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In-Depth

Show Me the Money

Who’s got the money and how are they spending it?

By Shuan Sim

The U.S. affluent has typically been considered to be among the nation’s top 10 percent of income earners, according to a recent study released by policy research group Urban Institute titled, “The Growing Size and Incomes of the Upper Middle Class.” Since 1979, according to the study, which uses U.S. Census Bureau data, the top 10 percent was composed of a group the study coined “the upper middle class” and “the rich,” who stood at .1 percent of the population. In 2014, the upper middle class comprised 29.4 percent of the population and the rich were at 1.8 percent.
   The collective affluent group has been getting wealthier over the years and the threshold to be considered in the top 10 percent has risen. In 2006 that threshold was approximately $112,000 and in 2011, an individual needed to earn approximately $120,000 to qualify, according to statistics from the Internal Revenue Service (IRS). In 2016, according to estimates from market research firm YouGov in its 2016 global study, “Affluent Perspective,” which also draws from U.S. Census Bureau data, the threshold to qualify as a top 10 percent earner has risen to $150,000.
   Despite the increased prosperity, spending on diamonds and jewelry has not grown proportionately. “With young affluent Millennials becoming more important as a consumer group for luxury, they are moving away from hard luxury such as jewelry in favor of travel and experiential goods,” says Milton Pedraza, CEO of research organization Luxury Institute.

Millennials and Prosperity
   There are currently about 4.8 million Millennial households who make over $150,000, according to a study, “Money Matters: How Affluent Millennials are Living the Millennial Dream,” by Millennial research company Future Cast. Pedraza believes that the boom of Millennial affluence has been largely attributed to Silicon Valley, consulting services and the start-up culture prevalent among young people in the workforce. These factors have also benefited from the strength of the country’s financial services and availability of capital. “The U.S. continues to be a safe haven and its resilience makes it a potential future bulwark of the world economy,” comments Pedraza.
   Meanwhile, asset-owning affluents — typically generations older than Millennials — have been helped by real estate appreciation and the healthy stock market following the 2008 recession.Cara David, managing partner at YouGov, notes that while the wealthy are faring well, their outlook of the U.S. economy stayed grim and their savings rates remained high. “Post-recession, we’re seeing the top 10 percent saving up to 25 percent of their income, with the top 1 percent saving as much as 35 percent of their income. Millennials are saving approximately 28 percent of their income,” David says.
   “The wealthy made a conscious decision to pare back their spending and decided to reprioritize,” David explains. She adds that as the group saw their net worth decline in 2009, they had decided that they never wanted to be in the same position again and that impacted their spending habits.
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Luxury Consumption and Impressions
   “The affluent are still concerned that we might be heading into another recession,” says Chandler Mount, director of the YouGov Affluent Perspective study. He points out that this mind-set has led to a purchasing strategy that reduces risk and calculated consumption habits that pull back on unnecessary luxuries, which includes jewelry. In YouGov’s study, discretionary spending of the top 10 percent of income earners was projected to fall .9 percent across nine product categories. Of those categories, jewelry, watches, bags, apparel, accessories and home decor collectively were projected to slump 11 percent.
   Recent events have done little to lift the doom and gloom that overhangs the U.S. economy, despite steadily growing output each year. China’s continuing slump and the U.K.’s recent decision to leave the European Union (EU) further exacerbated that adverse impression. “The negative outlook stems from uncertainty. Business people are concerned that they don’t have the confidence to invest heavily,” explains Pedraza. “They’re not worried about going bankrupt; they’re worried about not being able to make more money,” he adds.
   According to the YouGov study, all subdivisions of the affluent group were projected to cut back on spending, except for the subgroup the study labeled “the wealthy” — those earning over $350,000, with over $10 million in assets and comprising .3 percent of the population. This wealthy group was expected to increase spending in 2016 by 10.2 percent, or an estimated $2.7 billion uptick. This group correlates with a component of “the rich” identified in the Urban Institute study, which also has an income of $350,000 and over.
   Hard luxury consumption has been scaled back as a result of fiscal conservatism, but experiential luxury has been growing. “Young Millennials are still spending on wine, dining, iPhones and travel,” notes Pedraza. He points out that the luxury industry is merely shifting with regard to what is being consumed.

Reviving Luxury
   There is still a place for hard luxuries today, including diamonds and jewelry, according to Pedraza. “Self-gifting is big, but it’s not as big as receiving gifts,” he points out. Pedraza explains that people will always get married and gift others with jewelry for special occasions. “A lot of work is needed to make the consumer’s luxury consumption of jewelry experiential,” he says.
   Pedraza comments that jewelry consumption has traditionally been transactional. “Jewelry companies might send you emails about offers, but that is very mercenary,” he explains, adding that consumers want their diamond-buying experience to be sensory rich and not just about price points. David concurs with that point of view. “When somebody comes into a jewelry store, they are looking to buy something for somebody they love. The salespeople need to ask the right questions to build the right experience,” she says. These questions could include asking how the gifter would like the recipient to feel upon receiving the jewelry, or understanding the recipient’s luxury background. “Most people enter the luxury lifestyle because it was gifted to them when they were young. Recreating this experience is the switch that makes the recipient think ‘Wow, this gift is extraordinary,’” David explains.
   People still desire jewelry and hard luxury isn’t dead, even among Millennials, David highlights. According to the YouGov study, Millennials still intend to spend on jewelry and watches because they’re in that stage of their lives and careers where consumption of jewelry and watches matter. “However, it’s not about the price, whether the items are expensive or not. It’s about whether they can show them off,” David says.
   The jewelry and watch retailers seem to be slow to adapt to this new attitude toward luxury and jewelry. Pedraza expects a paring down of jewelry companies in the market in the short term as the luxury industry remains soft over the next five years. He feels that this consolidation might be good for the industry, giving companies space to breathe and readjust their strategies. “The jewelry and watch industry has a lot of self-inflicted wounds. There are too many companies chasing too few customers currently,” he concludes.

 

Does it Matter?

   On June 24, 2016, U.K. voters opted for the country to leave the European Union (EU), a move popularly known as “Brexit.” More than 17.4 million voters — 51.9 percent of ballots — wanted to leave the EU. This is the first time any country has left the bloc and the economic fallout was immediate.
   The sterling pound fell 10 percent to $1.33 against the U.S. dollar the day following the results of Brexit. The pound fell to a historic low of $1.29 against the dollar on July 7, 2016.
   Ratings agency Standard & Poors (S&P) downgraded the U.K.’s credit rating to “AA” from “AAA” three days after the vote. It was the first time S&P cut a top-rated sovereign rating by two notches in one move, according to Reuters. Fitch Ratings similarly downgraded U.K.’s creditworthiness by one notch to “AA” from “AA+” and Moody’s cut U.K.’s credit rating to “negative.”
   The Bank of England announced on July 14, 2016, that it was leaving interest rates at record lows, signaling the monetary authority’s stimulus intention in August, reported Bloomberg. The decision to keep rates at .5 percent led to a spike in the pound, which has been steadily rising since July 11 back up to $1.33 against the dollar, still 10 percent down prior to the referendum.
   Milton Pedraza, CEO of the Luxury Institute, feels that Brexit’s impact on the U.S. jewelry and luxury industry would be limited. He speculated that tourist spending from British visitors would decline and the stock market could be affected, but the U.S. luxury industry has other more pertinent worrying factors. “China’s impact on the global economy matters more to our stock markets and stock market declines are highly correlated with our luxury industry,” Pedraza says. “Brexit could have some dampening impact but our luxury industry is resilient.”
   Chandler Mount from YouGov similarly feels that Brexit’s effect on the U.S. luxury industry would be slim. “There is probably more uncertainty about the U.S. economy stemming from the upcoming presidential election,” Mount says. The U.S. affluent group is concerned about uncertainties on what decisions either candidate would make that would affect their business, he explains. Citing the YouGov study, Mount adds that 36 percent of the top 10 percent earners polled were concerned about the elections, with cost of food, healthcare and taxation policies on their minds.

Article from the Rapaport Magazine - August 2016. To subscribe click here.

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