Big spenders haven’t gone away

Elaine, a stockbroker from Long Island, is eating a freshly baked scone with clotted cream in the Panorama Lounge on a luxury Silversea cruise ship bound for Sydney, Australia. She’s happy to reveal that she paid more than $10,000 for this particular voyage. Charles, another cruiser and an “investor,” loves karaoke, wears fine leather loafers without socks and lives on Hong Kong’s Peak, some of the most expensive real estate in the world. Yet another guest is the former director of Heinz U.K. A scan of nameplates reveals a lord and lady. The demographic skews older, late 60s and 70s, and the money appears abundant.

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Meanwhile, at the beautiful new Mandarin Oriental Paris, with subtle pink butterfly and Lalique crystal accents, a significant number of young faces check into the $1,000 euro-a-night rooms and gather for a coupe de Champagne in the serene courtyard just off fashionable Rue Saint-Honore. And at Galleries Lafayette, one of Paris’ ornate “grand magasins,” young Chinese tourists line up behind velvet stanchions awaiting entrance to the Longchamp and Louis Vuitton boutiques.

The luxury category has officially rebounded. After a recessionary contraction, luxury brands such as LVMH are reporting double-digit growth. But the new luxury spending is being driven by young consumers rather than old money. A February report by American Express Business Insights (AEBI) says that Generation Y shoppers (aged 18 to 34) increased their spending on full-price luxury fashion by 33% and luxury jewelry by 27% in 2011, the biggest gains in spending for any age group.

Milton Pedraza, CEO of The Luxury Institute, a New York-based consultancy, isn’t surprised by these results. He said that luxury consumption is often driven by younger generations eager to create a certain perception. “They’re in the career-building and mate-finding years, and they’re interested in creating status with the right hand bag and shoes,” said Pedraza. “But when you get a little older, you get a little more sophisticated and you’re less interested in material goods. I’m 54 and I drive a BMW I paid for in cash 11 years ago and I don’t care.”

Pedraza noted that this new spending is somewhat more conscientious than it used to be. Prior to the recession, Gen Y consumers were also buying by the bucket load and racking up credit card bills to meet their indulgences. Pedraza said these consumers have since become more debt-conscious and discerning, if not exactly bargain-hunting. “Now, instead of buying three or four handbags, they might buy one for two-thirds of the value of all four put together.”

This trend is being replicated outside the United States, particularly in emerging markets. In China, where the growing number of millionaires tends to skew younger, about 45% of Chinese shoppers who buy luxury goods are ages 18 to 34, compared with 37% in Japan and 28% in Britain. Similar trends are being observed in Russia, Brazil and more affluent parts of the Middle East. Egypt and India, with impressive growth rates and very young populations, are being closely watched. Pedraza estimated that as much as 50% of luxury spending in the major capitals of Europe is by visitors from emerging markets.

Ed Jay, senior vice president at American Express Business Insights said that luxury retailers should be paying attention to the unique buying habits of these young consumers. “Gen Y consumers are…more spontaneous and frequently experiment and explore new brands,” he said. “These spending habits stand in direct contrast with those of the traditional luxury consumer, who are characterized by more consistent spending behavior and brand loyalty.”

Luxury retailers would be wise to start wooing these young consumers with superior service, said Pedraza. “Apple reinvented the retail store, Zappos reinvented online sales and people have started asking why luxury brands aren’t doing the same,” he said. “Luxury brands have a reputation for being really arrogant and snobby, like a velvet rope at a nightclub. That mentality is being slowly weeded out.”

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