Memo: Initiate Richcession

Americans are worried about their financial futures. Recession speculation rises and falls with the 24-hour news cycle, but new data suggests a problem. Consumer bifurcation, or the poor getting poorer while the rich get richer, is reverting back to the statistical mean. The period of excess that maintained luxury brands and services throughout the pandemic and beyond is coming to a close.

This means less Gucci and Louis Vuitton and more reasonable purchases by consumer luxury seekers. But don’t think about this through the lens of fashion and accessories alone. It also means fewer subscription food charges, less reliance on DoorDash / UberEats and more shopping at Kroger, Giant Eagle, HEB, and Albertsons.

The luxury market has enjoyed unprecedented growth in the US in recent years, driven by an upwardly mobile middle class and the increased accessibility of luxury goods through eCommerce. The COVID-19 pandemic led to a widespread economic downturn and despite this, luxury goods and services thrived. The ensuing recession in 2022 shook the foundations of the luxury goods and services sector. And in many ways, 2023 is manifesting what were cracks in the system in 2022. The luxury boom in the US will end in 2023 due to the lasting effects of the pandemic, the economic challenges brought on by the recession, and the consequent shift in consumer behavior and preferences.

Casse-toi, riche con. 

Bernard Arnault has come a long way since that 2012 headline in Libération newspaper. Moët Hennessy Louis Vuitton (LVMH) is the largest company in Europe and through the pandemic and beyond, it established itself as the most valuable brand conglomerate in the world. So much so that the company easily raises venture debt in a post-pandemic recession.

The bond is LVMH’s first venture into global debt markets since April 2020, when the company sold debt in the wake of the pandemic. That sale came soon after a huge deal in February to support the acquisition of Tiffany & Co.

And nearly a year ago, we published on this topic in an essay entitled, “Add Recession to Cart.

Only a recession could stop the new consumer boom. The next boom is in pre-pandemic activity, America’s latest social luxury.

Both excerpts seem to be communicating the same: hunker down for major changes. The COVID-19 pandemic has had a profound impact on the global economy, with businesses of all sizes suffering significant losses. The luxury industry, in particular, has experienced a severe decline in demand since the end of lockdown measures, travel restrictions, and reduced consumer goods spending.

Despite the partial recovery of the luxury sector in 2021 and into 2022, the persistent challenges posed by the pandemic have continued to hamper growth. Supply chain disruptions, for instance, have led to widespread shortages of raw materials and key components, driving up production costs and pushing some luxury brands to the brink of collapse. Others who insourced their logistics and supply chain processes seemed to have successfully insulated themselves. But now, the diminished purchasing power of consumers, coupled with the increased appeal of “experiential luxury”, has further dampened the prospects for the industry.

A Catalyst for Richcession

The recession that began in 2022 exacerbated the difficulties faced by the luxury industry. As global GDP contracted and unemployment rates rose, consumer confidence plummeted, leading to a decline in demand for luxury goods and services. This is particularly concerning given the luxury sector’s reliance on discretionary spending, which is among the first to be affected in times of economic uncertainty according to a fascinating white paper published by Jean Kapferer and Vincent Bastien in 2019.

A luxury strategy obeys anti-laws of marketing, such as higher prices as a method to increase demand. Only true luxury brands can benefit from this Veblen (1899) pricing effect (Amaldoss and Jain, 2005). Sales by luxury brands also have largely recovered from the global economic crisis, such that today luxury is a micro-economic, small, but very visible and flourishing sector. This sector also has been affected by globalization trends, shifting focus from production to retail. For example, luxury brands are compelled to open stores all around the world, to cater to a travelling elite and local upper-middle classes.

According to Kapferer and Bastien, we must establish three key notions to define luxury:
  • Luxury is subjective.
  • Luxury is an economic sector, once populated mainly by family firms but now more and more concentrated in publicly listed groups.
  • Luxury is a specific strategy, not to be confused with a premium strategy, even if consumers sometimes lump the different kinds of companies together

One sentence stood out, when reviewing the white paper: “Sales by luxury brands also have largely recovered from the global economic crisis, such that today luxury is a micro-economic, small, but very visible and flourishing sector.” The recession has, so far, led to increased market volatility, currency fluctuations, and uncertainty surrounding international trade, all of which made the luxury sector seem impervious to the macroeconomic changes. This invulnerability is no longer the case.

A Shift in Consumer Behavior and Preferences

Faced with persisting economic uncertainty, luxury consumers have become more price-conscious and focused on value, leading to a decline in demand for luxury goods. When LVMH raises $1 billion in debt, that should tell you something. The previous six to twelve months has prompted a reevaluation of priorities, with many consumers choosing to invest in their health, well-being, and personal development rather than indulging in luxury experiences or products.

This shift in consumer behavior has given rise to a new breed of luxury consumers who prioritize sustainability, ethical production, and social responsibility over traditional markers of luxury such as exclusivity and heritage according to a 2021 Deloitte report. As a result, the luxury market is undergoing a contraction of sorts, with established luxury brands struggling to adapt to changing consumer preferences and new entrants offering sustainable and ethical alternatives gaining traction.

End of the Luxury Boom: A Confluence of Factors

The convergence of the pandemic’s lasting effects, the economic challenges posed by the 2022 recession, and the shift in consumer behavior and preferences signal the end of the luxury boom in 2023. With the global economy still in recovery, consumer demand for luxury goods and services is expected to remain subdued, especially as the lasting effects of the pandemic and recession continue to reverberate through the market. The structural changes taking place within the luxury industry, driven by the shift in consumer preferences towards sustainability and social responsibility, will likely lead to a reshuffling of the sector’s competitive landscape. Established luxury brands and services that fail to adapt to these new consumer demands risk losing market share to emerging players offering innovative, sustainable, and ethical products.

As the luxury market contracts and consolidates, the implications for the industry extend beyond the short-term challenges posed by the pandemic and recession. The shift in consumer preferences indicates a fundamental change in the way luxury is perceived and consumed, suggesting that the luxury boom of recent years may be giving way to a new era characterized by a more nuanced understanding of what constitutes luxury. Take note of this recent Reuters report:

The United States is “the biggest bear story” in the luxury sector, HSBC said in a recent note, though it cautioned fears of a sharp downturn may be exaggerated. “(The) softer U.S. consumer is an important caution point,” said Oliver Chen, an analyst with Cowen, flagging possible risks for Tapestry and Versace owner Capri due to their exposure to the handbags segment.

Driven by the lingering effects of the pandemic, the economic turmoil resulting from the 2022 recession, and a profound shift in consumer behavior and preferences – we are in for richcession. As the luxury market undergoes a period of transformation, both established players and emerging brands will need to adapt and innovate to survive in a post-boom landscape. This new era of luxury will likely be defined by a renewed focus on sustainability, ethical production, and social responsibility, heralding a more mindful and conscientious approach to luxury consumption. But gone are the days of recessionary-insulation for luxury goods and services.

Mentions of the LVMHs of the world serve only as a leading indicator. Brand value to the middle-class and luxury consumers will need to be strong. Loyalty will matter more than ever as discretionary spending ceases. This goes for everything from a luxury shoe brand to a grass fed meat subscription company. The rich’s excess shielded many companies from the recessionary effects faced by value-based consumer products.

That time is over, the richcession is here.

By Web Smith | Edited by Hilary Milnes with art by Alex Remy and Christina Williams 

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