China's increasing wealth means more money spent on luxury items like yachts. This is great news for the Brunswick Corporation, owner of the Boston Whaler and Sea Ray brands. They forecast sales growth of 25 percent in China this year as boating gains popularity.
They believe the long-term potential in the marine business is larger than anywhere else in the world. With unique wealth, the boating culture is expected to take hold very strongly.
Government attempts to clean up the country’s lakes, a growing appreciation of family-oriented leisure pastimes and rapidly increasing prosperity are driving demand for vessels from dinghies to yachts.
Lake Forest, Illinois-based Brunswick sold about 55 boats in China last year, accounting for 35 percent of the 180 boats shorter than 40 feet long (12 meters) imported into the world’s second-biggest economy. This makes Brunswick the Chinese market leader in that class.
Brunswick, whose share price has surged 37 percent this year, expects sales growth in China this year to match the 25 percent posted in 2010. The stock rose 0.6 percent to $25.59 on April 1 in New York trading.
Demand for larger boats is growing in China, and the company plans to introduce its Meridian and Hatteras yachts that are as long as 100 feet.
Princess Yachts, owned by French luxury goods maker LVMH Louis Vuitton Moet Hennessey SA, started selling in China in 2009. It’s already sold five luxury boats in China, including a 95-foot yacht bought by a Dalian property developer last year.
China had 447,000 millionaires in 2009, a 31 percent increase from the year before ranking it behind the U.S., Japan and Germany.
A Brunswick vessel such as a 47-foot-cruiser, the Meridian 441, sells in China for 7.8 million Yuan ($1.2 million) inclusive of taxes. China imposes a 43 percent levy on imports of boats. The nation accounts for 1 percent to 2 percent of global yacht sales of $3.4 billion in 2010. Brunswick entered the Chinese market in 1998 and has sold over 600 private luxury yachts to Chinese customers.
With Brunswick’s past success in China, the future economy in China holds even more promise.
Showing posts with label luxury goods. Show all posts
Showing posts with label luxury goods. Show all posts
Monday, April 4, 2011
Monday, August 2, 2010
Americans Splurge on IPads While Broke in New Abnormal Economy
Bloomberg
In March, Ralph Ronzio went to a warehouse in a seedy part of Orange County, California, and watched a man auction off his condo for half what he’d paid for it. Ronzio had bought the place for $329,000 in 2005, when he moved to Southern California from Rhode Island to take a job at a data-storage company. It was the first place he’d ever owned.
“It was totally my bachelor pad,” he says. “Not much inside other than the usual leather couch and the big screen TV. My fiancée made me sell the couch.”
That wasn’t the only thing that changed when Ronzio got engaged. His fiancée had two young children, and there wasn’t enough room in the condo for all four of them. So last year, Ronzio bought a house nine miles (14 kilometers) away and they all moved in. He figured he could rent the condo and cover his costs. He figured wrong, Bloomberg Businessweek reports in its Aug. 2 issue.
The more he thought about the money he was losing, the more it stressed him out. Finally, Ronzio enlisted the help of a firm called You Walk Away and did exactly that from the remaining $319,000 on his condo mortgage. When the bank foreclosed, he says he felt a sense of relief. He also had more cash. He and his fiancée took the kids to Disneyland. Ronzio, 31, gave himself a treat as well.
“I bought myself an iPad,” he says.
Latest Apple Gadget
It used to be that someone like Ronzio could be fairly certain of the outcome when spending a few hundred thousand dollars on real estate. Housing prices were headed in only one direction. You could surf the boom and borrow against your home equity to pay for all manner of splurges -- a vacation, a flat- screen television, or the latest Apple Inc. gadget. Considering that housing prices almost doubled from 1999 to 2006, there was always an escape hatch: Sell your house and make enough money to pay it all back.
That was the old normal. Last year, Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., manager of the world’s biggest bond fund, declared a “new normal,” a global realignment in which the U.S. consumer, no longer a hungry monster, became cautious and subdued.
The current circumstances might be better described as the new abnormal, in which no one knows anything. In June, the Conference Board Consumer Confidence Index fell 9 points after an 11 percent drop in the S&P 500 the month before. New housing starts were at an eight-month low. Meanwhile, the unemployment rate still hovers near double digits. That’s 14.6 million Americans out of work. Federal Reserve Chairman Ben Bernanke added to the anxiety with a July 21 declaration that the economic outlook is “unusually uncertain.”
‘Liquidity-Constrained’
So who are all those people at the mall? It’s easy to forget that a 9.5 percent unemployment rate means that about 9 out of 10 Americans in the workforce are still employed.
“Some consumers are probably liquidity-constrained,” says Kenneth Rogoff, Harvard University professor and former chief economist at the International Monetary Fund. These are “the ones who are probably not the ones buying iPads. But 90 percent of Americans do have a job, and maybe 70 percent are confident about them. And maybe half of those have liquidity.”
On a recent afternoon, Lucy Johnston, 37, an accountant from Tulsa, Oklahoma, could be found at the Fashion Show mall on the Strip in Las Vegas. She’s cutting back on shopping and eating out because of the recession.
“It’s really tough right now,” Johnston says. “I don’t do many full-on spa days anymore.”
Yet there she was, shopping and vacationing in Vegas with her husband.
“We’ve pulled out all the stops. We’re staying at the Bellagio,” she says.
Schizophrenic Consumers
The new abnormal has given rise to a nation of schizophrenic consumers. They splurge on high-end discretionary items and cut back on brand-name toothpaste and shampoo. Companies such as Cupertino, California-based Apple, whose net income jumped 94 percent in its last quarter, and Starbucks Corp., which saw a 61 percent increase in operating income over the same time frame, are thriving.
Mercedes-Benz is having a record sales year; deliveries of new vehicles in the U.S. rose 25 percent in the first six months of 2010. Lexus and BMW were also up. Though luxury-goods manufacturers such as Hermes International SCA and Burberry Group Plc are looking primarily to Asia for growth, their recent earnings reports suggest stabilization and even modest improvement in the U.S.
Bifurcated Market
“Last September, retail started to recover on a very narrow basis,” says Michael Niemira, chief economist for the International Council of Shopping Centers. “Most of the industry was really weak. It wasn’t until the end of the year that you saw any momentum. It was all dollar stores and luxury. You have this bifurcated market. This year, it started to move to the middle a little. Now it’s kind of moved back to the edges.”
Some of this is a reminder that the rich have been largely shielded from the recession’s ravages.
“All of my customers think we are out of the recession,” says Marika Baca, an associate in the women’s department at the Barneys New York store. “This time last year, it was bad. But now the women who were reluctantly picking up one piece are easily buying three.”
Aspirational middle-class consumers say they are also yearning to get their hands on the same high-end merchandise, just as they did in better times.
Family Dollar Stores
In such an environment, optimism about the economic future ebbs and flows constantly, with far-reaching consequences for a nation in which consumer spending accounts for 70 percent of the gross national product. It’s an economy that suggests an EKG- shaped recovery -- a sequence of mini booms and busts as consumer fads and pent-up demand drive sales, until the impulses fade. Erratic behavior is everywhere, even at Matthews, North Carolina-based Family Dollar Stores Inc.
“My feeling is that you can see week-to-week differences today that are far more volatile than what we have been seeing,” says R. James Kelly, the company’s president and chief operating officer, reporting a quarter with a 19 percent increase in net income.
Consumer confidence was edging up earlier this year. The stock market had rebounded. It looked like the economy took on aspects of normal behavior -- and then it all fell apart. In June, the stock market gave back 4 percent of its value. Like teenagers suffering mood swings, consumers lost their nerve all over again.
‘Dark Cloud’
On July 27, the Conference Board reported that confidence was at a five-month low, which it blamed on job insecurity.
“Concerns about the labor market are casting a dark cloud over consumers that is not likely to lift until the job market improves,” Lynn Franco, director of the board’s consumer research center, says in a statement.
Not everybody’s consumer diagnosis is the same, though. Shortly before the Conference Board released its finding, Consumer Reports, the 74-year-old magazine, unveiled the results of its monthly telephone survey about economic issues. It found that consumers had ramped up their retail spending by an average of $40. Though major purchases like cars remained unlikely, Americans were planning to spend more on appliances and electronics.
“We just focus on what’s happening this month,” says Ed Farrell, a director of the Consumer Reports National Research Center. “We don’t ask people what they think the business climate is going to be like in a year. If these people could tell us that, we’d all be very well off.”
Consumer Survey
American Express Co. released the results of its consumer survey on July 13, showing more willingness to spend, damped somewhat by guilt and despair on the part of some of these same respondents. The New York-based credit-card company found that 51 percent of consumers had fallen behind on their annual savings plan, in part because they were either making impulse purchases or simply spending beyond their means. There it is: gloom, muted optimism, and wild abandon.
What if these things aren’t exclusive in the new abnormal? Frank Veneroso, an investment strategy adviser in Portsmouth, New Hampshire, follows the nation’s saving rate. It was his opinion that high debt levels and economic fears would force Americans to rein in their spending and increase their savings.
‘Celebratory Spending Spree’
In the early part of the recession, that’s what happened. Then it stopped happening. Veneroso writes in a report that the nation’s wealthier citizens were so relieved when the stock market rallied last year after the financial crisis that they went on a “celebratory spending spree.” The recent market turmoil will put a stop to it and savings will start to inch back up, Veneroso says.
Except market rallies aren’t the only thing that emboldens consumers. Market dips can also loosen up purse strings, says Dan Ariely, a professor of behavioral economics at Duke University and author of “Predictably Irrational: The Hidden Forces that Shape Our Decisions.” When people fret about market gyrations, they see the advantage of shopping over putting money into a mutual fund that might tank, Ariely says.
“If they lose money by spending it on something, at least they have something to show for it,” he says.
For consumers looking for a reason, ups and downs can both provide a justification for spending. Stephanie Redmond, a 25- year-old electronics worker, talked about her financial woes as she shopped at the Dolphin Mall in Miami. She described herself as pessimistic about the economy.
Need New Car
“I don’t see it getting any better,” she said. “I need a new car, but I don’t plan on getting one anytime soon.”
Instead she recently bought a plane ticket to New York and stayed in a Times Square hotel.
“It was my first time, so it was a lot of fun,” she said.
At the Woodfield Shopping Center in Schaumburg, Illinois, Michelle Rodriguez, 39, a part-time cafeteria worker at a local high school, said she cut back considerably after losing her old full-time job two years ago as a receptionist at Kraft Foods Inc.
“I think the economy has a ways to go,” she said. “I don’t make nearly as much as I used to make.”
Yet she said she bought a 46-inch flat-screen Sony TV in the last year. And now she was waiting for help in the Genius Bar line at the Apple Store.
Apple Revenue
One way of understanding Apple’s recent success -- the company announced “all-time record” revenue of $15.7 billion for its quarter ending on June 26 -- is that the iPad is positioned as a compromise product for people who crave the kick of a new Apple gadget and don’t want to spring for a Mac.
“I was talking to someone recently who said to me, ‘I bought the iPad because I can’t afford a new iMac,’” says Carla Serrano, chief strategist for TBWA/Chiat/Day, Apple’s advertising agency. “O.K., fine. But the iPad does hardly anything that an iMac can do.”
The recession is making people think they need to come up with that she describes as “post-rational” justifications for their extravagant purchases, she says.
The performance of Seattle-based Starbucks suggests that everyday luxuries have also not been wiped out. On July 21, the coffee chain announced a “record” quarter with same-store sales growth of 9 percent, the biggest increase since the second quarter of 2006, the peak of the old normal.
CEO Howard Schultz highlighted Starbucks’ new products, like the “customizable Frappuccino campaign,” as well as Via, the new instant coffee, which is pitched as a budget item, though not exactly priced like one when compared with other instant competitors. A 12-packet box of Via goes for $9.95.
‘Every day!’
Starbucks is the lower-end corollary to Apple, a purveyor of expensive treats. Stephanie Redmond, the Miami electronics worker, may not buy the new car she needs, but give up Starbucks? Never. She says she has to have it “every day!”
Mass marketers have a tougher time seducing consumers with psychological value. Burt Flickinger, a retail consultant based in New York, says Procter & Gamble Co. is struggling to keep people from abandoning its Ivory soap and Crest toothpaste for generic brands. According to Flickinger, better-educated shoppers understand how little difference there is in quality on many household items.
They may also be sneaking into discount retailers for these deals.
Cheap Towels
“The dollar store is the new Target,” says Al Moffatt, CEO of Worldwide Partners, a Denver-based advertising company. “You go in there to buy shampoo for a buck so you can go to Starbucks and justify spending $3 for a coffee.”
Moffatt says that he and his wife recently did their own variation on this recessionary theme. On a trip to Oregon, they bought cheap towels at a discount store before hitting a pricey spa.
Ran Kivetz, a professor of marketing at Columbia Business School, has done research on consumer psychology. He says that consumers’ brains lack a line that separates spending from saving. We practice a certain amount of thrift so that we can justify blowing a large sum frivolously, he says.
Kivetz says the recent recession has made consumer thinking even more conflicted. In the short run, we feel good when we save. In the long run, we tend to regret the denial of a spending outlet.
“We feel guilty” about spending, Kivetz says, which can lead to more irrational purchasing.
Need to Spend
That’s is exactly what’s happening now, according to Kivetz. Consumers were quick to reduce spending when the recession arrived. Then the recession lasted longer than expected, and the new abnormal set in. The economy started to improve. Then it appeared to worsen. There is only so long we can suppress our need to spend, Kivetz says.
“It’s just been a slow walk out of the woods,” he says. “And it’s so complicated. The things going on in Europe are frightening. There are problems with China, with our government debt, and bank debt. At the end of the day, people are saying, ‘There is still risk. I gotta cut back.’ But this is not a typical one-year recession. Life has to have some normalcy. I have to have some luxuries.”
There was little evidence of the recession at a recent lunchtime in the Mall of America in Bloomington, Minnesota. The nation’s largest mall was full of shoppers drinking expensive coffee and toting bags of electronics and expensive shoes. Some of them were there on vacation. Why not? The Mall of America doesn’t just have 520-plus shops, it has an enormous amusement park and a 1.2 million gallon aquarium. Sales are up 9 percent so far this year.
Mellissa Williams, a 30-year-old teacher from Laredo, Missouri, was looking for sneakers with her two children at a sporting goods store.
“We’ll be looking at price tags a little more than we normally would,” she said.
And yet she had come a long way to look for deals. What was her biggest splurge in the last six months?
“Probably this trip,” Williams said.
“It was totally my bachelor pad,” he says. “Not much inside other than the usual leather couch and the big screen TV. My fiancée made me sell the couch.”
That wasn’t the only thing that changed when Ronzio got engaged. His fiancée had two young children, and there wasn’t enough room in the condo for all four of them. So last year, Ronzio bought a house nine miles (14 kilometers) away and they all moved in. He figured he could rent the condo and cover his costs. He figured wrong, Bloomberg Businessweek reports in its Aug. 2 issue.
The more he thought about the money he was losing, the more it stressed him out. Finally, Ronzio enlisted the help of a firm called You Walk Away and did exactly that from the remaining $319,000 on his condo mortgage. When the bank foreclosed, he says he felt a sense of relief. He also had more cash. He and his fiancée took the kids to Disneyland. Ronzio, 31, gave himself a treat as well.
“I bought myself an iPad,” he says.
Latest Apple Gadget
It used to be that someone like Ronzio could be fairly certain of the outcome when spending a few hundred thousand dollars on real estate. Housing prices were headed in only one direction. You could surf the boom and borrow against your home equity to pay for all manner of splurges -- a vacation, a flat- screen television, or the latest Apple Inc. gadget. Considering that housing prices almost doubled from 1999 to 2006, there was always an escape hatch: Sell your house and make enough money to pay it all back.
That was the old normal. Last year, Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., manager of the world’s biggest bond fund, declared a “new normal,” a global realignment in which the U.S. consumer, no longer a hungry monster, became cautious and subdued.
The current circumstances might be better described as the new abnormal, in which no one knows anything. In June, the Conference Board Consumer Confidence Index fell 9 points after an 11 percent drop in the S&P 500 the month before. New housing starts were at an eight-month low. Meanwhile, the unemployment rate still hovers near double digits. That’s 14.6 million Americans out of work. Federal Reserve Chairman Ben Bernanke added to the anxiety with a July 21 declaration that the economic outlook is “unusually uncertain.”
‘Liquidity-Constrained’
So who are all those people at the mall? It’s easy to forget that a 9.5 percent unemployment rate means that about 9 out of 10 Americans in the workforce are still employed.
“Some consumers are probably liquidity-constrained,” says Kenneth Rogoff, Harvard University professor and former chief economist at the International Monetary Fund. These are “the ones who are probably not the ones buying iPads. But 90 percent of Americans do have a job, and maybe 70 percent are confident about them. And maybe half of those have liquidity.”
On a recent afternoon, Lucy Johnston, 37, an accountant from Tulsa, Oklahoma, could be found at the Fashion Show mall on the Strip in Las Vegas. She’s cutting back on shopping and eating out because of the recession.
“It’s really tough right now,” Johnston says. “I don’t do many full-on spa days anymore.”
Yet there she was, shopping and vacationing in Vegas with her husband.
“We’ve pulled out all the stops. We’re staying at the Bellagio,” she says.
Schizophrenic Consumers
The new abnormal has given rise to a nation of schizophrenic consumers. They splurge on high-end discretionary items and cut back on brand-name toothpaste and shampoo. Companies such as Cupertino, California-based Apple, whose net income jumped 94 percent in its last quarter, and Starbucks Corp., which saw a 61 percent increase in operating income over the same time frame, are thriving.
Mercedes-Benz is having a record sales year; deliveries of new vehicles in the U.S. rose 25 percent in the first six months of 2010. Lexus and BMW were also up. Though luxury-goods manufacturers such as Hermes International SCA and Burberry Group Plc are looking primarily to Asia for growth, their recent earnings reports suggest stabilization and even modest improvement in the U.S.
Bifurcated Market
“Last September, retail started to recover on a very narrow basis,” says Michael Niemira, chief economist for the International Council of Shopping Centers. “Most of the industry was really weak. It wasn’t until the end of the year that you saw any momentum. It was all dollar stores and luxury. You have this bifurcated market. This year, it started to move to the middle a little. Now it’s kind of moved back to the edges.”
Some of this is a reminder that the rich have been largely shielded from the recession’s ravages.
“All of my customers think we are out of the recession,” says Marika Baca, an associate in the women’s department at the Barneys New York store. “This time last year, it was bad. But now the women who were reluctantly picking up one piece are easily buying three.”
Aspirational middle-class consumers say they are also yearning to get their hands on the same high-end merchandise, just as they did in better times.
Family Dollar Stores
In such an environment, optimism about the economic future ebbs and flows constantly, with far-reaching consequences for a nation in which consumer spending accounts for 70 percent of the gross national product. It’s an economy that suggests an EKG- shaped recovery -- a sequence of mini booms and busts as consumer fads and pent-up demand drive sales, until the impulses fade. Erratic behavior is everywhere, even at Matthews, North Carolina-based Family Dollar Stores Inc.
“My feeling is that you can see week-to-week differences today that are far more volatile than what we have been seeing,” says R. James Kelly, the company’s president and chief operating officer, reporting a quarter with a 19 percent increase in net income.
Consumer confidence was edging up earlier this year. The stock market had rebounded. It looked like the economy took on aspects of normal behavior -- and then it all fell apart. In June, the stock market gave back 4 percent of its value. Like teenagers suffering mood swings, consumers lost their nerve all over again.
‘Dark Cloud’
On July 27, the Conference Board reported that confidence was at a five-month low, which it blamed on job insecurity.
“Concerns about the labor market are casting a dark cloud over consumers that is not likely to lift until the job market improves,” Lynn Franco, director of the board’s consumer research center, says in a statement.
Not everybody’s consumer diagnosis is the same, though. Shortly before the Conference Board released its finding, Consumer Reports, the 74-year-old magazine, unveiled the results of its monthly telephone survey about economic issues. It found that consumers had ramped up their retail spending by an average of $40. Though major purchases like cars remained unlikely, Americans were planning to spend more on appliances and electronics.
“We just focus on what’s happening this month,” says Ed Farrell, a director of the Consumer Reports National Research Center. “We don’t ask people what they think the business climate is going to be like in a year. If these people could tell us that, we’d all be very well off.”
Consumer Survey
American Express Co. released the results of its consumer survey on July 13, showing more willingness to spend, damped somewhat by guilt and despair on the part of some of these same respondents. The New York-based credit-card company found that 51 percent of consumers had fallen behind on their annual savings plan, in part because they were either making impulse purchases or simply spending beyond their means. There it is: gloom, muted optimism, and wild abandon.
What if these things aren’t exclusive in the new abnormal? Frank Veneroso, an investment strategy adviser in Portsmouth, New Hampshire, follows the nation’s saving rate. It was his opinion that high debt levels and economic fears would force Americans to rein in their spending and increase their savings.
‘Celebratory Spending Spree’
In the early part of the recession, that’s what happened. Then it stopped happening. Veneroso writes in a report that the nation’s wealthier citizens were so relieved when the stock market rallied last year after the financial crisis that they went on a “celebratory spending spree.” The recent market turmoil will put a stop to it and savings will start to inch back up, Veneroso says.
Except market rallies aren’t the only thing that emboldens consumers. Market dips can also loosen up purse strings, says Dan Ariely, a professor of behavioral economics at Duke University and author of “Predictably Irrational: The Hidden Forces that Shape Our Decisions.” When people fret about market gyrations, they see the advantage of shopping over putting money into a mutual fund that might tank, Ariely says.
“If they lose money by spending it on something, at least they have something to show for it,” he says.
For consumers looking for a reason, ups and downs can both provide a justification for spending. Stephanie Redmond, a 25- year-old electronics worker, talked about her financial woes as she shopped at the Dolphin Mall in Miami. She described herself as pessimistic about the economy.
Need New Car
“I don’t see it getting any better,” she said. “I need a new car, but I don’t plan on getting one anytime soon.”
Instead she recently bought a plane ticket to New York and stayed in a Times Square hotel.
“It was my first time, so it was a lot of fun,” she said.
At the Woodfield Shopping Center in Schaumburg, Illinois, Michelle Rodriguez, 39, a part-time cafeteria worker at a local high school, said she cut back considerably after losing her old full-time job two years ago as a receptionist at Kraft Foods Inc.
“I think the economy has a ways to go,” she said. “I don’t make nearly as much as I used to make.”
Yet she said she bought a 46-inch flat-screen Sony TV in the last year. And now she was waiting for help in the Genius Bar line at the Apple Store.
Apple Revenue
One way of understanding Apple’s recent success -- the company announced “all-time record” revenue of $15.7 billion for its quarter ending on June 26 -- is that the iPad is positioned as a compromise product for people who crave the kick of a new Apple gadget and don’t want to spring for a Mac.
“I was talking to someone recently who said to me, ‘I bought the iPad because I can’t afford a new iMac,’” says Carla Serrano, chief strategist for TBWA/Chiat/Day, Apple’s advertising agency. “O.K., fine. But the iPad does hardly anything that an iMac can do.”
The recession is making people think they need to come up with that she describes as “post-rational” justifications for their extravagant purchases, she says.
The performance of Seattle-based Starbucks suggests that everyday luxuries have also not been wiped out. On July 21, the coffee chain announced a “record” quarter with same-store sales growth of 9 percent, the biggest increase since the second quarter of 2006, the peak of the old normal.
CEO Howard Schultz highlighted Starbucks’ new products, like the “customizable Frappuccino campaign,” as well as Via, the new instant coffee, which is pitched as a budget item, though not exactly priced like one when compared with other instant competitors. A 12-packet box of Via goes for $9.95.
‘Every day!’
Starbucks is the lower-end corollary to Apple, a purveyor of expensive treats. Stephanie Redmond, the Miami electronics worker, may not buy the new car she needs, but give up Starbucks? Never. She says she has to have it “every day!”
Mass marketers have a tougher time seducing consumers with psychological value. Burt Flickinger, a retail consultant based in New York, says Procter & Gamble Co. is struggling to keep people from abandoning its Ivory soap and Crest toothpaste for generic brands. According to Flickinger, better-educated shoppers understand how little difference there is in quality on many household items.
They may also be sneaking into discount retailers for these deals.
Cheap Towels
“The dollar store is the new Target,” says Al Moffatt, CEO of Worldwide Partners, a Denver-based advertising company. “You go in there to buy shampoo for a buck so you can go to Starbucks and justify spending $3 for a coffee.”
Moffatt says that he and his wife recently did their own variation on this recessionary theme. On a trip to Oregon, they bought cheap towels at a discount store before hitting a pricey spa.
Ran Kivetz, a professor of marketing at Columbia Business School, has done research on consumer psychology. He says that consumers’ brains lack a line that separates spending from saving. We practice a certain amount of thrift so that we can justify blowing a large sum frivolously, he says.
Kivetz says the recent recession has made consumer thinking even more conflicted. In the short run, we feel good when we save. In the long run, we tend to regret the denial of a spending outlet.
“We feel guilty” about spending, Kivetz says, which can lead to more irrational purchasing.
Need to Spend
That’s is exactly what’s happening now, according to Kivetz. Consumers were quick to reduce spending when the recession arrived. Then the recession lasted longer than expected, and the new abnormal set in. The economy started to improve. Then it appeared to worsen. There is only so long we can suppress our need to spend, Kivetz says.
“It’s just been a slow walk out of the woods,” he says. “And it’s so complicated. The things going on in Europe are frightening. There are problems with China, with our government debt, and bank debt. At the end of the day, people are saying, ‘There is still risk. I gotta cut back.’ But this is not a typical one-year recession. Life has to have some normalcy. I have to have some luxuries.”
There was little evidence of the recession at a recent lunchtime in the Mall of America in Bloomington, Minnesota. The nation’s largest mall was full of shoppers drinking expensive coffee and toting bags of electronics and expensive shoes. Some of them were there on vacation. Why not? The Mall of America doesn’t just have 520-plus shops, it has an enormous amusement park and a 1.2 million gallon aquarium. Sales are up 9 percent so far this year.
Mellissa Williams, a 30-year-old teacher from Laredo, Missouri, was looking for sneakers with her two children at a sporting goods store.
“We’ll be looking at price tags a little more than we normally would,” she said.
And yet she had come a long way to look for deals. What was her biggest splurge in the last six months?
“Probably this trip,” Williams said.
Thursday, October 29, 2009
Conspicuous Consumption Dead? Maybe For Now
USA Today
When I spoke with Rosewood Hotels CEO John Scott, I first asked him about the state of the luxury hotel business. It's widely know that luxury hotels - Rosewood's specialty - have been suffering more than any other type of hotel.
The most-expensive hotels and resorts are hurting more than, say, the Holiday Inns of the world because they're facing a double whammy - the recession coupled with the so-called AIG effect. The term was coined last fall after it was revealed that bailed-out insurance giant AIG hosted a lavish, spa-filled $400,000 corporate retreat at a St. Regis resort just days after receiving billions in federal aid. News about the trip sparked a national debate about corporate entertaining habits and, ultimately, drove an untold number of companies to cancel their five-star hotel gatherings, and luxury cruises.
Q. What is the state of luxury lodging right now?
A. Certainly luxury has come under a lot of pressure, both economic pressure or perception related. (Before the downturn) it was almost a badge of honor to have stayed in the biggest suite and to have paid the most for it.
In the current environment, people are redefining themselves by discretion. Conspicuous consumption is dead, at least in the near term. People are trying to find value. They're still traveling to luxury hotels, but they're looking for really unique experiences. In many instances, they really do want to seek out value and they may not be traveling quite as often.
Industry data shows that the luxury segment has been disproportionately hit vs. the other segments, (with revenue per available room) down 25% and even higher in some markets for 2009. We have 18 hotels that are geographically dispersed.
Q. What does the environment mean for Rosewood since you only operate top-rated hotels?
A. How I compare myself in a difficult environment is how we're doing vs. our competitive set. So, (our revenue per available room is) down overall 20%. If I look at the industry average, it's usually down 22% to 25%. And then, really what I focus on is not that big economic indicator. I look at each one of my hotels and ask: How are you performing in a down market? Are you continuing to hold your share?
We look at (revenue per available room) on individual hotels compared to their market competitors (for instance, The Carlyle vs. New York City hotels, Rosewood Mayakoba vs. other luxury resorts in Playa del Carmen, Mexico). In each market, we are holding or growing our revpar. I'm quite pleased to say that we are holding or growing against the competitors.
Q. Rosewood isn't exactly a household name, so does that in some way help you in today's world?
A. My team and I talk about that. It's good news, bad news for us. One, we are an emerging brand. We are reasonably well known to a select group, but we're certainly not Ritz Carlton or Four Seasons. We're trying to get there, but we're not there yet.
(Last year) we began to see companies red-line top brands as an easy way to save money. They said, "I don't want to see on your expense account Ritz Carlton or Four Seasons or maybe Mandarin Oriental." From that perspective, it's not entirely rational because the prices may be the same (as a Rosewood hotel), but it's certainly political. A lot of these (companies) are under external pressure, be it from the government or their employees. If you just laid off people and now you're staying at the Four Seasons, how does that look?
We've been broadly painted by the same brush. But that's part of the story.
Q. What's the other part of the story?
A. The other side is that there were a lot of aspirational travelers - people from lower levels within organizations who were trading up because of the exuberance of the times. The expectation of readily available credit, of a big year-end bonus. The expectation that the US economy was always going to be strong.
This aspirational group of travelers now has less ability to travel and stay in luxury hotels. We had some of them, and that piece of business has been hurt. But our core traveler tends to be a little bit older, tends to be the most senior and tends to be more affluent and more worldly.
The most-expensive hotels and resorts are hurting more than, say, the Holiday Inns of the world because they're facing a double whammy - the recession coupled with the so-called AIG effect. The term was coined last fall after it was revealed that bailed-out insurance giant AIG hosted a lavish, spa-filled $400,000 corporate retreat at a St. Regis resort just days after receiving billions in federal aid. News about the trip sparked a national debate about corporate entertaining habits and, ultimately, drove an untold number of companies to cancel their five-star hotel gatherings, and luxury cruises.Q. What is the state of luxury lodging right now?
A. Certainly luxury has come under a lot of pressure, both economic pressure or perception related. (Before the downturn) it was almost a badge of honor to have stayed in the biggest suite and to have paid the most for it.
In the current environment, people are redefining themselves by discretion. Conspicuous consumption is dead, at least in the near term. People are trying to find value. They're still traveling to luxury hotels, but they're looking for really unique experiences. In many instances, they really do want to seek out value and they may not be traveling quite as often.
Industry data shows that the luxury segment has been disproportionately hit vs. the other segments, (with revenue per available room) down 25% and even higher in some markets for 2009. We have 18 hotels that are geographically dispersed.
Q. What does the environment mean for Rosewood since you only operate top-rated hotels?
We look at (revenue per available room) on individual hotels compared to their market competitors (for instance, The Carlyle vs. New York City hotels, Rosewood Mayakoba vs. other luxury resorts in Playa del Carmen, Mexico). In each market, we are holding or growing our revpar. I'm quite pleased to say that we are holding or growing against the competitors.
Q. Rosewood isn't exactly a household name, so does that in some way help you in today's world?
A. My team and I talk about that. It's good news, bad news for us. One, we are an emerging brand. We are reasonably well known to a select group, but we're certainly not Ritz Carlton or Four Seasons. We're trying to get there, but we're not there yet.
(Last year) we began to see companies red-line top brands as an easy way to save money. They said, "I don't want to see on your expense account Ritz Carlton or Four Seasons or maybe Mandarin Oriental." From that perspective, it's not entirely rational because the prices may be the same (as a Rosewood hotel), but it's certainly political. A lot of these (companies) are under external pressure, be it from the government or their employees. If you just laid off people and now you're staying at the Four Seasons, how does that look?
We've been broadly painted by the same brush. But that's part of the story.
Q. What's the other part of the story?
A. The other side is that there were a lot of aspirational travelers - people from lower levels within organizations who were trading up because of the exuberance of the times. The expectation of readily available credit, of a big year-end bonus. The expectation that the US economy was always going to be strong.
This aspirational group of travelers now has less ability to travel and stay in luxury hotels. We had some of them, and that piece of business has been hurt. But our core traveler tends to be a little bit older, tends to be the most senior and tends to be more affluent and more worldly.
Friday, October 10, 2008
Luxury Stores Brace for Slowdown
The luxury-goods industry is bracing for fallout from the global financial crisis.Some companies, including jewelers' Tiffany & Co. and Bulgari SpA, are considering a brake on future store openings to reduce costs ahead of a likely sluggish holiday season. French fashion house Dior SA may close some boutiques in smaller U.S. cities.
Until recently, the world of luxury perfumes, leather goods, designer wedding jewelry and designer clothing seemed impervious to the retail slowdown affecting apparel and home furnishings. Their resilience was due largely to growing business in emerging markets, such as China and Russia, which offset a slowdown in the U.S., Europe and Japan.
Now, the Chinese and Russian stock markets are faltering, putting pressure on their wealthy consumers and tugging on the luxury-goods sector's safety net.
"I'm not sure [emerging markets] are able to offset the weakness in other markets," Bulgari Chief Executive Francesco Trapani said in an interview. "Everyone is going to be affected." He estimated only 10% of new Bulgari store projects now would be approved, compared with about 50% earlier.
Polo Ralph Lauren Corp. inaugurated its largest women's store in the world, in Paris, last week and is still planning new boutique openings. But Charles Fagan, the executive vice-president of the company's global retail brand, said: "We're being prudent. We're very aware of our inventory and expenses."
High-end fashion houses such as Louis Vuitton, Gucci and Polo Ralph Lauren aggressively expanded into China, Southeast Asia, Russia and India as a response to the last downturn, between 2001 and 2003. At the time, they started emphasizing very highest-priced products -- such as customized bags and jewelry -- in order to attract the wealthiest consumers.
All told, emerging markets make up about 15% of the luxury goods sector's overall sales. However, executives had counted on double-digit gains in countries such as China and Russia to buffer declining or flat business elsewhere.
At LVMH Moët Hennessy Louis Vuitton SA, the world's largest luxury-goods group and owner of fashion house Louis Vuitton and Hennessy cognac, sales in Asia, excluding Japan, account for 21% of sales in the first half of the year. Those sales grew 13% -- a much faster rate than the group's 5% average sales increase.
Luxury goods companies now fear those sky-high growth rates could decelerate as stock markets plunge. Stock and property markets have tumbled in China with the country's benchmark stock index off about 65% from its peak last October.
The effect on consumer spending will be heavy because a large swath of the population plays on the stock market "like in Las Vegas," says François-Henri Pinault, chief executive of PPR SA. As in other countries, investors' dwindling portfolios could change their "mindset," says Mr. Pinault, whose PPR group owns the Gucci and Bottega Veneta luxury houses.
Don Hanna, chief emerging markets economist at Citigroup Inc., says Chinese sales of big-ticket items such as automobiles and electronics have decelerated in the second half of the year at a faster rate than sales of mass consumption goods, like food and basic clothing.
"There is more pressure on wealthier households because those are the people who hold the assets," says Mr. Hanna.
It's a similar story in Russia. Russian retailers' orders for the collections shown on the Milan catwalk two weeks ago were flat compared with last year -- the first time in five years that they haven't increased, according to Sanford Bernstein luxury goods analyst Luca Solca.
It remains unclear how sales at some of the biggest luxury-goods companies fared over the summer. Third-quarter sales results begin trickling out this week.
However, there are some bright spots. French luxury-goods house Hermès International SA last year opened its first men's-only store on Wall Street. Chief Executive Officer Patrick Thomas said sales at the boutique were especially strong during the last two weeks of September, just as some of the store's banking neighbors were collapsing.
"Over time," says Todd Slater, an analyst at Lazard Capital Markets LLC. "There's a lot of upside."
Still, several companies are predicting softer revenue growth. HSBC analyst Antoine Belge expects sales gains at LVMH to slow to 1.6% in the third quarter, down from 5% growth in the first half. LVMH is due to report revenue on Thursday.
Compagnie Financière Richemont SA, the parent of jeweler Cartier, said last month that sales through the end of August in the U.S. were "beginning to show some signs of a slowdown." Bulgari's Mr. Trapani said July and August sales held up well globally, but that September was rockier. The company tracks sales on a daily basis.
The immediate fallout of the credit crisis on the sector will be more hesitant store expansion. Italian fashion house Prada SpA postponed an initial public offering intended, in part, to bankroll new stores in emerging markets. Tiffany, which has said it would open 12 to 15 stores overseas annually beginning next year, "would consider modestly adjusting our rate of store expansion" if conditions remain soft, Chief Executive Officer Michael J. Kowalski said in an email.
By: Christina Passariello and Rachel Dodes
Wall Street Journal; October 8, 2008
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