Luxury Brands, Inflation, and Consumer Choices: A New Reality?

Yeah.

So the past year they're down 2%, which 2% doesn't seem like a lot, but when you've been gaining and growing and like being flat was bad, being down at all is really bad. And it's gotten so bad that for the first time in as long as anybody can remember, Saks Fifth Avenue is canceling their annual light show.

Hey, everybody.

Welcome to another episode of the Business.

Lunch with your host, Ryan Dyson, myself with Roland Frazier. Wonderful to be here chatting about fun things. Ryan, what are we going to talk about today?

I want to talk about your favorite subject.

Ooh, synthesizers.

Close. No, luxury. Luxury items.

Nice.

You know, the kind. The Hermes, the Patek Philippe's of the world, the Rolls Royces, all of these things. No, so I didn't, I did not know this, but Bain and company every year puts out a luxury report on this, I'm guessing. And, and apparently luxury has been doing. I think we did know this. Luxury has been doing pretty phenomenal over the past like, decade and a half. I mean, luxury brand, past year, as.

Far as I understand.

Yeah. So the past year they're down 2%, which 2% doesn't seem like a lot. But when you've been gaining and growing and like being flat was bad, being down at all is really bad. And it's gotten so bad that for the first time in as long as anybody can remember, Saks Fifth Avenue is canceling their annual light show, which my wife and daughters, they, they were out there last year, you know, love it. It's a holiday tradition and they're, they're canceling it presumably because they're freaking broke. So. Yeah. So luxury is hurting.

Can I be hurting for a minute? Because I think, you know, let's be snobby, let's be. I was hoping Avenue is not luxury. It's not bargain, but it's not luxury.

Sax is not. It's. It's like maybe it's like, like in.

The baller on a budget. It is maybe in the 80s, but sax and Bloomies, you know, both just not. Not what they once were. You know, go. You gotta go back 40 years to where they're arguably making the turn out of luxury.

Okay, sorry. Well, they're apparently hurt. It's trickling down to the baller on a budget brands as well. But so here's, so here's the question. The last time that luxury went in decline was 2009. Okay. I don't know if you remember what happened in 2009, but it was a pretty beefy Recession, it was a really good time. Pretty, pretty tough recession. They're blaming it on two things. Number one, China, China's been hurting. And number two, Gen Z apparently just, they don't seem to care about brands, you know, at all. I don't buy that one as much because they said the same thing about millennials and then millennials all got jobs and guess what? They wanted to signal just like the rest of us. Yeah, they say that. They say this about every freaking generation. Like. Yeah, exactly. When you're poor, you don't care about luxury because you can't afford it.

They, they do care about brands. It's just the brands are Fisher Price.

And whoever's making toys and then the, the brands are whoever's making the hot up and coming thing, the Stanley Love Shack, Tumblr, you know, Collab and the, it, you know, it's, it's, it's different kinds of brands. So, you know. Yeah, okay, the, the 12 year old is not yet hooked on Louis Vuitton or Chanel or Hermes or whatever. But you know, that's like, that's, that's, that's. I agree with you. That doesn't make any sense. It's that you're trying to put it on way too early.

Right? So I'm not buying, I'm not buying because they did say the same thing about millennials. And millennials, they get some money, they get some promotions and they want to signal success just like, you know, Gen Z's and boomers. So I'm sorry, Gen X and boomer. So obviously what we're looking at here is this has been an indication of recession. I just want to get your, kind of your take, you know, on this. What do you, do you think that is this just kind of much ado about nothing? What do you think?

Well, I feel like we also saw a bit of it in the pandemic where people were moving down brand so like they would go try to find the same thing that was that there was a brand premium on, that had functionality that was less expensive. So I think as.

Yeah, there was a brief blip in the pandemic. You're right, they mentioned that there's a brief blip and then the government gave everybody free money and boy did it pop back up again. Yeah, so that was a brief blip.

So I like, I like kind of thinking about that plus 2009, plus the others that, that we've seen in our, in our time. I believe that, I believe it's not going to be the case because I think following the results of the recent election and looking at stock market and bitcoin and everything, everybody thinks it's another go go four years at least. So I don't see that that's going to happen. I definitely think it was on its way to. Because people were panicked about high inflation. Would it continue? Would the policies that created that continue with, with inflation, real estate going up and stocks peaking? It was just a really interesting time. And so I think that a lot of people had to redirect a lot of their money, I mean a lot of their money to just buying the things they were already buying. And so they weren't, they weren't making those discretionary luxury buys. But, and, and yes, the free money I think accelerated it. Like you go into a bar and there's no Jose Cuervo, he's gonna, what is it? No Class Azul. You know, we don't have any because you know, everybody's been buying shots of the hundred dollar, you know, black bottle Class Azul. And that's where the free money went. The free money went into frivolity like that. And also I think in the pandemic, comfort buys, you know, I, I deserve something and I got a little bit extra money. I got twelve hundred dollars check from the government, you know, I'm gonna, I'm gonna get 12 shots of that liquor or I'm gonna buy that thousand dollar inflated pair of tennis shoes that dropped by Nike at, you know, at 100 bucks. And that's gone and not likely to return unless the free money returns. So I don't know, man, I feel like it's going to stable, it's going to stabilize. But I also think that you have brands like Louis Vuitton that made the mistake that Nike made, which I just read a big article on Nike, kind of the fall of Nike's drop culture that when was it Parker that was CEO left and the new guy came in. The new guy was from Bain and I can't remember his name off the top of my head, but basically said go, go. You know, he came in and was like, let's make all the shoes available to everybody and let's kill all of our partnerships with all of the distributors and open Nike stores and do all that. And Peloton did the same thing because it's all going to contain, you know, that that's gone. And if the luxury brand is playing the playbook that those guys played and I think some of them are, I believe they are destined to end up the same way. And the, the classic ones like a lot of the other LVMH brands in that brand portfolio will be fine and the Chanel's and the, the Hermes I think are going to do fine. It's just that like the, what would you call it, like a fringe or the bridge. The bridge luxury brands. The ones that were like that are like hop up, like Coach and those kinds of things. I think they're going to have a hard time because there's no scarcity, but there's actually real scarcity with some of those other guys and there's not with Louis Vuitton mostly because they've been knocked off just so much and they've allowed that to happen. So it'll be interesting to see, but I personally don't think so.

So they also said, and I thought this was interesting, that spending as a whole hasn't changed dramatically. It's shifted into more experiences like travel and experiential goods like yachts and cars. So good to see that people are still buying yachts and that kind of down market customers continue to purchase. And this is the point you were making before. Small indulgences like beauty, fragrance and eyewear. And they call this the lipstick effect, the phenomenon where people spend more on smaller goods so they're kind of buying, buying those things up. So, so I'd love to know like from your perspective, do you think that this, we're making predictions here, do you think that this speaks to what the last year was like or do you think it also informs what the next year is going to be like? Because this happened in 20, in 2009 was kind of the last time we saw this and then also during the COVID recession. But if you look at 2010, 2010 was great, right? 2010 we came out of it. So is this kind of the last gasp of the end of a recession or is it kind of a signal of like oh man, we're going in. What do you think?

I agree with you. I think it's the carryover effect from the last year and everything that's, that's come up. But I think the go forward is, you know, is, is normal. And I think, I mean, I will say like I told you, I had a car that I went and got custom designed and I, when it came in and you didn't know the price, you didn't have to commit to it, but you didn't know the price until it came in and it came in. And I think that the danger is that, that some of these luxury brands are still living in the inflationary times of 2122. And so this came in, and I'm a repeat buyer for this, you know, for this brand. And yet it came in at, let's see, it would be 30% more than the one that I bought four years ago. And because interest rates have more than doubled, the payment on it was 50% higher than it was four years ago. So I said, no, I could afford it, but it just didn't seem worth it.

And it's hard for you to get sticker shock. You don't get sticker shock very easily.

It's value shock.

Pretty uppity.

I'm pretty uppity. But. But it's a val like, it's a value prop. Their value prop didn't change. So I have the same car that I had four years ago with a slight body change for 30% more than I paid four years ago and 50% more than I paid last month when I had the old one. I can't look at that and say that the value justifies. It just feels like you're being screwed. So to me, it's like I just was like, no. And I think this time next year I'll be able to get it exactly what I got the one four years ago for. And I'm okay waiting. So I think that there is a risk that if we're going to talk luxury, so forgive my, you know, forgive the things I talk about, but private jets are up hugely from what they were four years ago. Hotels that are luxury hotels, five star hotels, insane wine and restaurants. Wine, period. And restaurants, period. And wine in restaurants. Holy crap. All luxury things that are just priced at this point where they seem tone deaf to the way that the economy is and the things that have gone, and I don't believe that any of that is sustainable. It will be interesting. And I'm told by all of the real estate people around here that the housing prices are, this is just the new price. And it'll be interesting to see if that's the case. But it's taken affordability out for a giant part of the market, which means that there will not be. Because the reason the prices went up was supply and demand, right? If you didn't have that many houses, but you had lots of people that could afford them, the price is going to just continue to going up to equilibrium. But if you have not a lot of houses, but now 60% of the people that could afford them before are priced out of the market, your demand, even though the other people want them it's just impossible for them because they can't qualify. So will that, will that support that level? I mean, definitely not if any more inventory comes on. So it'll be interesting to see. But I, I feel like that the discretionary luxury people are going to find ways to make it more affordable and that those prices won't sustain, but the market will be, they'll be fine in the market as companies because there's always going to be enough demand, there's going to always be enough few people who are very fortunate to be doing well enough to buy luxury things and they'll pay for it. But, but the, that kind of middle road, you know, like the crappy house that's down the road for $2 million, that's, that you can't live in. That doesn't make any sense. I, it'll be interesting to see. I'd love to hear your thoughts on that too.

Yeah. So I think two topics that are in there. So one, I saw this and I was kind of encouraged by it because in my experience consumer behavior always lags reality. And so consumers are always, they're always nervous when things have come back and they're still behaving as though things are great when they're bad. And so I think for the first half of kind of this recessionary cycle we were in, people were still spend, spend, spend. And so what we finally had was a time when people realized, oh crap, things kind of got tough. Maybe I should spend a little bit less. As soon as everybody realizes that things are tough, that's a sign that things are about to get better. Just in my experience, once the rest of the world has decided that things are bad, that just means that things are about to get good again. Like just. That sounds cynical. It just has been my experience from doing this. So I saw this and I'm like, yay, finally good. Now people will still be, you know, behave as though they're bad for a bit. But I think that that does mean that they'll, they'll start to actually, you know, turn around. So I saw this. I was encouraged by it.

It is interesting though and you know, where you, where you draw the luxury line. But I did just read an interesting thing that was talking about the future of sit down restaurants and it was, I wish I could remember all of them but, but Red Lobster and several restaurants that Fridays, TGI Fridays, several restaurants that were sit down restaurants have gone bankrupt, not coming back. They were bought by PE and the, they loaded up on debt to pay for them and then the pandemic hit and then they were closed. But then coming back with all that debt, they didn't hire enough labor, they wouldn't pay enough for the labor, they didn't hire enough labor. It was a terrible experience when people came in long waits, supply chain issues, and they all lost their people to other things, from eating at home to fast, you know, fast casual to other things like that. And the only one that's really done well is Chili's because they invested intentionally in overstaffing so people wouldn't have to wait and creating a user experience that, that was delightful. And so they're coming out of it into this, you know, post pandemic recovery, new go go economy, super, super strong and the others are just gone. And, and I think that that's part of the luxury thing too is that like with all these hotels and all these, you know, boutique brands, from clothing to liquor to whatever that have priced themselves high based on, you know, pandemic free money, they're not priced in the reality of where they live. And that's going to take them too long as well because they don't like, they're still pricing like it was two years ago, but the consumer is living like it was last year and they didn't catch up from that year. So they're two gap years behind where the market is and a bunch of them just aren't going to be here. And that it's so weird to me that rather than like making the adjustment like Chili's, so many of them are just like, well, that's the new price. I don't know why people aren't paying it. Why aren't people paying that? Why aren't they, you know, but we can still give the crappy user experience. We can still not provide cleaning service at the hotel. We can, you know, say these things. We can still say, oh, due to the pandemic labor supply, we, we will be, we'll get back to you within 72 hours, you know, on the phones and things like that. It's, man, that doesn't fly. If you're, if you've got a business and you're going to, you're going to make it, you need to be way, way, way more swift in adjusting your prices, your expectations, your labor, your, you know, customer experience to meet where that market is now. And I think that's one of the biggest challenges that everybody, business wise, is wrestling with right now is, is there's so many different sets of expectations from the supply chain, pandemic, free money, etcetera Etc. That they just don't know what to do. And whoever gets it right, whoever gets up to date and matches their offer with and their experience with the customer expectation and wallet, those are the people that are going to win big.

Yeah, you, you went where I wanted to go next, which is what does this mean for business owners and how should they adapt? And I think you just nailed it. If you're either luxury and you can afford to charge luxury prices, but if you're truly luxury, then you better deliver a luxury experience. Because I think over the past few years, there were a lot of brands that got to fake luxury and they got to charge luxury. And I'm not just talking about luxury brands. I'm talking about across the board. Yep. There were kind of crappy restaurants that got to charge high prices because inflation, because there weren't a lot of options. There were a lot of coaches and consultants that got to charge really high prices because everybody else was. There were a lot of E commerce stores that got to charge a lot for their, for their prices because of, you know, logistical issues. And not everybody was able to get their stuff shipped out. There were a lot of normal, ordinary brands. They got to charge luxury prices for not delivering a luxury product or a luxury experience, but they somehow convinced themselves that they were a luxury brand and they got to enjoy luxury margins and they didn't. And now they're living that reality. So I think you need to either, like, you either are luxury and you can deliver a true luxury product and a true luxury experience. And this is important, the market agrees that you're luxury too, because you don't just get to decide that you are if nobody else believes that you are or yeah, it is time to price accordingly. And I do think that those brands that decide, and I think this is the first time that we might be saying, hey, it might be time to adjust your prices downward, if you can, because we've been saying push your prices up, push your prices up. I think right now there's going to be a market advantage to see if you can adjust the economics of your business to actually bring your prices down a little bit. You've got the, the opportunity now to scoop up massive amounts of market share. We did this at Digital marketer back in 2009. Coming out of that. When every, coming out of that recessionary cycle when everybody else was, you know, charging thousands of dollars for these courses, we put everything behind a membership site and said, It's $38.60 a month, all you can eat. And we Just scooped up the entire market there. I think that those are your two models. You're either true luxury and you're going to get back to business in high margins because the faux luxury people are going to are going to fail or you want to. Now is probably the time to figure out and ask the question, how do we lower our prices and deliver an even better experience? Because if you can figure that one out, you're, you're about to gobble up a lot of market share.

I agree. I love it. Well, hopefully you guys found this helpful. I think, you know, wherever you are in the market, if you fall into these kinds of businesses, I think there's some pretty good advice here. Love to hear your thoughts as well. And if you liked it, share it with friends. If you didn't tell us why we're curious and what's wrong with you. No. Anyway, that's it for today. We'll see you next time on Business Lunch.

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