A robust US economy, how the sharing economy is changing attitudes to wealth, emotional marketing, were all key themes at this year’s Walpole Luxury Americas summit in London.
American globe shoppers are Global Blue’s second biggest globe shopper nation in our post-Brexit vote economic climate. With a robust economy, strong dollar and growing private consumption of between 2-3% per year, US consumers have more money when they travel overseas and are fuelling the luxury industry with buoyed levels of wealth.
Strong US economy
‘The question is, could the dollar strengthen further?’ asks Anthony Collard, JP Morgan’s head of investments for UK business. ‘If it does, it will impact domestic consumption in multiple ways,’ he says. ‘If you are a US consumer, you’re happy about this…your dollars buy more. But for luxury and tourism, for the 70m visitors every year who spend $1.5bn, can that be impacted by a stronger dollar. It’s expensive to visit the US and this in turn is impacting US domestic luxury.’
‘Aside from any relative fall-out from the Brexit vote, the US is looking good,’ says Collard. ‘We think the US is a strong economy. Private consumption growth is growing at 2-3% per year now, and we’re in a strong position – momentum is good, private luxury consumption may even move up to 3-4% in the next year.’
However Collard thinks the uncertainly of Brexit could impact wages growth. ‘Since 2012, we have seen constant real wage growth, around 2-3%, which is good for the consumer and will likely move higher. What really matters is that consumption growth is strong. Personal disposable income is up – we’ve seen a +30% increase per person per year since 1998. Post the financial crisis consumers’ personal balance sheets – mortgages and households – have been cleaned up. We’ve taken debt payments from 13% down to 10% – the average US household is in a really good state, it is not over leveraged, and the leverage ratio is quite low relative to history,’ says Collard.
Collard continues: ‘Household net worth is worth more than ever today. We’re $80 trillion net worth in the US today. We’ve had a $30 trillion increase in household US net worth increase since the financial crisis in 2008 – that’s five times GDP, we’ve not seen this level of wealth creation vs GDP ever before, even when it was three or four times GDP in the 1950s.’
The people benefitting the most from this are the top 1-5% of the population and JP Morgan clients says Collard. ‘They are creating this wealth. Ever since 2008 they’ve been borrowing cheap money, investing in their businesses and properties. QE has only helped them inflate their wealth levels and this level of wealth creation is fuelling the luxury industry,’ he says.
Babyboomers vs millennials
Collard warns that changes are coming in the US population. ‘The percentage of the working population is shrinking – the babyboomers are coming – in 15 years time, we will have 20% of US population as over 65. The replacement needs to come from millennials and to a lesser degree minorities or immigrants. The replacement is a problem because they make 60% less in terms of wealth. Plus, millennials might not replace like for like because they may not make as much as babyboomers.’
Collard asks what are the future consumption trends of millennnials who are less inclined to invest in traditional signs of consumption. ‘Millennials are untrusting of banks – they might use peer-to-peer lending instead or Uber instead of owning a car or Airbnb instead of a luxury apartment,’ he says.
Millennials’ desire to own things is changing. ‘The sharing economy is eroding a lot of traditional wealth indicators,’ advises Collard. ‘If you keep sharing things instead of buying them, will the aggregate consumption be the same or less in the next decade? This generation is driving new behaviours. If you keep promoting the sharing economy then the creation of wealth slows down and so the traditional value of wealth will change with this generation.’
The sharing economy is certainly set to grow – especially for cars and accommodation. But what does it mean for the luxury industry? Collard highlights the popularity of websites such as Rent the Runway: ‘why wouldn’t you want to rent those luxury products instead of buying them?’ This is especially pertinent for millennials – their motivations and desires are more transient now. ‘They want to maximise utility, they are in a position to change their enjoyment of consumption and save 50% of spending,’ says Collard giving an example as, renting out a loft in Soho in New York vs a room at the Four Seasons like the previous generation used to do (as a sign of wealth) that creates the same effect. ‘That’s how they think; it’s a ‘disruptive’ mindset. Regionally, this mindset eminates from the US West Coast, but is now growing across the world especially in places like Singapore – Asia follows US trends broadly speaking,’ he adds.
Stephen Murphy a luxury brand consultant for US firm Murphy & Partners says luxury brands need to pay attention to two big demographic trends in the US: the ‘high-spending, tech-savvy’ babyboomers and the millennials who by 2019 will surpass the babyboomers in spending. ‘Of the 92 million American millennials, 11.8 million are luxury shoppers,’ he says.
For luxury brands, emotional resonance is three times more valuable in order for consumers to recommend or repurchase according to Murphy. ‘Emotion rules. Emotionally connected people are 52% more likely to repurchase than existing customers who are loyal,’ he says.
‘Emotional engagement in America starts with the babyboomers,’ says Murphy. Between 65-70% of them are active on social media, and while millennials may have an unsentimental approach to life, they still want engagement, he adds. However, this group are more transient, they’re about ephemerality, according to Murphy, who says they use brands such as Airbnb, Uber and Spotify for accommodation, transport and music rather than owning them.
Maria McClay, industry head of fashion for Google says the luxury sector needs to consider both emotional and locally relevant brand content. ‘Luxury brands cannot ever disengage from content. Brands need a global platform but with a local point of view. ‘Give consumes a local sphere of influence among the community, create partnerships where it makes sense, make it authentic, those influencers need to sound true and personal, but have a global reach,’ she says.
Emotion is one of the big three Es that luxury brands need to think about, according to Marigay McKee, a luxury retail consultant and former executive at Saks Fifth Avenue and Harrods. ‘The three big challenges for the department store sector are online, off-price and outlets, while future opportunity for growth lies with creating unique experiences, environments and emotions,’ says McKee who adds that European department stores have a more forgiving way of doing business with vendors, compared to their US counterparts, due to the tough wholesale environment in the US.