• by Deanna Zammit , March 14, 2008

America's millionaires are feeling the pinch, and so are luxury marketers. According to a study released this week, the number of millionaire households in the U.S. grew last year by just 2%, the slowest advance since 2003.

While the number of wealthy Americans--worth $1 million or more--is still on the rise, that percentage represents a drastic downturn from the champagne-clinking growth of years past. In 2004, the number of millionaires in the U.S. grew by 21%, in 2005 by 11% and in 2006 by 8%. Growth of even richer Americans--worth $5 million or more--has also slowed to just 2%, according to the Spectrem Group, which conducted the study.

"The substantial gains in the number of millionaire and ultra-high net-worth households we've seen since the end of the dot-com bust has all but ground to a halt," says George H. Walper, Jr., president of Spectrem Group. "We had already tracked a steady decline in millionaires' investment optimism since mid-2007 on a variety of concerns, including a slowing economy, rising energy costs and poor stock market conditions."

Recent years represented a boom-time for American investors and the luxury marketers that filled their homes with Lexus SUVs, Rolex timepieces and Coach handbags. Now, the net worth of even wealthy Americans is dipping as real estate prices slump and stock portfolios sag. And, as investment banks and government economists begin beating the drums of recession, even high-net-worth households are cutting back.

"They're primary property is real estate, but they also have a stock portfolio, so it's a double whammy," Milton Pedraza, CEO of The Luxury Institute, tells Marketing Daily.

Aspirational or "masstige" brands may be hit the hardest by the downturn as their market cuts back. The merely affluent-those making $150,000 a year or more but without sizeable property or portfolio holdings--will be cutting back most, followed by lower-bracket millionaires with families. The answer will be fewer Coach handbags or Tiffany baubles, although they'll still be dropping cash on their most valued brands, Pedraza says.

"When times are rough, they get scared, and rightfully so--they need to pull back," said Pedraza. "That's where the luxury industry gets slammed."

Pedraza points to sagging department store sales "because they sell so much to so many different kinds of people." Indeed, sales at Nordstrom stores open at least a year dipped by 5.3%, and February sales at Neiman Marcus dropped by 7.3% vs. a year ago. And Sacks, which managed a 3.4% gain, warned that sales of high-margin items like handbags were off, according to an upcoming Luxury Institute Wealth report.

To combat that effect, luxury manufacturers will reposition themselves as elite. Handbag manufacturers Louis Vuitton and Gucci are raising prices--in part to combat a weak dollar, but also to create the perception that they are moving upmarket, Pedraza said. Other big ticket brands are offering custom-made and limited-edition lines to keep their labels free of the mass-market riff raff.

Ultimately, the brands best positioned to weather the storm are those with strong ties to their truly wealthy customers--particularly empty nesters worth more than $10 million, Pedraza said.

"Hermes won't get hurt, Bulgari won't get hurt as much ... They really sell to the ultra-wealthy."