The high price of gasoline and slowdown in housing are taking a toll on one of the most striking economic trends of recent years: Consumers’ widening taste for more upscale purchases.
According to a report in the Wall Street Journal, amid the broader prosperity of the past decade, Americans grew far more willing to shell out for $4 cups of coffee and $400 handbags. Retailers such as Starbucks Corp., Whole Foods Market Inc. and Williams-Sonoma – operator of Pottery Barn and its own kitchen stores – expanded by appealing to the aspirations of middle-class shoppers.
Now, many of those are feeling pinched. In recent weeks, Starbucks, Whole Foods and Williams-Sonoma – along with other such as boat maker Brunswick Corp. and specialty-sandwich chain Panera Bread Co. – have reported disappointing sales that sent their share prices lower. Restaurants catering to middle-income consumers are seeing a sales slump too.
Growing evidence suggests the chief culprit is gasoline prices in the $3-a-gallon range – up 71 cents from six months ago, according to federal data. Buyers “are spending a lot of money on gas,” said Brunswick Chief Executive Dustan McCoy. “The sort of people who boat don’t drive around in compact cars. They drive around in big cars or fast cars.”
But Wendy Liebmann, president of consulting firm WSL Strategic Retail in New York, finds evidence in a recent survey of 1,500 consumers of a broader shift in consumer behavior after almost a decade in which most were “trading up” for high-end items. Many are now cutting back, she said, with low-income households becoming more likely to stick to dollar stores and supercenters and middle-income families visiting more mass merchants and grocery stores than specialty outlets.
Especially surprising, Liebmann said, is evidence that households earning as much as $75,000 a year are changing their habits. Survey responses among this group were more similar to those of low-income households than those of wealthy families, she said. The types of spending most likely to be chopped: fashion accessories, clothing, home décor, electronics and entertainment.
“People are prioritizing before they go off and spend their dollars on luxury items,” said Cathy O’Malley, manager of the Fairlane Town Center in Dearborn, Mich.
How deep the trend extends, and how long it will last, are being closely watched by economists and retailers: Three-fourths of U.S. economic growth last year stemmed from increased consumer spending.
Spending has clearly slowed some. While consumer spending rose at an annualized, inflation-adjusted rate of 2.5% in the second quarter, that was down from 4.8% in the first quarter. Retail sales grew 1.4% in July from June, better than had been expected, but economists were divided over whether that meant spending would stay strong or whether the surge looked stronger than it was after an especially weak June.
Meanwhile, consumers seem to be more worried about the economy and prospects of inflation. The University of Michigan’s preliminary reading of consumer sentiment plunged to 78.7 in early August from 84.7 in late July, the lowest level since the aftermath of Hurricane Katrina last year, according to economists who viewed the report.
For now, the latest slowdown seems to be squarely affecting the middle-class segment. The richest shoppers continued to spend on luxury items. Lower-income shoppers, more vulnerable to high fuel prices, already had been spending less, as seen by slowing sales at Wal-Mart Stores Inc. and similar chains.