High Earners Take a Break From Shopping
For Mac McKay, 2012 was going to be the year he started splurging again. After sales at his flower shop in Arlington, Va., rebounded, the 62-year-old planned to take his first vacation since the recession and start a $30,000 kitchen renovation. Those plans are now dead. “We’ve cut back on a lot of things we used to do,” says McKay, who watched revenue at Garden City Florist sink 15 percent this year. “You can see people tightening. They were more free with their money last year.”
McKay is what retail consultants call a Henry: high earner, not rich yet. This group has helped a gamut of retailers from Target to Saks get through a spotty U.S. recovery. Now, as the European debt crisis snowballs and stock markets lose steam, Henrys are tapping the brakes after just becoming comfortable spending again, says Pamela Danziger, president of consulting firm Unity Marketing. “They are the heavy lifters of the consumer economy,” she says, adding that it “would be very bad” if they became more cautious.
There are signs that consumers have already retrenched. U.S. retail sales fell 0.2 percent in May, following a similar decline in April, according to the Commerce Department. Sales excluding automobiles slumped 0.4 percent, the most in two years.
Henrys, who earn between $100,000 and $250,000 a year, account for 21 million U.S. households, according to Danziger. They represent 90 percent of affluent consumers (defined as households in the top 20 percent by income), a category that is responsible for 40 percent of consumer spending. Henrys are influential because they interact with a wide range of retail brands. They’re regular customers at so-called accessible luxury purveyors such as Coach, Tiffany, and Restoration Hardware, as well as premium mass brands like Gap’s Banana Republic and Williams-Sonoma. They shop at discounters but also splurge on pricier names like Chanel and Hermès.
Back in 2010 the demographic above Henrys—the “ultra-affluents” who make up the top 2 percent of earners—led the way back into stores. (The recession forced even them to cut back.) Henrys kicked in last year as the economy appeared to improve, helping deliver another solid year of retail sales growth.
While they have discretionary income to spend, the Henrys can be fickle, according to Michael McNamara, vice president at MasterCard Advisors SpendingPulse, which tracks consumer spending. Their purchasing decisions are influenced by how rich they think they are—the infamous wealth effect—and there are plenty of reasons they might be feeling more middle-class right now. “They don’t have a layer of wealth that’s permanent and insulating them, so they are much more susceptible” to swings in confidence, says McNamara.
Negative headlines, stock market swings, and depressed home values have much more sway over Henrys’ spending habits than on those of the ultra-affluents. McKay, whose shop is in one of the wealthiest counties in the country, said a top customer went from spending $2,000 on Mother’s Day to less than half that. Another longtime client recently lost his job as a rocket scientist. “Every time you see someone, they tell you these horror stories about their company going down,” says McKay. “Everywhere you look, there are layoffs. It has everyone spooked.”
That has left many companies relying on the wealthiest of the wealthy for growth. Sahil Bhasin runs Coomi, a jeweler that sells $20,000 necklaces crafted from ancient Roman artifacts. Two of his biggest customers, Neiman Marcus Group and Saks, asked him to deliver some lower-priced pieces to attract Henrys. Last year, he introduced items below $10,000. His $5,000 earrings aren’t selling; meanwhile he can’t keep $58,000 gold bracelets in stock. “It’s definitely the ultrarich” buying our jewelry, says Bhasin. The market below that has been tough because “that customer isn’t shopping.”
LuxeYard, a Los Angeles-based flash-sales website that targets consumers with six-figure incomes, is seeing the same thing. Pricey wares such as $300 Givenchy scarves are selling briskly while sales of cheaper luxury goods have tailed off, says Chief Operating Officer Steve Beauregard.
The question is whether the überwealthy will spend enough to keep the good times going. There are no signs of a slowdown at Manhattan Motorcars, a dealership that specializes in luxury cars. Lamborghinis are sold out, waiting lists are growing, and the firm is headed for the best sales performance in its 17 years, says general manager John Kaufman. Our customers “don’t rely on their Wall Street bonus to purchase the car,” Kaufman says. “They’re fine.”