Rich people still shop for luxury despite inflation and recession fears

Food, gas and travel prices have skyrocketed over the past year — but they seem to be ignored by the wealthy and still fuel sales at luxury companies, where sneakers can fetch $1,200 and sports cars easily reach $300,000.

Companies that cater to the super-rich, including Ferrari and parent companies of Dior, Louis Vuitton and Versace, are reporting strong sales or raising their earnings forecasts. The upbeat results come even with recession fears over the economy, with Walmart, Best Buy, Gap and others slashing their financial forecasts, citing falling spending among low-income consumers due to inflation.

Experts say the indefatigable strength in the luxury category is in line with the previous economic slowdown, where the wealthy are often the last to feel the effects due to the protection offered by their vast fortunes. Among the aircraft group, continued spending also indicates that expensive purchases often serve as status symbols.

“Having symbols of power within your tribe is a powerful thing,” said Milton Pedraza, founder and CEO of Luxury Institute, a market research and business management firm. “Those symbols of power are still very important within the super-rich tribes.”

Louis Vuitton, for example, offers a pair of sneakers for $1,230, as well as a bag that costs $2,370. High fashion parent company LVMH, which also owns Christian Dior, Fendi and Givenchy, reported organic revenue growth of 21% to €36.7 billion ($37.8 billion) in the first half of 2022 compared to last year.

At Versace, where a pair of flip-flop shoes or T-shirts can easily fetch $1,000, quarterly revenue rose nearly 30% to $275 million from a year ago when excluding the impact of currency moves. Parent company Capri Holdings, which also owns Michael Kors and Jimmy Choo, said total revenue rose 15% to $1.36 billion for the period.

Despite broader economic uncertainties, Capri CEO John Idol said the company remains confident in its long-term goals due to the “proven resilience of the luxury industry”.

“None of us know what will happen in the second half of the year with the consumer, but the luxury industry seems to be very strong and very healthy,” Capri said during this week’s earnings call.

Earlier this month, Italian supercar maker Ferrari bolstered its guidance for the year after revenue hit a record 1.29 billion euros ($1.33 billion) in the second quarter. Pricing for the 75-year-old Ferrari 296 GTB with plug-in hybrid capabilities starts at $322,000, according to Car and Driver, while the 2022 Ferrari 812 GTS starts around $600,000. Even used Ferraris sell for hundreds of thousands of dollars.

Outside of the luxury realm, some companies also point to the strength in more expensive options. For example, Delta Air Lines cited stronger revenue recovery for offerings like Business Class and Premium Economy, compared to other bus tickets.

While the luxury industry has always had a degree of resilience, the growing wealth inequality fueled by the pandemic is adding to the sector’s current strength, said Amrita Banta, managing director of Agility Research & Strategy, which specializes in affluent consumers.

“The disposable income of most affluent consumers and (high net worth) consumers has increased due to less travel spending,” she said.

Additionally, she said there has been a cultural shift since the 2008 recession and that today’s high net worth consumers are less guilty of spending in a slowdown, and “feel that they deserve to spend their fortune.” She said this partly reflects people in developing countries, where wealth is growing.

The Luxury Institute’s Pedraza said luxury firms may be noticing a spending slowdown among 80% of their “semi-wealthy” clients. But he said those consumers typically account for about 30% of sales.

Instead, he said, luxury brands often rely on just 20% of their customers — the ultra-rich and the wealthy — for the majority of their sales. And because this cadre is more resistant to inflation and stagnation, he said, luxury companies tend to eventually experience a slowdown.

“The type of customers and the amount of sales they represent in true luxury brands makes them extremely resilient,” he said. “It’s not immune, but it’s super flexible.”

Leave a Comment