by 17.4 percent as the value of investments declined and economic growth sputtered. Already battered by the euro crisis, Singapore, with an export drop, and Poland, which lost foreign investment, saw their HNWI numbers decline by 7.8 percent and 7.3 percent, respectively.

…And Winners
   In the Middle East, the size of the HNWI population rose 2.7 percent to 450,000 and wealth edged up .7 percent to $1.7 trillion. Pockets of growth in 2011 included: Brazil, with a number of positive economic indicators, whose HNWI population rose by 6.2 percent; Ireland, which responded to government austerity measures with a 16.8 percent rise in HNWIs and Thailand, which rode real estate and income increases to a 12.8 percent increase in HNWIs.

A Look Ahead
   The one lesson learned in the years since the worldwide financial collapse is that we
are all in this together. All economies are interrelated and economic disasters or imbalances in one region — including currency slides, credit rating downgrades, natural disasters, ruinous debt levels and eroded consumer confidence — impact economies in other regions. The future will depend on a number of factors: how governments and the public manage the problems in the present, the level of confidence in the actions of political leaders, the perceived stability of investment markets and the personal decisions of consumers worldwide to save, to consume, to sell, buy and invest.

   With additional reporting on India by Zainab Morbiwala.

Article from the Rapaport Magazine - December 2012. To subscribe click here.

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