Is rising inflation affecting American consumer behaviour? Retail lender Citi suggests so, as US credit card spending on luxury brands fell for a third consecutive month in September, signalling further weakness in the industry’s biggest market as the US heads into the November 3 midterm elections.
Both American and global luxury brands are struggling due to prolonged weakness in China and the economic fallout from the Iran war.
These brands had pinned hopes on resilient demand from wealthy US shoppers, including a growing league of 21st-century AI millionaires, to offset softer sales elsewhere and help lift the sector out of a prolonged downturn.
Now here is what Citi noted: while wealth growth continued among affluent consumers, that in turn supported the top end of the market in September, overall US luxury credit card purchases fell 6% from a year earlier, after declining 4% in both July and August.
The luxury brands most exposed to the phenomenon include Tapestry, owner of Coach and Kate Spade; French conglomerate LVMH, known for brands like Louis Vuitton and Tiffany; and Italy’s Ferragamo.
“Brands with greater exposure to higher-end consumers should remain relatively resilient, supported by equity-market wealth effects,” Citi analysts said.
While spending on leather goods and ready-to-wear items improved sequentially in September, watches and luxury jewellery followed a path of deterioration.
“Most soft luxury brands which sell apparel, shoes and leather goods have raised their prices by low single digits in percentage terms so far this year, slightly below the low to mid-single-digit price increases from watch and jewellery makers,” Citi analysts noted.
The Citi data, based on millions of credit card transactions, backed surveys from the Conference Board and the University of Michigan that showed growing unease about the US economy among the voters ahead of the midterm elections, which will decide who will control the Congress until the 2029 presidential elections.
While Citi noted that the run-up to elections is often marked by heightened caution among consumers and businesses as political uncertainty weighs on spending decisions, it also spotted a similar trend in September, stating that brands have very little recovery scope in the face of the rising US Treasury yields and mortgage rates that could further cool economic activity.
Citi is not alone in noticing the downturn in consumer spending in the luxury segment.
Morgan Stanley analysts too spotted a similar trend in September, stating that brands have very little scope of delivering the long-awaited return to growth after two consecutive years of contraction.
The broking expects luxury groups to flag weaker US demand during the upcoming earnings season, which begins on October 12 when LVMH, widely considered a bellwether for the industry, reports third-quarter sales.
Gucci owner Kering will be releasing its earnings on October 22.
It has already told analysts to expect a slowdown in the US market, according to Italian broking Equita.