Affluent Consumers Are Powering The Retail Recovery...spending habits of other Americans. To fully...

L E K . C O ML.E.K. Consulting Executive Insights

EXECUTIVE INSIGHTS VOLUME XII, ISSUE 7

Affluent Consumers Are Powering The Retail Recovery

Affluent Consumers Are Powering the Retail Recovery was written by Andrew Rees, Vice President and Retail and Consumer Products Practice Leader; and Dan McKone, Vice President of L.E.K. Consulting. Please contact L.E.K. at [email protected] for additional information.

While many Americans are cautiously encouraged by economic

recovery signals, the nation’s most affluent consumers are rebounding

more rapidly than the average consumer. Thanks to the resilient

stock market, America’s high-earning households are opening

their wallets and spending at a significantly higher rate than

the general population. This marked shift in affluent consumer

spending patterns has significant ramifications for retailers who

have been facing stagnant sales.

The high-income bracket has historically made a disproportionally

large contribution to domestic spending, with households

earning more than $150,000 annually representing more than

half of U.S. retail sales1. Wealthy individuals have also not

traditionally been as price-sensitive as other population

segments, and typically make purchases based on value and

quality rather than absolute price.

Approximately one year ago, these high-earning households

lost confidence in their personal finances and began to strongly

reflect the general population’s pessimistic consumer sentiment

(Figure 1). Now that the economy is recovering, wealthy

consumers appear to be abandoning the relatively austere

spending habits of other Americans. To fully understand this

shift, L.E.K. contacted more than 2,000 U.S. households in

April 2010 to gain insight into Americans’ spending patterns

for its semiannual Consumer Sentiment Survey.

The Affluent Are More Optimistic

While the attitudes of U.S. households have only improved

modestly since the depths of the recession, high-income homes

have an increasingly positive outlook. L.E.K.’s research found

that households earning more than $150,000 annually are much

more likely than the general population to believe that their

financial conditions have recovered or were never affected (39%

to 22%, Figure 2). On average the general population believes

that they are still more than a year away from “personal recovery”

from the downturn; however, affluent consumers generally

believe that their situations will return to normalcy by Q4 2010.

Not surprisingly, the return of affluent consumer confidence

seems to have tracked the relative rebound in the equity

markets, with the most affluent consumers soaring back with

S&P 500 growth (Figure 3). Since spending is highly correlated

with consumer sentiment, it appears that the wealthy are

literally pulling the U.S. out of its recession.

Figure 1

Net Percent of Respondents

October2008

April2009

October2009

April2010

>$200K

>$150K-$200K

General population

Better 40

30

20

10

0

-10

-20

-30

-40

-50

Worse -60

Source: L.E.K. Consumer Sentiment Survey

U.S. Sentiment on Personal Finance by Household Income, Today vs. Pre-Recession

1Source: The American Affluence Research Center

http://www.lek.com/experts/andrew-rees

http://www.lek.com/experts/dan-mckone

http://www.lek.com/experts/dan-mckone

mailto:retail%40lek.com?subject=

EXECUTIVE INSIGHTS

L E K . C O M L.E.K. Consulting Executive Insights Vol. XII, Issue 7

Importantly, affluent consumers are translating optimism into

purchasing power. According to the L.E.K. research, households

earning more than $150,000 annually are the only demographic

claiming to spend more today than before the recession (Figure

4). By stark contrast, the general population has decreased its

spending by more than four percent. The affluents are also the

only group explicitly planning increases in retail spending

going forward.

Figure 2

The Affluent Drive Consumer Megatrends

Retailers also need to understand the deeper motivations

of customers, and the L.E.K. Consumer Sentiment Survey

identified individuals who describe themselves as “passionate”

about specific consumer trends (via a series of highly targeted

questions about their shopping habits). Of note, the percent-

age of high-income individuals who align themselves with these

trends is typically more than seven percent higher than the

general population (Figure 5). In addition, it appears that

support for key consumer megatrends is anchored in this group;

their improving attitudes have major ramifications for Teen

Independence, Online Shopping and Natural Products.

100

90

80

70

60

50

40

30

20

10

0

31

14

20

12

8

14

General population

25

13

19

14

10

19

$100K-$150K >$150K $300K-$750K

19

8

19

16

18

21

19

26

17

18

11

9

20

18

10

21

19

13

$750K-$1.5M

17

14

5

21

22

21

>$1.5M

In 24 months

In 18 months

In 12 months

In 6 months

Already Has

Never Impacted

~13 months ~11 months ~9 months ~12 months ~11 months ~8 months

Household Income Net Worth*

Overall Average

Note: *Net worth calculated as value of home plus value of other savings and investments

Percent of respondents


140

120

100

80

60

40

20

0

U.S. Sentiment on Personal Finances by Household Income, Today vs. Pre-Recession and the S&P 500 Index



October2008

April2009

October2009

April2010

S&P 500 Index (Oct ‘08 = 100)

Better 40

30

20

10

0

-10

-20

-30

-40

-50

Worse -60

>$150K

S&P 500

Percent Change in Overall Spending by Household Income


Percent Change in Spend

Today vs. pre-recession

Post-recession vs.today

5

4

3

2

1

0

-1

-2

-3

-4

-5

>$200K

>$150K-$200K

General population

Consumer Trends GeneralPopulation

Annual HouseholdIncome>$150,000

PercentDifference

Teen Independence:Increased influence and purchasing power among teens

35%* 43% 8%

Time Savings:Products that address hectic lifestyles

23% 31% 8%

“Green” Products:Environmentally friendly items

21% 27% 6%

Online Shopping:Enhanced purchasing via the Web

19% 26% 7%

Natural Products: Organic and related food items

17% 24% 7%

Figure 5

“Passionate” Followers of Consumer Trends


*Agreement among respondents with teenagers in their family

When Will Your Financial Situation Recover?

100

90

80

70

60

50

40

30

20

10

0

31

14

20

12

8

14

General population

25

13

19

14

10

19

$100K-$150K >$150K $300K-$750K

19

8

19

16

18

21

19

26

17

18

11

9

20

18

10

21

19

13

$750K-$1.5M

17

14

5

21

22

21

>$1.5M

In 24 months

In 18 months

In 12 months

In 6 months

Already Has

Never Impacted



Overall Average




140

120

100

80

60

40

20

0




October2008

April2009

October2009

April2010

S&P 500 Index (Oct ‘08 = 100)

Better 40

30

20

10

0

-10

-20

-30

-40

-50

Worse -60

>$150K

S&P 500






5

4

3

2

1

0

-1

-2

-3

-4

-5

>$200K

>$150K-$200K

General population



PercentDifference


35%* 43% 8%


23% 31% 8%


21% 27% 6%


19% 26% 7%


17% 24% 7%

Figure 5





100

90

80

70

60

50

40

30

20

10

0

31

14

20

12

8

14

General population

25

13

19

14

10

19

$100K-$150K >$150K $300K-$750K

19

8

19

16

18

21

19

26

17

18

11

9

20

18

10

21

19

13

$750K-$1.5M

17

14

5

21

22

21

>$1.5M

In 24 months

In 18 months

In 12 months

In 6 months

Already Has

Never Impacted



Overall Average




140

120

100

80

60

40

20

0




October2008

April2009

October2009

April2010

S&P 500 Index (Oct ‘08 = 100)

Better 40

30

20

10

0

-10

-20

-30

-40

-50

Worse -60

>$150K

S&P 500






5

4

3

2

1

0

-1

-2

-3

-4

-5

>$200K

>$150K-$200K

General population



PercentDifference


35%* 43% 8%


23% 31% 8%


21% 27% 6%


19% 26% 7%


17% 24% 7%

Figure 5





Figure 3 Figure 4

EXECUTIVE INSIGHTS

L E K . C O M L.E.K. Consulting Executive Insights Vol. XII, Issue 7

Figure 5

100

90

80

70

60

50

40

30

20

10

0

31

14

20

12

8

14

General population

25

13

19

14

10

19

$100K-$150K >$150K $300K-$750K

19

8

19

16

18

21

19

26

17

18

11

9

20

18

10

21

19

13

$750K-$1.5M

17

14

5

21

22

21

>$1.5M

In 24 months

In 18 months

In 12 months

In 6 months

Already Has

Never Impacted



Overall Average




140

120

100

80

60

40

20

0




October2008

April2009

October2009

April2010

S&P 500 Index (Oct ‘08 = 100)

Better 40

30

20

10

0

-10

-20

-30

-40

-50

Worse -60

>$150K

S&P 500






5

4

3

2

1

0

-1

-2

-3

-4

-5

>$200K

>$150K-$200K

General population



PercentDifference


35%* 43% 8%


23% 31% 8%


21% 27% 6%


19% 26% 7%


17% 24% 7%

Figure 5





Implications of Renewed Affluent Spending Power

The attitudes of haves and have-nots generally converged

during the economic crisis, but now have become markedly

unhinged. While the separation of affluent consumers from the

pack is not new, it raises several interesting implications regarding

this group’s disproportionately large impact on the economy.

Despite social equity questions related to this separation, the

general population benefits from high earners returning to their

carefree spending ways, given their potential to strengthen the

frail economy. However, until improvements in consumer confi-

dence are broad and robust, the current engine of retail recovery

is exposed to the psychology of affluent consumers, meaning

that stock market fluctuations have amplified feedback risks.

Successful navigation through today’s business climate requires

retailers to gain a deep understanding of their customers,

segment by segment. In particular, insights into a company’s

most affluent consumers can have a profound impact on

business strategy and provide a tangible set of marketing steps

amid hazy market conditions.

L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and analytical rigor to help clients solve their most critical business problems. Founded more than 25 years ago, L.E.K. employs more than 900 professionals in 20 offices across Europe, the Americas and Asia-Pacific. L.E.K. advises and supports global companies that are leaders in their industries – including the largest private and public sector organizations, private equity firms and emerging entrepreneurial businesses. L.E.K. helps business leaders consistently make better decisions, deliver improved business performance and create greater shareholder returns. For more information, go to www.lek.com.

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