The recession clock is ticking, and it’s gets louder as it ticks faster. JP Morgan Chase CEO Jamie Dimon told CNBC that a recession is all but inevitable. Others may argue that the recession has already hit, based on the traditional definition as two consecutive quarters of negative GDP growth, which occurred earlier this year. However, because unemployment remains low, many economists are reluctant to make the official recession call.
This time unemployment may be a trailing indicator for a recession rather than a leading indicator. As we have learned over the past two years, these are far from normal times.
Professionals Losing Their Jobs
On the retail front, retailers remain employee challenged on the shop and warehouse floors, with Amazon looking for 150,000 workers, Target aiming to add 100,000, Kohl’s 90,000 and Walmart 40,000 for the third and fourth quarters. Yet on the flip side, a growing number of retailers are shedding higher-paid office and headquarters staff. And some are doing both. Walmart plans to lay off “hundreds” of corporate associates. And then there is Amazon; it hasn’t resorted to layoffs yet, but it has put a freeze on hiring for its corporate offices.
These are not low-paying, hourly retail workers but rather professional and creative class employees making salaries that put them into the HENRY demographic – high-earners-not-rich-yet – who are doing better income-wise than the bottom 70 percent but less than the top 10 percent.
This year Peloton has been slashing and burning its staff, cutting 600 jobs largely from store closures. But now it’s turned to the office, announcing 500 more staffers must go and the marketing department will take the brunt of the cuts. Also announcing layoffs in the office ranks include PVH, VF, Stanley Black & Decker, Gap, Bed Bath & Beyond, Best Buy, Ford Motor, HBO Max, Netflix, Robinhood, Groupon, Kohl’s and Wayfair.
Technology companies are not immune either and their layoffs will largely impact HENRY level employees too. “There have been over 30,000 job cuts by tech companies in the U.S. in the past few months alone, and unemployment claims have climbed to eight-month highs,” Zero Hedge recently reported as Apple, Amazon, Tesla, Snap/Snapchat, Shopify, Twitter and Meta have announced layoffs. And Microsoft just cut about 1,000 jobs.
With the stock market in turmoil amidst lower corporate earnings and rising interest rates, the high-earning financial sector jobs are also at risk. Goldman Sachs just announced plans to cut several hundred jobs in the third quarter, while JPMorgan and Bank of America remain cautious.
In more troubling news, a survey conducted by PwC in August 2022 among 700+ senior U.S. executives found 50 percent of the firms are anticipating a reduction in overall headcount, while 52 percent foresee instituting a hiring freeze and 44 percent are rescinding job offers.
HENRYs Are Feeling the Pinch
The HENRYs see the economy headed for a dive. Some two-thirds believe we already are in a recession, or it will arrive within the next six months. And that is shutting the tap on their spending. Already 45 percent of HENRYs have cut back luxury spending from a year ago and a solid majority (63 percent) say now is a good time to limit purchases, according to a recent Research the Affluent Luxury Tracking survey.
For luxury brands, this comes on the heels of the pandemic’s disruption, which resulted in a 22 percent loss in the personal luxury goods market from 2019 to 2020, according to Bain. While the industry recovered immediately in 2021, even topped 2019 revenues by 1 percent, luxury brands face another test if a recession sets in.
While HENRYs are not the luxury industry’s primary target (high-net-worth and ultra-affluent consumers with incomes over $250k+), they still depend upon the lower-income but still affluent next-generation HENRYs for a good portion of revenues and growth. And since most ultra-affluent consumers start out their engagement with luxury brands when they are still HENRYs, they are the future of luxury brands.
As a group, the HENRYs, which correspond to declines eight and nine in the BLS Consumer Expenditure survey, account for 27 percent of all consumer expenditures. That is equal to the amount spent by the three middle-income deciles (30 percent) below them and more than the top 10 percent, with average incomes of about $300k. The ultra-affluent 10 percent collectively contributes 23 percent in total U.S. spending.
While the affluent in general, and the ultra-affluents in particular, have greater ability to absorb a recession, a recent CNBC and Momentive survey found they are just as concerned as those at lower-income levels about the current economy’s downward turn. “People making six-figure incomes are almost as worried about inflation as people making half as much —and they are just as likely to be taking steps to mitigate its effect on their lives,” said Laura Wronski, senior manager of research science at Momentive.
Disruption to HENRYs’ Lifestyles Will Disrupt Luxury Brands
HENRYs lifestyles will be disrupted if the economy continues to turn south. They will more carefully evaluate new purchases and be more likely to trade down to less costly alternatives than they are to trade up to luxury. Yet while pocketbook issues will more strongly influence HENRYs’ shopping behavior in the near-term, their underlying emotional needs will remain and that is what drives them to luxury brands.
Luxury shopping is driven primarily by emotional, not physical needs. “Shopping behavior is always a means to an emotional-based end,” explained Chris Gray, PsyD., founder of consumer psychology consultancy Buycology and one of the early pioneers in the shopper psychology field with Saachi & Saachi. “Behaviors happen for a reason, always,” he continued. “If you can get to the bottom of why – the reason it is happening – you can start to understand consumer behavior.” It all comes down to the value equation: giving HENRYs more of what they need, want and crave. Practically speaking, here are some ways to get the value equation right:
- Time for Near-Luxury Brands to Get Aggressive
Legacy luxury brands have been reaching down into the HENRY demographic by offering less-premium prices for specialized, different, or more affordable items. Think Tiffany silver and Hermès ties and scarves as entry level purchases. So far, this aspirational-pricing strategy has proven effective, allowing a broader cross section of customers to participate with the brand and has not threatened the luxury status of the brands’ higher-end offerings.
But emerging alongside the echelons of true luxury is a growing portfolio of near-luxury brands with more affordable prices. In fashion, Everlane offers wardrobe basics made from the highest-quality luxury fabrications and affordably priced disclosing its “Radical Transparent” model. For example, its Gallery Tote bag is priced at $225 and is comparable in size to Louis Vuitton’s ubiquitous $2,000+ Never Full Tote, but crafted in leather versus coated canvas.
For the home, Parachute has the same elevated luxury feel at more affordable prices. It started as a linens bedding brand and has now expanded across a growing range of products, including bedroom and living room furniture. Parachute will give RH, which is ascending the luxury “mountain” and raising prices accordingly, a run for its money. And like Everlane, Parachute started as a digital-native brand but is now expanding into brick-and-mortar retail in selective markets where HENRY customers live.
- Luxury Doesn’t Scream; It Whispers
In the face of income challenges coupled with a demand for brands that reflect the social and environmental values they hold dear; many HENRYs are avoiding conspicuous luxury brands in favor of quiet luxury that takes a less in-your-face approach.
“Luxury brands have struck a Faustian bargain, as Louis Vuitton and other conspicuous logo-wear brands have, between being demotic, meaning of the people, and yet preventing a vast majority from experiencing their goods,” said Benedict Auld, founder of brand strategy consultancy Lapidarius. Auld sees logo-centric displays diluting brand value rather than creating it. “Catering to the idea of showing monetary income status via branded goods is the last gasp of any quote, unquote luxury brand,” he shared. “It’s what luxury brands do when they have no other meaning to offer.”
- More Meaning
Meaning.Global’s Dr. Martina Olbert, arguably the world’s leading authority on meaning, calls on brands to add more meaning to the luxury brand paradigm. HENRYs want it too. “Luxury brands need to be thinking about future-proofing their businesses in ways that go beyond catering to different markets,” she shared. She believes the future-proofing opportunity lies in enhancing the quality and timelessness of the products and services offered.
“Ultimately, the symbolic value of luxury isn’t going to change,” she continued. “Many of these luxury brands have been around for hundreds of years. There is always going to be demand for something that is handcrafted, premium quality and of lasting value.” Luxury brands must return to their roots and enhance their true legacy value. “This is a time to create and strengthen brand perceptions, which ultimately creates value. That’s all anchored in meaning,” Olbert concluded.
- Resale Resonates
Resale is all the rage. An impressive three-fourths of consumers of all ages and across the socioeconomic spectrum participate in the secondhand market. And by all accounts resale is growing faster than first-hand goods.
For example, Bain reports the $32 billion pre-loved personal luxury market grew five times faster than the primary market from 2017 to 2021, up 65 percent as compared to 12 percent for first-hand personal luxury. And it’s not just fashion or luxury, the secondhand furniture market is predicted by Statista to more than double from $13.4 billion in 2022 to $27 billion by 2026.
There are plenty of players in the B2C resale business – The RealReal in luxury; thredUP, Poshmark and the Vestiare Collective in fashion — and Kaiyo in home furnishings, to name a few. An emerging group of Resale-As-A-Service (RaaS) companies can help individual companies turn on the spigot to power their own brand-centric resale business.
RaaS players do the heavy lifting on the back and front end and have proven, repeatable processes in place so a company doesn’t have to start from scratch. Recurate and to a lesser extent thredUP offer RaaS in fashion, Reflaunt in luxury and FloorFound is innovating in RaaS for furniture brands with Kaiyo.
HENRYs want the option of buying secondhand. It gives them a chance to experience a brand on the cheap(er) and is proof-positive that long-lasting quality is there. And offering a company’s own secondhand goods is good business. “We let brands take back control of their secondhand market,” said Reflaunt CCO and co-founder Felix Winkler. “The brand’s customer relationship is not only maintained but strengthened. And their brand reputation grows too by encouraging customers to make a positive difference for the environment and understand the lasting value of the items they’ve bought.”
Keeping HENRYs Engaged
Having come through a deeply personal crisis during the pandemic and now potentially facing another one economically, HENRYs are once again facing disruptions to their lives. To survive, luxury brands need to keep HENRYs trading up, and that requires these iconic brands provide more meaning and relevance through their value proposition and shopping experience.
Meaning is what people value and what they emotionally connect with in their own lives through their beliefs, needs, values, identities and authentic sense of self. The true value of any brand is in what it represents to people – what it means to them,” said Meaning.Global Dr. Olbert in her latest study “Reimagining Consumerism As A Force For Good.”
“To make brands purposeful in people’s lives, they paradoxically cannot be led by purpose. Brands must be led by meaning because meaning is what people value, and not brand purpose. People don’t care about the brand’s why; they care about their own why. They don’t care about brand purposes; they care about their own. This means that the only real purpose that is important to brands is the customer’s purpose – which to brands isn’t purpose, but the meaning they add to people’s lives.” Simply stated, brands need to connect with upscale consumers on their terms, not the brand’s.