November 21, 2023
The wealthiest Americans are cutting back on spending ahead of Black Friday, a worrying sign for an economy that until now has relied on the American consumer to avoid a recession.
In the three months leading up to the all-important holiday shopping season, a group of retailers catering to the upper-middle class, including Apple, Coach and Nordstrom, experienced their biggest sales decline in two years, according to an exclusive Bloomberg Second analysis. Measure data(1). The unrest also hit better-performing shopping centers in wealthier areas, even as overall retail sales figures rise.
Despite record interest rates and soaring inflation, the upper middle class “had been driving much of the higher-than-expected spending,” says Kayla Bruun, senior economist at Morning Consult, a survey research firm. Now, people with household incomes of at least $100,000 are starting to be more frugal, she says.
Wealthy shoppers often have a huge impact on changes in consumer spending because they have money to splurge when times are good, but they are quicker than the wealthy to pull back when they feel pressured. So a hit to brands, retailers and shopping malls that serve the wealthiest Americans portends possible future weakness for the U.S. economy.
As a proxy for upper-income spending, Bloomberg created a wealth index(2) of 30 major retailers and brands across 10 categories (spanning clothing, jewelry and electronics) with higher average transaction values than their peer group.
All companies in the index surpassed an average of $100 per purchase in October, except makeup and skin care sellers Sephora and L’Occitane. Some retailers, including Apple ($267) and West Elm ($292), far surpassed that figure. Most are popular holiday shopping destinations, including Best Buy and Williams-Sonoma.
Retailers and brands in the index have seen a deterioration in sales since January that recently deepened, according to Bloomberg Second Measure, which tracks anonymous credit and debit card transactions in the United States. Sales during the August to October quarter decreased in 70% of companies. The average change in sales(3) reflected a 14% drop, the worst performance in two years. The few brands bucking the trend were Ugg, which Vogue earlier this year called the “hottest new shoe.”
Julie Robinson-Jasper, 54, whose Seattle household makes more than $100,000 a year, is already planning to keep Christmas expenses down. She has limited gifts for her two children to $600, the same amount as the past three years, but with considerably less purchasing power after rapid inflation. The family eats mostly at home to avoid higher prices at restaurants and turn to the resale market to buy clothes.
“We don’t want to be caught with our pants down if something were to happen again, like a layoff or an illness,” says Robinson-Jasper, who works at a plant nursery.
Foot traffic at shopping centers serving higher-income areas is also beginning to decline for the first time since the pandemic, according to an analysis of Placer.ai(4) mobility data for major shopping centers in 25 states. . In October, 21 of the 25 shopping destinations analyzed (spanning from Birmingham, Alabama to Garden City, New York, and Bellevue, Washington) recorded declines in foot traffic. Overall visits sank 3.3% over the past three-month period, the worst performance since early 2021.
The weakness extends to areas that have gained population after the pandemic. On the outskirts of affluent Houston, where household incomes are 20% higher than in Texas overall, Baybrook Mall saw a drop in foot traffic of 660,000 visits this year, or about 6%, according to Placer .ai, which analyzes mobile phone location data. .(5)
“Everyone is window shopping right now,” says Bre Clinton, assistant manager of the Body Shop at Baybrook Mall. “They don’t have a lot of bags in their hands.”
Clinton, 25, says holiday shopping is off to a slow start, with cheaper items, such as mini-sized body scrubs, selling better than more expensive options. To attract shoppers, she says, the store is giving away more trial sizes of lotion.
A spokeswoman for Brookfield Properties, which owns Baybrook Mall, said retail sales at the mall increased in the 12 months through September and the company is “delighted” with its performance.
The slowdown in malls and retailers serving the upper-middle class contrasts with headline U.S. retail sales figures, which have seen year-over-year growth since 2020, when the pandemic crippled the economy. While locked down, high-end buyers began splurging on their homes and new wardrobes. As Covid faded, spending shifted toward services and experiences like vacations, restaurants and Taylor Swift concerts.
But years of high inflation and rising interest rates have soured the mood of some consumers. While the labor market has remained strong, real incomes have had periods of decline, and sectors of the upper middle class have taken a bigger hit.
The median income of American households headed by someone with a college degree fell 4.9% to $118,000 in 2022, twice the rate of decline for all earners, according to Census Bureau data. Only in recent months have inflation-adjusted wages begun to rise again.
Spending patterns among the upper middle class often reflect how they feel about their wealth, which is strongly tied to the value of their homes. In several major markets, real estate prices have been falling.
Wealthier Americans are increasingly worried about their jobs and are choosing to pay off debt after spending money on summer trips, Bruun says.
Shoppers are already abandoning big-ticket items like washing machines, Botox and even teeth straighteners. Buying on credit has become more expensive after the Federal Reserve significantly raised interest rates to curb inflation, hurting sales of Harley-Davidson motorcycles and Teslas.
Customers are “sitting on the sidelines,” Edel O’Sullivan, Harley-Davidson’s chief commercial officer, told analysts last month. “Just move away from this level of discretionary purchasing in 2023.”
Similarly, Revolve Group, an online fashion clothing retailer with an average order of around $300, warned of future problems earlier this month when co-CEO Mike Karanikolas spoke to analysts.
“Aspiring luxury consumers who had a lot of cash 18 months ago simply don’t have the same ability to spend,” he said.
(1) Bloomberg Second Measure data is based on debit/credit card transactions by U.S. consumers. Excludes cash, checks, gift cards and some buy now, pay later services. Data for brands such as Nike, Apple and Coach comes from their retail divisions (stores and e-commerce). Sales at wholesale partners, such as department stores, are not included in brand data.
(2) Bloomberg selected 30 large retailers and brands across 10 categories (clothing, footwear, furniture, home goods, jewelry, eyewear, electronics, makeup, handbags, and department stores) to analyze that had a substantial number of transactions in the data by Second Measure. and an average transaction value that was one of the highest in its peer group. (All but L’Occitane and Sephora had an average purchase value above $100.) The 30 companies are: Abercrombie & Fitch, Anthropologie, Apple, Athleta, Best Buy, Birkenstock, Bloomingdale’s, Coach, Crate & Barrel, Dillard’s, Hoka, J.Crew, Jared the Galleria of Jewelry, Kate Spade, LLBean, L’Occitane , Lululemon, Michael Kors, Nike, Nordstrom, Pandora, Patagonia, Polo Ralph Lauren, Pottery Barn, Sephora, Sunglass Hut, Ugg, Warby Parker, West Elm and Williams-Sonoma.
(3) To get the changes in sales, Bloomberg first calculated the three-month rolling average sales for each company to avoid putting too much value on outlier months. We then find the year-over-year month for the three-month moving averages. The result for October 2023 will then be an average of sales for August, September and October 2023 compared to the same months of the previous year. To compare trends across retailers we used the year-over-year median for all 30 companies.
(4) Bloomberg selected one mall in each of the 25 states that had visitors with a 2019 median household income of at least 110% of that state’s median. These malls were also among the top five most visited malls in each state. States included: Alabama, Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Michigan, Minnesota, Nevada, New York, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington and Wisconsin.
(5) Placer.ai uses anonymous mobile phone data to estimate foot traffic.