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Wealthy Tighten Their Belts, Look For Bargains

06 february 2009

Faced with the sharpest decline in net worth in nearly 50 years, wealthy Americans are re-evaluating their priorities and slashing their spending at a rate unseen in decades - a move that could have dire consequences for the economy, luxury stores and high-end brands, says (RAPAPORT) Associated Press WorldStream in a correspondence from New York.

In response to the increasingly subdued shopping mood that began late last year, luxury brands are cutting their inventory, changing the assortment of products they offer and tweaking their advertising message. "Fewer, better things," suggests diamond jewelry giant De Beers Group in an ad campaign launched last month.

Sure, many of the ultra-rich aren't exactly scrimping. Some are still dropping $100,000 on a fur coat or $600 for a pair of shoes - but increasing numbers who were never bargain-hunters are picking through mounds of discounted designer goods to save money in an uncertain time. And why not? Deep discounts are making it a great time to stock up on high-end clothes and accessories, whether it’s a Chanel suit, a Prada bag or a $1,000 pair of Christian Louboutin shoes, with their bright red soles.

But the financial meltdown has deflated the demand that reigned for much of this decade, resulting in plummeting sales for many luxury purveyors. That has forced high-end stores like Saks Fifth Avenue and Neiman Marcus to offer discounts of up to 70 percent before the traditional start of the holiday shopping season - akin to their downscale competitors.

The aspirational luxury shoppers, those whose average annual salary is about $150,000, began cutting back a year ago, according to Milton Pedraza, chief executive of the Luxury Institute, a research firm. That spiraled up the economic scale after the economy worsened.

Single-digit millionaires began pulling back sharply starting in March, when Bear Stearns nearly collapsed and was bought by JPMorgan in a fire sale, Pedraza said. And the ultra-wealthy, with a net worth above $10 million - who make up about 60 percent of sales and 20 percent of top luxury stores' customer base - started cutting back in September, when the financial crisis ballooned, Pedraza said.

The cutbacks by the wealthy are clearly different from the grocery-aisle economizing that so many Americans have begun making. For one thing, the rich typically don't trade down to lower-price brands and stores, luxury experts say. Instead of six pairs of Manolo Blahnik shoes at $700 each, they will buy two - not browse the shoe department at J.C. Penney or shop at Nine West.

It may be hard to sympathize with such tradeoffs, given the sudden erosion of jobs in nearly every sector and people's uncertainty about putting food on the table or paying the mortgage. But millionaires saying no to that third pair of high-priced heels is worrisome for us all, say economists, because it deepens the trough consumer spending has fallen into. Michael P. Niemira, chief economist at the International Council of Shopping Centers (ICSC), says the economy depends on spending by the wealthy because of their dominance in discretionary purchases, from boats to furs.

But such over-the-top spending isn't prudent anymore. Americans' wealth fell 4.7 percent to $56.5 trillion in the third quarter from the second, the biggest decline since the second quarter of 1962, according to Scott Hoyt, senior director of consumer economics at Moody's Economy.com. Meanwhile, investment bankers who once could depend on $3 million annual compensation to finance their spending are facing shrinking bonuses, long-term unemployment or worthless company stock, where they may have had most of their net worth.

In the last weekend before Christmas, Faith Hope Consolo, chairman of real estate firm Prudential Douglas Elliman's retail leasing sales division, noted that luxury stores stepped up price cuts even more: On New York's chic Madison Avenue, discounts at luxury boutiques ranged from 70 percent to 80 percent off; at Saks Fifth Avenue, discounts were up to 90 percent. "They are virtually giving the goods away," she said.

Offering such deep discounts can cost high-end retailers beyond falling profits, risking the cachet of their brands. That happened to Saks after the Sept. 11 attacks, when deep cuts on designer goods hurt the retailer's tony image.

Retailers may also confront problems trying to raise prices once the economy improves, as consumers accustomed to deep discounts balk at buying items at regular prices. "It is hard for us to tell what the true mindset of the customer is at this point," said Ginger Reed, a spokeswoman at Neiman Marcus, whose profits dropped 85 percent in the quarter ended November 1.