Cautious optimism is how one might best describe the affluent American consumer’s state of mind in these days of economic recovery. With average incomes in the six figures, this demographic wields significant buying power in luxury markets. Many are still recovering from the hits the recession took on their financial portfolios, but their outlooks are a bit brighter in 2010, according to a recent survey of affluents’ values, financial priorities, and concerns conducted for the Merrill Lynch Affluent Insights Quarterly survey.
Forty-one percent of the 1,000 affluent consumers interviewed nationally for the Merrill Lynch Global Wealth & Investment Management survey say they’re feeling financially better off today than they did in 2009, and 78 percent believe their personal finances will improve in the coming year.
However, while affluent Americans may be regaining a sense of financial security, they’re not ready to begin spending hand over fist again. In fact, 37 percent of those interviewed for Merrill Lynch said they spent less overall in 2010 than in 2009. Confidence in the U.S. economy among this group is improving, but still low. Asked whether they think the economy will improve in 2011, 26 percent indicated a positive outlook, while another 25 percent were less than optimistic; the rest came down squarely in the middle. In light of such mixed feelings, it’s not surprising that the survey showed affluents largely curtailing their expenditures and remaining conservative in their management of investments.
Dovetailing with the Merrill Lynch survey, other findings from the quarterly Luxury Consumption Index developed by marketing research firm Unity Marketing show a 6.2-point drop in affluent consumers’ confidence in October that resulted in flatlined luxury spending during 2010’s third quarter. In this period, Unity’s survey found, affluent consumers spent 1.4 percent less on luxury goods than in the previous quarter, while ultra-affluents—which Unity classifies as those top 2 percent of U.S. households with incomes in excess of $250,000—chopped their spending by 11 percent.
Even with these reductions, affluents still spent 33 percent more on luxury goods year over year, according to Unity. And while less was spent overall by this group in the third quarter than in the second quarter, a higher percentage of these consumers purchased luxury goods. They’ve maintained their budgets and their style of living by being more selective in their indulgences and by seeking out discounts and trading down to value brands.
These new shopping habits apply across all luxury product categories, from dining and travel to home goods and services, and are driven by a shift in mentality. “Prior to the recession, affluents gained power as shoppers from the size of their wallets, but today they gain power as consumers by how smart they are—and they are very smart,” says Pam Danziger, Unity’s president. “They know how to assess value and where to find value.”
Going forward, affluents are likely to remain reserved in their spending. Forty-nine percent of those Unity interviewed predict that in the next 12 months their spending on luxury goods will not change, while 24 percent plan to spend less. Twenty-seven percent of those surveyed for Merrill Lynch indicate that they have cut back on luxury purchases and recreational activities, as well, while 23 percent say they’re spending less overall and managing their daily expenses more closely as a means of remaining financially stable.
“Prior to the financial crisis, affluents were living large; they perceived themselves as being wealthier and tended to live up to that idea. They were spending more and saving less because they felt wealthier. But once all that wealth disappeared, they had to go back to living on their actual incomes again,” says Danziger.
According to Merrill Lynch’s Affluent Insights Quarterly, affluent Americans have learned some valuable lessons during the recession, primarily that it pays to live within one’s means, no matter how ample those means may be.
