Inflation, Recession Fears Have Some Holiday Shoppers Trading Down
Consumers are swapping everything from Lululemon leggings to Natori underwear for cheaper alternatives
Consumers are swapping everything from Lululemon leggings to Natori underwear for cheaper alternatives
Many shoppers are trading down to less expensive clothing and accessories—swapping Lululemon leggings for Uniqlo and expensive lingerie for Target bras and panties—as inflation eats into their disposable income and a rocky stock market erodes their wealth.
The downshift raises concerns about the coming holiday season, historically a time when many people splurge on designer handbags, fine jewellery and other extravagant purchases for themselves or loved ones. Investors will get updates on shopping attitudes this week when Ralph Lauren Corp., Michael Kors parent Capri Holdings Ltd. and Tapestry Inc., the owner of Coach, report their latest results.
“I’m skipping the splurge this year,” said Kate Cheng, who owns a jewellery store in San Francisco. Ms. Cheng said she normally treats herself to a designer handbag or another luxury item during the holidays, but is holding off this year over concerns about a looming recession.
She has noticed a shift in her customers’ buying habits in recent months to less-expensive silver jewellery from gold. That has prompted her to curtail her own spending. She switched to Uniqlo leggings instead of products from Lululemon, which cost about twice as much. She also canceled a trip to Maui, which would have cost about $4,000, and instead plans to take a road trip to New Mexico for about half the price.
Seventy-two percent of consumers plan to look for less expensive alternatives this holiday season as a result of inflation, according to a survey of 2,200 U.S. adults by Morning Consult, a research company.
With inflation at a four-decade high, consumers have been trading down to less-expensive groceries and other necessities for the better part of this year. Now, with the stock-market plunge of recent months further eroding the wealth of middle- and higher-income households, the penny-pinching is extending to more discretionary purchases.
Holiday retail sales in November and December, excluding spending on cars, gasoline and restaurants, is slated to increase between 6% and 8% from a year ago, after a 13.5% jump last year, according to the National Retail Federation, a trade group. The labor market is strong, and NRF expects some consumers will tap their savings and credit cards to deal with price increases.
U.S. consumers slowed their spending on luxury goods in recent months, according to credit-card data from Mastercard Inc., Citigroup Inc. and BofA Securities Inc. Spending over the summer and into September fell from the same period a year earlier, after posting double-digit percentage gains for most of the past two years.
Thomas Chauvet, who heads Citi’s Europe luxury goods equity research, said the slowdown was driven by a deceleration in transaction values, suggesting that even affluent consumers are trading down. According to BofA Securities, middle-income consumers, those making $50,000 to $125,000, slowed their spending the most.
Marc Metrick, chief executive of Saks, the online platform of the Saks Fifth Avenue brand, said customers with household incomes of about $100,000 are still spending but at a slower rate. These customers spent 20% more at Saks in recent months compared with the same period in 2021, but that is down from the 40% increase during the first six months of this year. As a result, Saks is selling fewer wallets, belts and other items bought by entry-level shoppers. “They are the canary in the coal mine for sentiment at that aspirational level,” Mr. Metrick said.
Jean-Marc Duplaix, finance chief for Gucci parent Kering SA, told investors in October that entry-level shoppers are buying less. “Among certain categories of products, which are maybe more appealing to a more aspirational clientele, there is some more pressure,” he said.
The slowdown has also hit American jeweller Tiffany, according to its parent, LVMH Moët Hennessy Louis Vuitton SA. “The business in the U.S. is a bit less strong than it used to be,” but it is still growing at a double-digit percentage, Jean-Jacques Guiony, LVMH’s finance chief, told analysts in early October.
Kering and LVMH executives said some U.S. shoppers shifted spending to Europe given the strength of the U.S. dollar. LVMH said its overall business with American shoppers in the third quarter was similar to the first and second quarters of this year.
Mr. Chauvet said the U.S. slowdown in Citi’s data, which started in May, wasn’t the result of purchases shifting overseas because it captures spending by U.S. consumers regardless of their location.
Luxury brands have been among the most aggressive in raising prices. HSBC estimates the sector raised prices around 5% since April, on top of an 8% increase starting in September 2021.
David Hampshere, who owns a real-estate investment company, switched from Ralph Lauren button-down shirts to Costco Wholesale Corp.’s Kirkland brand earlier this year. “With the stock market tanking and mortgage rates rising, I’ve definitely been cutting my expenses,” said Mr. Hampshere, who is 55 years old and lives in Freeport, Fla.
Mr. Hampshere recently returned a pair of $300 noise-canceling headphones and is instead using an old pair that he already owned. He plans to give friends and family $30 gift cards this holiday season rather than the $100 cards he doled out last year.
Stacie Krajchir, 54, a publicist who lives in Los Angeles, has stopped buying Natori underwear and now gets her bras and panties at Target. “I don’t need a $110 bra,” said Ms. Krajchir. “A $12 bra is good enough.”
She recently returned a $300 blouse she bought at Nordstrom. “I can buy a blouse, jeans and a dress at Zara, and it still won’t add up to $300,” Ms. Krajchir said. She plans to trade down in her gift-giving, too. She is getting her sister one gift this year, instead of the five gifts she normally gives her.
Brett Glickman started swapping lower-priced items for high-end ones in her San Francisco boutique after she noticed consumers becoming more frugal in recent months. She is pulling $198 French silk nightgowns off the shelves and replacing them with $24 sweaters and $65 baby-doll dresses. “I had to flip about 30% of my inventory to less- expensive prices,” the former Levi Strauss & Co. executive said.
JCPenney and Kohl’s Corp. said they are seeing consumers switch to private-label brands, which tend to be more affordable than national brands. “They were definitely trading down,” Jill Timm, Kohl’s finance chief said at a conference in September, referring to Kohl’s shoppers.
Vered DeLeeuw, of Washington, D.C., used to buy most of her clothes at Bloomingdale’s, but has switched to Nordstrom Rack for its bargain prices. “Bloomingdale’s was my mother ship, but it is too expensive now,” the 51-year-old food blogger said.
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Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
There’s more to building substantial savings than putting away what you can after paying your bills
Whether you’re starting your wealth creation journey in your 20s, 30s, 40s, 50s or beyond, the core principles remain consistent. Create more income, manage your savings, and invest intelligently.
We look at the best wealth creation strategies depending on which decade you’re in right now.
In your 20s
The key to wealth creation is to start early. So if you’re reading this and you’re in your 20s, you’re well ahead of the game.
Accept that the greatest investment you can make is in yourself and your ability to earn an income.
“If you want to build wealth in Australia, you need to have a plan to be earning more than $100,000 per annum either now or within the next five years,” financial planner Chris Carlin says. “Most finance experts focus on ways to reduce your expenses, which is important, but for sustainable long-term wealth creation, we believe that you should be focusing on ways to increase your income rather than just focus on reducing your expenses.
For more stories like this, order your copy of the latest issue of Kanebridge Quarterly magazine here.
“If you need to change careers, study, start a business or ask for a pay rise, do whatever it takes to get your income above that level while you’ve got time on your side. Next step is to buy a house, because the sooner you get your foot in the door of the property market, the easier it will be for you to build wealth over the long term.”
Bear in mind that your first home doesn’t need to be your forever home. Think of it as your foot in the door to build wealth.
“If you’re accessing a first home buyers grant, you only need to live in it for 12 months and then you can consider converting it into an investment property or selling it,” Carlin says.
In your 30s
This is the time in life to establish a regular investment strategy. Consider long-term investments that you can lock up for five to 10 years. You can take on more risk at this time of your life, which can generate higher returns.
Set your priorities for life, and don’t take on more debt than you can afford to pay back.
Also, keep track of expenses and income with budget planners — a great habit to get into now.
There are many other things you should be considering too, such as topping up your super above the Super Guarantee and reviewing your personal insurance and investments.
In your 40s
This can be an expensive time of life, particularly if you’re supporting a family. But you’re probably in a more stable financial position by now, giving you a good springboard into investments such as a diversified portfolio of shares.
Investing in property is the best option at this age, whether it’s the family home or an additional property that can be utilised for an Airbnb. Also, make sure you rein in your debt. A bank loan for a mortgage is one thing, but debt on credit cards is hard to justify by this stage of your life.
Invest in your retirement by topping up your superannuation. Even an additional $50 a month will benefit from the wonders of compound interest.
Generally speaking, shares outperform other investments over the longer term. And if you invest in companies that pay dividends, you’ll benefit from being paid part of the company’s profits, generally twice a year. While dividends are less common in a downturn like we’re having now, they are likely to increase once company profits recover.
In your 50s (and beyond)
If you’re in your 50s or older, traditional financial planning tends to encourage less aggressive asset classes as people near retirement.
If you’re in a low asset position due to divorce and having to start again or you’ve missed the real estate boom and are still renting, the main focus should be on controlling spending and pumping money into super and savings and then investing aggressively, advises financial adviser and money coach Max Phelps.
“Property investing is either an option through super, or outside of super if the deposit can be raised,” he says. “Outside of super, properties with scope to improve, extend or subdivide will help build capital faster than normal market growth, to help catch up.”
Share investing could also be an option, with particular focus on high growth funds, such as international securities.
“Controlling spending at a level just above the aged pension should be a key focus, otherwise it’ll be a big step down when you finally stop work. Use a good budgeting and planning app,” Phelps says.
However, if you own your own home, and have a standard super balance, focus on the home and perhaps look at downsizing opportunities in the future.
“Maximising super contributions is likely to be beneficial to get the tax savings, potentially using a transition to retirement strategy,” he says. “For those looking for a sea or tree change, we would always recommend keeping the family home until a year or two after moving to a new area to make sure it really suits.
“For those wanting to stay in the same home forever, releasing equity to buy a couple of high yielding investment properties could be a good option, with the time to pay down the mortgages and keep them for additional income for retirement,” Phelps says.
If your own home is paid off and you have a high super balance and a strong asset position, the focus will likely be on asset protection and less risky asset allocation for investments, he says.
Whatever age you are, consider getting help now. The right financial advice early can set you on the right track.
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