The COVID-19 pandemic has upended every aspect of business, but there is reason for optimism in the high-end sector. By Dianne M. Pogoda
The tools to reactivate discretionary spending include innovation, boosting consumers’ confidence and shaping their perceptions about premium products and services, according to two experts on the luxury market.
Bill Darcy, NKBA CEO, hosted a thought-provoking discussion on NKBA Live’s “Brave New Business” webcast that explored the ways the pandemic lockdown has impacted consumer behavior, spending and attitudes — especially at the top end of the market — and the steps brands need to take to stimulate demand again.
Joining Darcy for “Consumer Confidence and the Discretionary Dollar” were J. Walker Smith, Ph.D., Chief Knowledge Officer for Brand & Marketing with Kantar Consulting, and the 2020 recipient of the Charles Coolidge Parlin Award, the oldest and most prestigious Lifetime Achievement Award in marketing and marketing research, and award-winning author Pam Danziger, a researcher, speaker and expert on retail, the luxury market and the affluent consumer segment. Among Danziger’s books are “Why People Buy Things They Don’t Need,” and “Meet the HENRYs: The Millennials That Matter Most for Luxury Brands,” about the consumer segment of “High Earners Not Rich Yet.”
The panel started by defining some terms: necessity spending, the things we need for daily living, vs. discretionary spending, as Danziger said, “all the extras in life that make it worth living — wants and desires.”
Where it gets tricky is that there isn’t a clear-cut difference between the two, she said, because a lot of discretion goes into necessity purchases. “We might need sneakers, but we want a pair of Nikes,” she said, adding that discretionary spending is so important to kitchen and bath pros, because some of what they sell is necessity, but much more of it is discretionary. “That’s where you make your money, in getting people to trade up to more premium items. And luxury is at the pinnacle of discretionary purchases.”
The Target Audience
The consumer segment known as HENRYs are in the middle-range, doing better than 75% of all U.S. households, but still a rung below the ultra-affluent customer, Danziger explained. With income roughly between $100,000 and $250,000 they make up about 21% of the population, but account for 36% of all consumer spending. The top 5% of consumers only account for 10% of spending. The difference is because there are 28 million HENRY households vs. 6.5 million ultra-affluent households.
“HENRYs are so important to the K&B market because they’re the best prospects for future clients,” she said. “Everyone who reaches ultra-affluent income levels started out as a HENRY. It’s important to make an early connection with young HENRYs.”
Smith concurred, adding that the luxury consumer, what he called the “balance-sheet consumer,” is one who thinks in terms of net worth, not paycheck-to-unstable-paycheck, and has the financial reserves to assess purchasing decisions from a more secure position. They have more freedom to fall back on their reserves and they’re choosing to avoid risk.
“In terms of the COVID-19 crisis, these individuals have chosen to self-isolate. The trick to engaging with them is all about their avoidance of being exposed to high risk,” Smith said. “They’re not going out to eat, but not because they can’t afford it, they choose to minimize their exposure.”
The luxury market has shifted from categories like exotic travel, which rely on high personal engagement, to categories that don’t have that kind of focus.
Smith said there is still a desire for escapism, so luxury consumers who are engaged in avoidance are still looking for an escapist experience, especially spending on the home, technology, digital/video entertainment, cooking, in-home services like a Peloton bike instead of going to a gym.
“The ability of the luxury customer to self-isolate is dictating how they’re engaged in the marketplace,” he said.
Darcy pointed out that in a time of national crisis, when conspicuous consumption might be frowned upon, brands need to find new ways to connect with consumers. Danziger noted that the role of marketing and branding is to encourage clients to trade up to spend more of their discretionary dollars on premium products.
“Our customer’s perception is our business reality,” she said. “Marketing and branding is how we shape that consumer perception. We have to understand the values and motivations of our clients, and we have to make sure that our values and what we promise to deliver matches theirs.”
Many traditional luxury brand value propositions have negative connotations — like conspicuous consumption.
“Wearing a bold logo can brand you as an elitist or a ‘one-percenter,’ and in today’s climate, where income inequality is a hot-button issue, you don’t want to be associated with that,” Danziger added. “People will trade up to luxury purchases if the value is there. They may not want a logo, but they do want the value of luxury: long-lasting quality, superb workmanship, hand-crafting and superior materials inherent in luxury brands. Our job is to educate our clients about the value they’ll get for paying a premium price. They’ll spend more if they’ll get more and if the value is there.
“Once you make the case for value, price ultimately becomes secondary,” she said, “and for the right customer, it may not even be an issue at all.”
A New Era for Luxury
Smith said he sees the luxury marketplace pivoting into a new era. Luxury has evolved from acquiring things for a better lifestyle earlier in the 20th century to spending on personalization over product toward the end of the 20th century. Now, in the 21st century, consumers take for granted that a product is well-suited to them , but now they’re looking for brands to make a contribution to a better society. The pandemic, the protests and all the issues around things like sustainability are really pushing brands in this direction, he said.
Danziger postulated that while the affluent consumer might be more immune to economic turbulence, but their consumer confidence can be shaken as much as anyone else’s — and consumer confidence is what gives people permission to spend.
“For the future, I foresee a lot more spending for the home market,” she said. “First, people are spending more time at home and want to refresh. People who aren’t moving as much are remodeling. On the other hand, with all the threat of infection more prominent in crowded areas, we can anticipate people moving from urban areas to suburban or rural areas — and as we know, home buying is good for NKBA members.”
Consumer Behavior in Disruptions
In noting that there have been three major disruptions since 2000 — the Sept. 11 attacks, the financial crisis of 2007-2009, and now the pandemic — Smith talked about some similarities and differences among the three.
Similarities are that innovation succeeds, big brands enjoy more advantages than smaller brands, and there aren’t real changes in price perceptions. There are some changes in the ability of people to afford things, he said, but not lasting changes in people’s price to value perception — and that will happen now as well.
“[Sept. 11] was more about fear, so the job was to restore confidence,” he said, “while 2007-2009 was a liquidity crisis, so there was pressure on the credit markets and loans to enable people to afford things again.
“Now, we have a demand problem, that started as a supply shock,” he continued. “We’re trying to get people out into the marketplace again to pick up the slack in demand. We’ve got to reassure people about their health and hygiene to do that. The first thing is to signal hygiene as people engage with you in the marketplace. That’s the only way to get the high-end consumer — who’s already been avoiding the market — back.”
Smith turned to the concept of long-term scarring effect on consumers who are just now coming into the marketplace and forming their expectations of the marketplace — the future luxury customer.
“There’s a tendency to overestimate the likelihood of a recurrence of a ‘black-swan’ event, so as a result, people become more cautious and pull back,” he said. “We tell our clients to focus their attention on communicating confidence to consumers, that they don’t have to fear the marketplace going forward. The forecasts about the scarring effects of this current pandemic are pretty scary, as much as a 10% [decline] over a five-plus-year period, so as companies we need to step in and take some responsibility for restoring confidence before they really begin to impact our future opportunities.”
Reactivating the Market
Asked for some advice to brands, designers and retailers, each panelist offered a few key points.
Smith advised, “Innovate around hygiene, communicate that you’re more flexible, that you can adapt to new needs, and indicate that you’re a brand with a conscience and in tune with the big changes that are happening in the marketplace in the context of society in general.”
Danziger expressed optimism about the future of the home sector coming out of this crisis, while acknowledging the challenges ahead.
“You are the most important resource for your business, so conserve your optimism and your spirit,” she said. “Maintain a positive attitude, believe in yourself, your talent, and in the life-enhancing products and services that you provide your clients. That’s what made you what you are today and what will take you into the future. Your products and services will be more important than ever before to clients, especially since they’re anticipating spending a lot more time in their homes — so you have to make that home a wonderful place to be.”
“Brave New Business” airs on Thursdays at 2 pm (Eastern). For a schedule and to register for upcoming events, click here.
