The Death of Mass Luxury?

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The Death of Mass Luxury?

In the early years of the 21st century, middle-class consumers discovered the pleasure and prestige of owning upper-class products. There were at least three reasons:

The first reason was economic. Shoppers had plenty of disposable income, because the housing boom inflated the equity in their homes. Plus, interest rates were so low it was easy to borrow money. And thanks to benign deflation, the prices of commodities, from gasoline to milk, were relatively cheap. Discount retailers like Wal-Mart and Costco gave consumers tremendous savings on basic goods at "everyday low prices." In 2001 alone, consumers' savings on everyday products amounted to $100 billion, all of which was freed up for spending on premium products.

The second reason was psychological. In a media-saturated world of 24/7 advertising and constant news coverage of wealthy celebrities, middle-class Americans developed an appetite for high-end products, such as Prada handbags and Gucci shoes. As a result, in recent years, U.S. consumers' spending on luxury goods grew four times faster than their total spending.

The third reason was demographic. As the youngest Baby Boomers reached middle age and the oldest Boomers settled into retirement, the tremendous spending power of the largest generation in history flooded the market. In fact, between 1980 and 2003, the number of U.S. millionaires quintupled from 1 million to 5 million.

All of those forces — economic, psychological, and demographic — converged to create a lucrative market for luxury goods. But now, according to a pessimistic report in BusinessWeek1 called "The Death of Mass Luxury," the widespread demand for premium products has suddenly dried up. Gas is expensive, the housing market has cooled considerably, and lenders are less willing to give credit.

Supposedly, high-end brands like Coach, which sells handbags for as much as $1,200, have recently seen their growth slow down rapidly. Since 2003, Coach had been growing by 20 percent per year; now it has scaled back its expectations and foresees growth of 5 percent going forward.

The executives of many high-end brands have undergone a shift in mindset to make luxury affordable to a wider audience...

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