• by Sarah Mahoney , Staff Writer @mahoney_sarah, July 26, 2023

A $200 Hermès mug

From Nordstrom to Tiffany to Hermès, luxury marketing has always traded on the dreams of the not-quite-wealthy, offering entry-level pricing on smaller items. Those consumers are under pressure, pushing brands to new strategies. Milton Pedraza, founder and chief executive officer of the Luxury Institute, unpacks and explains how companies navigate a challenging economy.

Retail Insider: Plenty of companies feel the effect of this collapse in aspirational luxury. Maybe their household income is $150,000 or $200,000, but now their mortgage costs more. So do groceries. They aren't buying that fancy handbag. How are luxury companies adapting?

Milton Pedraza: I don't know that the luxury brands will go downmarket just to bring them in. Take Hermès. It will still have a $500 ring or $700 bangle, but I bet there'll be fewer. For many top-tier luxury brands, the wealthiest 5% of customers account for 40% of sales. The following 15% give you 30% of sales. But the lower-earning customers account for just 30%. So those shoppers matter, but not as much as you might think.

Retail Insider: How do you define the luxury audience these days?

Pedraza: In terms of income, it's about $250,000 or more per household, with liquid, investable assets of about $1 million.

That's important because people -- especially in cities like New York -- can have relatively high incomes but still live hand-to-mouth. And to be a true luxury shopper, you need to have $5 million or more in liquid assets.

Retail Insider: Brands like Tiffany have been deliberately going upmarket, paring back affordable luxuries. What's the goal?

Pedraza: Tiffany and others are realizing that they can't depend as much on these aspirational shoppers. So they'll move up. Other brands that call themselves luxury, like Michael Kors, might say, let's lower our products. What Nordstrom did, which I don't agree with, it went all in on Nordstrom Rack.

In some ways, it abandoned the core business. Now it's just like Macy's or Dillard's. And then the risk is that you have to discount more, which hurts margins. Luxury has been disciplined about not discounting, but when you go downmarket, you risk having to discount more. It's a dilemma.

Retail Insider: Plenty of luxury brands never cared about that audience anyway -- companies like Gulfstream, Bulgari, or Maybach. Others, like Burberry or Mercedes or Coach, really do, right?

Pedraza: Yes, that's "luxury" with a small L. Those companies have to stay committed to serving the aspirational consumer, especially the younger millennial and Gen Z. To the degree that those customers are challenged, those brands may have to cut back on quality to serve them.

Retail Insider: Because cutting prices backfires?

Pedraza: Yes, look at Tesla. Elon Musk takes the Tesla somebody bought for $60,000 the week before and now sells it for $40,000. How does that make a Tesla buyer feel? A sense of betrayal and lack of trust occurs when you drop prices. That's the dilemma for those reaching the aspirational market. You lose credibility every time you flinch, offering sales and promotions.

Retail Insider: Fashion brands seem especially vulnerable. They rely on millennial and Gen Z trendsetters to build buzz. Often, people that age don't have much money.

Pedraza: Yes. Some brands have even backed off social media, including Loro Piano and Bottega Veneta, because they're more word-of-mouth.

Younger shoppers are often more price-sensitive. They may have a lot of income but no assets. They haven't had a lifetime of accumulation unless they inherited it. And when they do spend, these young consumers prioritize travel and experiences over products. They're also worried – there have been a lot of white-collar layoffs.

Retail Insider: How do these younger consumers fit into the "quiet luxury" trend? If I'm an aspirational shopper, don't I want everyone to see those logos?

Pedraza: Quiet luxury has been around for a long time, and it's how the ultra-wealthy live. They don't want to call attention to themselves and don't care what you think. They don't wear loud brands. More people are now adopting that mindset, even to some degree, aspirational shoppers. That's why Gucci is down a bit.