Editor’s note: Pam Danziger is president of marketing consulting firm Unity Marketing, Stevens, Pa.
In the July issue of Quirk’s e-newsletter I introduced you to the HENRYs – the high-earners-not-rich-yet – and discussed why marketers and retailers need to understand where the HENRYs fit in today’s rapidly changing and competitive consumer economy. In this second of three articles, I will discuss the purchase behavior of this demographic.
The HENRYs are the heavy lifters in the consumer economy. If 70 percent of the U.S. GDP is consumer spending, then the HENRYs are the key driver in that figure. While they make up only about 18 percent of the total U.S. households, they account for roughly 40 percent of total spending. The ultra-affluent – top 2-to-3 percent of households – account for less than 10 percent of the total, and the rest is contributed by everybody else. So not only is the luxury market’s success dependent upon the HENRYs but the whole U.S. economy relies on the spending of this segment.
We have surveyed the affluent top 20 percent about their spending and purchases of high-end goods and services – as well as their financial expectations and attitudes – every three months for the past 10 years. The financial data is used to calculate consumer confidence of the affluent consumer segment. This affluent consumer confidence measure is called the Luxury Consumption Index (LCI). It is similar to The Conference Board's Consumer Confidence Index but it is keyed only to the affluent heavy lifters. In early 2007 we noticed a sharp drop in the LCI that signaled a marked change in their confidence before the official start of the Great Recession in December 2007.
Today the LCI has recovered half of the consumer confidence that there was before it started to drop in early 2007. It remains well below 2004-2006 levels and has been zig-zagging up a few points one quarter only to drop back the next. It has showed no sustained upward trend – rather the LCI says the affluent simply aren't convinced that the recession is really over and as a result they remain cautious about their spending.
And while we have heard a lot about the rich getting richer in the post-recession economy, that only applies to those in the top 2-to-3 percent, not those with less wealth and lower incomes. So the HENRYs aren't necessarily seeing or feeling that their wealth is growing. And even if their savings and investments have recovered from the losses set up by the recession, we are seeing a reverse wealth effect.
Traditional wisdom is that when people feel richer, with their home values and investments rising, they spend more freely. But today, the lessons learned from the recession are front of mind and they know that what goes up can indeed come down. Rather than spend any growth in wealth, the HENRYs are quite comfortable sitting on those earnings.
Two independent metrics of purchase behavior
There are two key metrics related to consumer purchase behavior that we measure. Each one is independent of the other, so one can go up, the other down and vice versa. One variable is purchase incidence, or the share of affluents making a purchase in any one of the 21 different high-end goods or services categories we track. This is a good indicator of demand and overall we tend to see little difference in any given period between the share of HENRYs and ultra-affluents who report making a high-end or luxury goods or services purchase.
The same cannot be said for the other metric: spending levels. Overall spending declined sharply with the recession but started to rise from 2011 through 2012, releasing pent-up demand. But after 2012 we've seen spending decline and then flatline at a lower level, about even with that from around 2010. HENRYs and ultra-affluents followed the same general trajectory, dropping off during the depths of the recession, with an uptick in 2011 and 2012 then falling back down to a new normal.
There are several reasons for this but the aging of the affluent consumers is the most important. They are eight years older now than when they went into the recession and in just about any discretionary category of purchases such as fashion, home furnishings and consumables (wine, liquor, beauty products, etc.), a younger consumer is a much better consumer. The older people get the less acquisitive they are and their spending shifts toward other areas, such as travel and health care.
One significant change we’ve seen after the worst of the recession is that the ultra-affluents are shopping and spending on luxury goods and services much the same way as HENRYs: cautiously and carefully. Before the recession the typical ultra-affluent spent roughly three-to-four times more on luxury and high-end goods and services than the HENRYs but after 2012 that gap has narrowed to only two-times more on average.
That means in this post-recession period the share of HENRYs active in the luxury and high-end goods and services market is about the same as ultra-affluents. The difference is that 30 percent of 25 million HENRY households is a much larger base than 30 percent of some 3 million ultra-affluents, even if the ultra-affluents are spending twice as much on average.
Let's break it down: If 30 percent of HENRY households spend $1,000 on new home furnishings in a year, that totals $7.5 billion overall. If the same percentage of ultra-affluents spend $2,000 – twice as much as the HENRY households – that only translates into about $2 billion overall. The market potential of the HENRY consumer segment is at least three times larger despite ultra-affluents’ greater individual spending potential.