Luxury goods: Wealthy still not asking the price

 @ibtimes
on August 17 2007 6:17 PM

The stock market is swinging like a pendulum and the credit market is getting tighter than a drum but there are no signs the rich are buckling their Pradas to hold onto their bucks.

Luxury goods still have quite a lot of momentum, said Kamalesh Rao, director of industry research at SpendingPulse, the retail data service of MasterCard Advisors.

Rao said luxury goods sales rose 10.7 percent in July from a year ago and added, I'd be surprised if that changed radically in August.

SpendingPulse tracks sales in the MasterCard payments network and estimates sales for other types of payment.

Rao estimated that luxury goods sales in August would rise a vibrant 8 percent or 9 percent compared to apparel sales overall, which rose about 2 percent in July.

Coach Inc, which makes high-end leather goods, can attest to this.

Coach's business continues very strong in all channels among the more value-oriented consumer and the premium consumer, Coach's Chief Executive Lew Frankfort said in an interview.

And Coach is not alone.

No one is reporting any downturn, said Milton Pedraza, chief executive of research firm The Luxury Institute.

He said credit market problems were not enough to stop the rich from shelling out cash. But, a dramatic drop in their stock portfolios could change that.

The institute says that 87 percent of people with an average net worth of $3 million and average income of $288,000 have said a 10 percent or more drop in their stock holdings would trigger a cutback on luxuries.

Nearly half (46 percent) said it would take a decline of 10 percent to 19 percent, and 27 percent said they could stomach a decline of 20 percent to 29 percent before they started cutting back on indulgences. Hotels, autos, jewelry and electronics would be among the first to feel the pinch.

The Dow Jones Industrial Average and the Standard & Poor's 500 Index have both fallen more than 7 percent in the last month, though they were up more than 1 percent on Friday afternoon after the U.S. Federal Reserve cut the discount rate, charged on direct Fed loans to banks, as the mortgage crisis widened.

Young, wealthy consumers with a lot of income but no net worth (would) pull back, no question, Pedraza said. They would begin to prioritize: Do I really need to buy the 500 version of the BMW? Maybe I better pull back to the 300 series.'

MEGAYACHTS VS THAT GALLON O' GAS

It is about priorities, after all. Wal-Mart Stores Inc's Chief Executive Lee Scott said it was no secret that many customers are running out of money toward the end of the month.

The world's largest retailer, which relies heavily on working class families, reported a lower-than-expected profit this week and cut its full-year forecast, saying economic pressures like higher fuel prices have slammed shoppers'.

U.S. consumers in general are showing signs of cutting spending as the housing market decline widens, mortgage defaults increase and energy and food prices climb.

On Friday, the Reuters/University of Michigan Surveys of Consumers showed that U.S. consumer sentiment deteriorated in August to its weakest reading in a year.

Consumer sentiment is seen as an indicator of future consumer spending, which accounts for about 70 percent of gross domestic product growth in the United States.

David Rosenberg, North American economist at Merrill Lynch, pointed out earlier in the week that auto sales have fallen for a record seven straight months, consumer spending in real terms has stagnated over the February-to-July period, and chainstore sales were flat sequentially in July.

But luxury goods companies have historically fared better during downturns because their customers are better positioned for such times.

I keep a watchful eye on the news and try to make sense of whether this is just a correction or are we really in for a major recession, said Manhattanite Terry Gallo, who said she is in her fifties and works in advertising.

I think like everyone we're nervous, but I'm not saying 'Oh, I'm not going to buy something because I'm afraid that the economy is going to tank at this point, she said while shopping in the designer shoe department at luxury department store Saks.

OLD MONEY VS NEW

The Luxury Institute's Pedraza said the young rich make up only a fraction of consumers of luxury goods, who are mostly mature and have had years to amass fortunes.

These are the clients of California Coast Yachts in Newport Beach, California, which has a two to three year backlog for top end luxury yachts.

The high-end luxury market has never, ever been as brisk -- and that's globally, said Steve Lehman, the company's chief executive. We really haven't seen (our buyers) be affected by market swings.

(See http://blogs.reuters.com/category/themes/shop-talk/ for Shop Talk -- Reuters' retail and consumer blog)

(Additional reporting by Michelle Nichols in New York and Alexandria Sage in Los Angeles; Editing by Toni Reinhold)

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