US consumers cut back on buying luxury goods before the holiday season

Luxury spending by Americans last year boosted fortunes of companies such as Chanel and LVMH

Customers at the Kirna Zabete store at the Royal Poinciana Plaza in Palm Beach, Florida, US. Purchases by Americans last year boosted the fortunes of many luxury goods companies. Bloomberg

Americans have cut back on buying luxury goods such as designer clothing and accessories over the past two months, data from three credit card companies showed, raising questions over the sector's resilience.

Data from Citigroup, MasterCard and Bank of America released this month showed lower US spending weeks before the holiday shopping season, which could raise concern among investors that the industry's post-Covid-19 pandemic boom is at risk of petering out.

Luxury goods purchases by Americans last year boosted the fortunes of companies such as Chanel and LVMH.

Although luxury sales are still holding up well compared with cheaper brands, executives from some of the world's biggest luxury companies will be questioned about whether that trend will continue when they update on trading this week.

LVMH chief financial officer Jean Jacques Guiony said last week the company had so far not seen signs that shoppers were holding back, even for entry-level purchases.

Rivals Hermes and Gucci-owner Kering are set to report third-quarter sales on October 20 and Cartier-owner Richemont's first-half report is due on November 11.

US shoppers are paring back their spending on high-end merchandise, the data shows. Separate estimates from the three credit card companies show that Americans cut spending on luxury goods in August by 2 per cent to 4 per cent, and in September by 5 per cent to 6 per cent, versus a year earlier.

Spending cuts on luxury goods were sharpest among middle-income Americans with yearly incomes of $50,000 to $125,000, and those with yearly incomes of less than $50,000 a year, according to research by Bank of America, which analysed debit and credit card purchases by about 16 per cent of US households.

In 2021, people with less than $50,000 in annual income represented 39 per cent of US spending on luxury goods, Bank of America said, while those with incomes of $50,000 to $125,000 represented 34 per cent.

“Aspirational” consumers, who tend to be younger and have less wealth than the luxury goods industry's traditional clientele, are usually the first to “feel the pain” and respond by decreasing spending, said Mario Ortelli of mergers-and-acquisitions advisory firm Ortelli & Co.

In the US, higher-priced brands such as Hermes and Dior would likely be more insulated from a slowdown than accessible luxury brands such as Michael Kors, Mr Ortelli said.

Brands including Yves Saint Laurent, Dior and Gucci have also expanded well beyond Rodeo Drive and Madison Avenue to aspirational shoppers.

Citi reported that both the number of Americans buying luxury goods and the amount they spent fell in September. The bank measured spending across 18 million accounts.

An Hermes International luxury goods store in Paris. In the US, higher-priced brands such as Hermes and Dior would likely be more insulated from a slowdown than accessible luxury brands. Bloomberg

Meanwhile, MasterCard's “SpendingPulse” report, measuring retail sales across payment types, showed luxury purchases, excluding jewellery, were down 5.2 per cent in September year-on-year, while spending on restaurants and air travel were on the rise.

Major players, such as Louis Vuitton and Chanel, have recently raised prices. Chanel's quilted classic flap handbag cost $7,800 in July 2021, according to online reseller Bagaholic, but it is now priced at $8,800.

“They might not be buying the bag again this year or next year,” said Gregory Mancini, global co-head of equity research at Nuveen, noting that new luxury consumers who bought their first high-end items with savings accumulated during lockdowns would likely return again, if later, for designer goods.

Further challenging labels on the lower end of the luxury scale is a shift towards higher-end goods.

“In a market like America where people buy a lot of stuff, people are becoming more discerning and buying less quantity but better quality,” Mr Ortelli said.