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Leibish & Co

Wednesday, October 27, 2010

‘The Luxury Drought’

There’s a gap between older affluent households and younger folks who are eager to purchase life’s better things but don’t quite have the earning power. Add to this a broad division between very high net worth households and those who are modestly well off and the recent recession that has changed buying habits, and you are looking at a foundation of slow growth in the luxury sector for the next ten years, according to marketing expert Pam Danziger.

“Demographics is destiny in lots of ways,” Danziger, president of Unity Marketing, Stevens, Pa., told an audience of luxury professionals Tuesday in New York. The she explained how demographic trends are creating a slow period in luxury spending.

The main consumers of luxury goods and services are affluent households, she explained. They are the top 20 percent of households in income with average earnings of about $170,000.

Danziger divides affluent households into three groups: 25-34 (made up of Millennials) who are “not quite there,” in terms of earnings; 35-44, “younger affluents” (mostly Generation X), the “most prolific consumers;” and the 45-54, “mature affluents” (mostly Baby Boomers), who don’t spend as much on luxury as their younger counterparts. The older affluents is the dominate age group in the luxury market today and until at least 2019. The recession plays into this but the main reason is because the younger affluent group is a relatively small compared to the other two age groups.

“Mature affluents are going to dominate the market between now and 2020,” she told the audience at the event sponsored by The Luxury Marketing Council. “We’ve got to wait for the Millennials, the babies of the baby boomers, to come on board and they’re not going to reach middle age and reach that window of affluence until about 2019 and 2020.”

To make her point, Danziger showed a chart of population projections of by age. One line which curves in an upward manner consists of mature affluents who “are really peaking.” Another line, which started high but then went on a downward curve represents the young affluents. The space in between is what she calls “the luxury drought.”

“This period is going to be dominated by more mature affluents who just do not spend as much or have as heavy an appetite for luxury as the younger affluents,” she said. 

“I call it a drought because it doesn’t mean that it’s drying up,” she continued. “It doesn’t mean the luxury market is going away, but it does mean you’re going to have to work harder to make ready in this marketplace. You’re going to have to work harder and be smarter than the next guy because there aren’t as many people that you can sell to.”

Danziger said marketers need to target the 25- to 34-year-old group by providing products and services geared for that demographic and engaging them with social media.

“We knows these people have a heavy appetite for luxury,” she said. “We know they are friending all the luxury brands on Facebook. But guess what? They don’t have the money to buy those brands yet so there’s going to be a lot of opportunity for marketers to figure out how to connect luxury brands with 25 to 34 years old before they get money in their pockets.”

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