Conspicuous Consumption? Yes, but It’s Not Crazy

An interesting article I found on The NY Times about the buying rationale of the UHNWI: http://www.nytimes.com/2014/11/23/upshot/conspicuous-consumption-yes-but-its-not-crazy.html?emc=edit_th_20141123&nl=todaysheadlines&nlid=57049944&abt=0002&abg=1&_r=0.

The article raises some importantpoints which could be of interest to the watch industry!

 

There’s no denying the over-the-top flavor of much high-end consumption these days. A Reinast toothbrush, of solid titanium, sells for $4,200 even though it may not get your teeth any cleaner than a $2 toothbrush from Walgreens. Then there’s the Greubel Forsey Double Tourbillon 30° Technique, a platinum wristwatch that sells for scores of thousands of dollars. Its intricate mechanical works may be a masterpiece of traditional engineering, but for that, you might keep your day-to-day appointments just as well with a $40 Timex.

 

Buyers of these products have plenty of money, of course. But are they different from the rest of us in other ways? It’s an important question. Because income growth in recent decades has been so heavily concentrated at the very top, luxury markets have become the biggest drivers of economic activity around the world. To understand these markets, we must first understand the motives of the customers they serve, and it’s here that many analysts have stumbled.

One common claim is that the wealthy routinely violate the economist’s law of demand. A bedrock principle of economic rationality, this law holds that as the price of a good rises, consumers buy less of it. Many analysts, however, portray the rich as people who lust after what are known as “Veblen goods” — commodities whose sales actually increase when their prices rise.

The term was inspired by the economist Thorstein Veblen, who interpreted much consumption by the rich as an attempt to signal their great wealth to others. In his view, the lavish summer mansions of 19th-century industrialists in Newport, R.I., were valued less for their own sake than for the fact that they marked their owners as people of wealth and power.

Yet wealth-signaling is probably less important than Veblen thought. Rich people buy luxury goods for many reasons, but even those seeking to display their wealth can almost always find efficient ways of doing so. Why buy a gratuitously expensive good when you can signal your riches just as effectively with an equally expensive good that you actually like? To be sure, billionaires are often willing to spend enormous sums for beautiful things that can’t be duplicated at low cost. But almost none of them would want to buy more of something simply because its price had risen.

 

If they were merely chasing Veblen goods, the rich would be easily exploited by the purveyors of luxury items. Yet the markets for these goods are among the most bitterly contested, and not just because the stakes are so high. Thousands of wine producers spend small fortunes trying to achieve 96-point Robert Parker ratings, but very few get them.

The disruptions that have occurred in the luxury car market also cast doubt on the Veblen-goods concept. Throughout the 1980s, for example, BMW and Mercedes-Benz were leaders in the market for sedans costing up to about $70,000. But wealthy motorists eventually found more choices when respected reviewers assured them that the Toyota brand Lexus offered a better car in many respects.

If BMW and Mercedes sedans had been Veblen goods, their producers could have responded to the Lexus challenge by simply raising their prices. In fact, they have managed to prosper by getting costs under control and making their cars much more appealing.

 

The rich, of course, are willing to spend more, often a lot more, for products that deliver quality improvements they value. But few of them want to throw money away. In that respect, they’re like middle-income Americans, many of whom don’t feel especially prosperous these days. Yet relative both to current world standards and to living standards of the past, middle-income Americans are incredibly wealthy. And when viewed from the perspective of those standards, much of their current consumption is strikingly similar to that of today’s rich.

Each day, for instance, many of us consume espresso brews priced at what would be almost a week’s wages in other parts of the world. We’d be offended if someone described these purchases as attempts to display our wealth. And we’d be puzzled if someone said we’d buy even more lattes if our favorite cafe were to raise its prices. The coffee just tastes better, we’d say, and we’re willing to pay a premium for that.

Luxury markets are already important, and with inequality poised to grow further, these markets will become ever more so. Those who fail to understand them cannot hope to understand what drives the world economy.

That goal will remain elusive until we recognize that the wealthy are essentially similar to the rest of us. They just have a lot more money

I studied this concept of Venlen Goods in High School
11/25/2014 - 11:09

Economics.  They are also referred to as "Goods of Ostentation", meaning that if the Price is high, then the demand is also high.

I am basing the below comments without having read the NY times article.

I guess every luxury brand / product has a "price range", as customers cannot always be fooled, but I think that many brands have a few key products which fall heavily in the Veblen catogory. For example, Ferrari recently celebrated its 60th year in the US, and made 10 open-top examples of its F12 Berlinetta and priced at US$ 2-3 million (approx) each, whereas the model it is based on costs US$ 250-300K (approx).  This LE was based on pure hype but it found its buyers.  They were sold out.

Many luxury brands are so clever at creating hype, that they manage to increase price and demand even when it is not deserved.  A few watch brands come to mind.

On another unrelated note, if it were not for Lexus in the 1980's, there isa fair chance that Mercedes / BMW / Audi would not attain the technical and design superiority they have today.  And if it were not for the Honda / Acura NSX sports car of the 1980's, Ferrari might not exist today.

 

 

 

Interesting how people simultaneously oversimplify and overcomplicate things!
11/25/2014 - 12:29

I am cerainly no expert, but I think that these notions tend to vastly overcomplicate the matter in some ways and yet oversimplify it in others.

It overcomplicates because (at least in my opinion) this is nothing more than people willing to pay for value.  That is, ultimately, simple economics.  People pay for what they value.

Where it oversimplifies is when it decides that the "value" is ostentation.  It is far more complex than that and varies from person to person.

In the end, I think the article summed it up appropriately, "That goal will remain elusive until we recognize that the wealthy are essentially similar to the rest of us. They just have a lot more money."  The very welathy simply has more money to put toward acquiring things that he or she values.  Further, the value of the money itself is relative to the other possible uses.  One weighs the use of money for anything versus other things competing for the funds.  This is true in every aspect and every stage of life.  Businesses make this trade off all the time - do I pay pepole more, or invest in R&D; do I spend more on marketing, or update my manufacturiong processes, etc.  People make this decision in every stage of life - do I go out for a nice dinner, or pay for 5 dinners at home; do I get a job and put the kids in daycare, or do I stay home; do I buy that $4 Starbucks everyday at $120 per month, or do I use it for gas in the car.

It is just so much easier to create an "us and them" environment.  The most likely things separating the very welathy from everyone else is a unique blend of opportunity, ability, and ambition.  (There is likely much else, but I am not writing an argument to defend, just some observations, and these three always leap out at me as big contributors to any kind of success.)

A topic to stir the emotions ;-)
11/25/2014 - 22:13

LOL, I hope to confirm your theory Alex when I become wealthy cool.  Somewhat on topic, Forbes recently reported that wealthy Americans (earning above $200k) gave proportionately less of their incomes to charity in 2012 than 2006, a 4.5% drop, while middle and low-income Americans gave more (5% and 17%, respectively).  During the same period, Forbes noted, the collective wealth of their Forbes 400 list of richest Americans increasd by over $1 trillion.