3 Reasons Why The Recession Won’t Affect Luxury
In a way, luxury markets are unaffected by what is happening worldwide.
A myriad of global and national economic issues is causing the likes of a potential recession that the luxury market has never seen before.
As a refresher for our readers, a recession is typically identified by a fall in GDP in two successive quarters and occurs when there is a widespread drop in spending. However, unlike recessions of the past, there is mixed economic data. The labor market has been strong, and consumer confidence has remained steady over recent months.
The catalysts causing the recession.
There’s so much going on in the world today, and every aspect could lead to a potential recession. There exists a cost-of-living crisis, an oil/gas crisis, soaring inflation and the war in Ukraine, and all of these are dangerous catalysts that can cause an unstable state of affairs not only in the country but the world, too.
Why the luxury retail markets won’t be affected by the recession.
You can look at previous recessions to see how luxury markets fared. In each instance, luxury markets are well-insulated from economic downturns because much of their sales come from consumers not affected by recessions.
In the early 80s, inflation reached more than 14 percent. During this time, luxury markets across all sectors (cars, jewelry, watches, fashion) remained stable.
In a way, luxury markers are unaffected by what is happening worldwide. That is not to say that these catalysts do not affect luxury markets, but not in the way that most think. Compared to other industries, the luxury markets are not affected to the extent that other industries are.
Luxury markets attract the elite, regardless of recession or not. Even in a recession, while some become more conservative in their spending, there is also an element of preparedness for downturns. There is also a tendency for “durable goods” such as jewelry and watches to remain more stable as they can be viewed as more of an “investment” than ready-to-wear.
Early in the pandemic, online sales went through the roof when the U.S. economy shut down and went into lockdown. In 2020 alone, online spending for luxury sales surged 23 percent from 12 percent in 2019. Then on the other side, when lockdowns were lifted, foot traffic and brick-and-mortar sales climbed once more.
In the short term.
The recession may be detrimental to the growth and progress of sales. However, it won’t change by much and not nearly to the degree of other industries. If you look at luxury brands, much of their revenue comes not only from the elite but the elite willing to spend more. In fact, luxury brands rely on 20 percent of their clientele, the elite and wealthy, for the bulk of their sales.
A note of caution, however, for those brands who have become increasingly reliant on the aspirational customer. As inflation and other factors place pressure on discretionary spending by that client base, those houses tend to be more affected than pure-play luxe brands that focus on the “UHNW” (ultra-high net worth) clientele.
Additionally, when it comes to the war in Ukraine and the European market, Europeans will spend less mainly due to the gas, oil and energy prices from Russia in the short term. To briefly summarize, Russia’s invasion of Ukraine has sent energy prices to historic sights, as the conflict has resulted in high market volatility and a coordinated round of sanctions targeting Russia’s economy. As the second largest producer of natural gas globally, about 70 percent of Europe relies on Russian gas transiting through Ukraine.
Meanwhile, for the elite who are willing to spend thousands of dollars on luxury goods, they are not impacted by a few extra hundred dollars a month for necessities.
In the long term.
The luxury market is resilient. There are always those willing to spend money—economic downturn or not—on many of these brands, and sales will pick up despite any potential lag in growth.
China is one of the biggest consumer countries in the world for luxury goods. Per person in China who buys luxury, per head they spend more on luxury individually than anyone in any other country globally. If you look at numbers back in 2021, Chinese consumers spent a total of 74 billion dollars on luxury goods, up 36 percent from 2020.
In short, while the luxury markets are not immune to the recession, they do prove to be resistant.
While many industries expect to face adversity in the face of a potential recession, The Bowerman Group aims to create opportunities within the luxury and premium markets as our team has lived in this niche for over 20 years. Join our network and plan ahead with one of our recruiters today