Gene Gau found himself at the end of a long table in Herman Miller’s store in Manhattan’s Meatpacking District, armed with his laptop. It was a quiet afternoon, with little customer activity besides one man who briefly tested out one of their popular $8,000 lounge chairs before leaving. Across the street, at RH’s massive 90,000-square-foot flagship store, a similar scene unfolded with only a handful of shoppers perusing the high-priced items spread across five floors.
This trend of limited spending among affluent Americans is not limited to these two retailers. Companies catering to households able to afford luxury furniture like $12,000 couches and $4,000 coffee tables are all reporting the same phenomenon. One example is MillerKnoll, the parent company of Herman Miller, which recently issued a warning about economic challenges due to higher interest rates, low CEO and consumer confidence levels, and complications arising from the regional banking crisis earlier in the year. This concern is not exclusive to the furnishings industry, as Leslie’s, the largest seller of swimming pools and hot tubs in the country, saw its shares plummet more than 40% after warning about increasingly price-sensitive customers impacting sales. Similarly, recreational vehicle shipments were down nearly 50% in the first five months of 2023.
These reports appear to clash with the overall image of a confident US consumer that emerged from recent summer reports. In July, US consumer sentiment experienced consecutive monthly increases, reaching its highest level since September 2021 due to the Federal Reserve’s inflation-cooling rate-raising policies. The recovery in consumer spending has also been boosted by wealthier Americans, with data company Morning Consult revealing that spending by middle and high-income earners has increased by 23% and 31% respectively since hitting a low point in March. According to Kayla Bruun, a senior economist at Morning Consult, the high-income group initially pulled back their spending more during the tech layoffs and concerns about banking sector stability earlier in the year, but their spending has rebounded quickly. However, their focus has shifted towards holidays rather than clothing purchases.
As the US gradually emerged from pandemic restrictions, there has been a noticeable shift in spending from goods to services across income brackets. However, for wealthier Americans, this shift has meant redirecting some of their spending from Manhattan boutiques to those in European cities like Milan, according to Federica Levato, a senior partner at Bain & Company. Levato highlights that American tourists are now flocking to Europe, indicating that the American customer is buying elsewhere. Morning Consult’s findings also reveal a surge in higher-income Americans’ spending on hotels and airfares, surpassing their spending on other commodities.
While the wealthy can afford higher airfare prices, Neil Saunders, managing director of GlobalData Retail, explains that even they have budget limitations. Inflation is beginning to take its toll on this previously resilient consumer segment. Although households earning over $100,000 per year are more shielded from inflation than most, Bruun notes that they still have to buy gas. Morning Consult surveys indicate that even within this income bracket, the number of Americans who can add to their savings has been declining since mid-2021.
RH and other luxury retailers have pointed to the impact of rising interest rates on the luxury housing market as a contributing factor to their weakened sales. The sale of items such as hot tubs is closely tied to housing activity and construction, which have experienced a pullback in the US. Furthermore, department stores are exhibiting cautious behavior when it comes to inventory replenishment due to economic uncertainties. While higher-end retailers like Coach and Nordstrom are hesitant to heavily discount products and risk jeopardizing their brands, they are ensuring that more affordable items are available to entice customers to make smaller purchases.
Companies that experienced significant success early in the pandemic are now grappling with the challenge of maintaining that momentum. Sales of home items experienced a surge during the pandemic years, as consumers channeled their extra savings into upgrading their properties. For example, MillerKnoll saw a 60% revenue increase for the year ending May 2022 due to the shift towards remote work. However, sales have been declining since 2022, and recent quarters have been slow, with a less busy summer than the previous year, as observed by Gene Gau in Herman Miller’s Manhattan store.
Boussour predicts that the pullback in discretionary spending among wealthier Americans will persist into 2024. Factors such as higher interest rates, elevated borrowing costs, and limited access to credit contribute to this projection. As Boussour aptly puts it, items like swimming pools are long-lasting, and one household can only have so many in their backyard.
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