Receive the latest articles for free. Click here to get the Luxury Daily newsletters.
Fiscal cliff legislation may reduce aspirational luxury spendBy Tricia Carr
True affluent consumers are not likely to alter their spending habits on high-end goods and services after the fiscal cliff decision, but aspirational buys in the beauty, fragrance and spirits categories could be cut due to the payroll tax increase, experts agree.
High-net-worth consumers will remain comfortable in their financial standing despite the fiscal cliff legislation passed on the evening of Jan. 1 to allow taxes to increase for households with an individual income of more than $400,000 or a couples’ income of more than $450,000, experts say. However, the payroll tax increase from 4.2 percent to 6.2 percent could keep disposable cash out of aspirational or entry-level luxury consumers’ pockets.
“The tax increase is not a surprise for the affluent,” said Chris Ramey, president of Affluent Insights, Miami. “Like the stock market, the coming increases were embedded in their 2012 buying habits and consumer confidence reports.”
Luxury brands and retailers could see a decrease in infrequent, low-ticket purchases after consumers start to feel the payroll tax increase.
Virtually everyone who is employed – approximately 65 percent of consumers in the United States – will see 2 percent of their income disappear, per Bob Shullman, founder/CEO of the Shullman Research Center, New York.
This income deficit will likely have the most effect on sales of high-end consumer packaged goods.
For instance, consumers who may have splurged on one expensive bottle of Champagne for Valentine’s Day might not have the discretionary income available to do so this year.
Other categories that could suffer include luxury brand cosmetics and fragrance and luxury car leases.
“This will have more of an impact on the L’Oréals, LVMHs and Diageos than the Harry Winstons and Chanels,” Mr. Shullman said.
President Obama speaks on the fiscal cliff decision
Moreover, the current economic conditions in the United States are a concern for all retailers – luxury or mass, per Affluent Insights’ Mr. Ramey.
The luxury industry is likely to remain fragile as long as the U.S. government believes that increasing taxes will solve the deficit, he said.
The industry will also see further withdrawal of the aspirational customer.
“There are still critical issues to be resolved in Washington,” Mr. Ramey said. “These issues and the polarizing differences of philosophy will continue to dampen consumer confidence.”
They will spend
In the immediate future, the fiscal cliff legislation will not have an impact on luxury spending, experts agree.
In fact, the decision may help boost spending since wealthy consumers are rid of feelings of uncertainty about their future taxes, per Ron Kurtz, president of the American Affluence Research Center, Atlanta.
The resulting tax increase will not reduce spending from true luxury consumers in the U.S.
But there are other unresolved issues concerning the debt limit and lowering the deficit by cutting spending and perhaps reducing tax deductibles. This could result in an imminent tax increase for wealthy consumers.
“I do not think luxury brands and retailers should worry about the impact of this legislation,” Mr. Kurtz said. “They should be concerned about how the other issues are resolved, as that could have an effect on the stock market and personal income that might depress the spending mood of the affluent.”
All in all, the New Year will probably bring steady growth for the luxury industry much like 2012, per Milton Pedraza, CEO of the Luxury Institute, New York.
The U.S. economy continues to be steady and luxury will likely follow that pattern.
The fiscal cliff legislation will not result in a decrease in discretionary income among households with an individual income of more than $400,000 or a couples’ income of more than $450,000.
“As long as the government is on track to be more fiscally responsible, it will be a longer-term project to rebuild,” Mr. Pedraza said.
“Europe had the same issues,” he said. “There are risks out there, but not imminent risks.”
Tricia Carr, editorial assistant on Luxury Daily, New York
Like this article? Sign up for a free subscription to Luxury Daily's must-read newsletters. Click here!
Related content: None Found
Tags: Affluent Insights, American Affluence Research Center, Bob Shullman, Chris Ramey, Events / Causes, fiscal cliff, Government, legislation, luxury, Luxury Institute, luxury marketing, luxury retail, Milton Pedraza, Ron Kurtz, Shullman Research CenterYou can leave a response, or trackback from your own site.