Generation Y-ers worldwide are the driver of spending on affordable-luxury goods, which explains why companies specializing in this category are outperforming the market: Euromonitor

Cindy Allen

October 18, 2011 (Euromonitor) – When the world economy plunged into crisis in 2008, the generation which lost the most – in terms of jobs and purchasing power – was paradoxically the generation driving a resurgent luxury goods market. But, is this so-called 'Generation Y', comprising young people born between 1977 and 1994, resolute enough to cope with another, potentially more damaging, global recession?

Baby-boomers leave future generations high and dry

The baby-boomer parents of Generation Y were, on paper, the lucky ones. They grew up in largely peaceful times, rode a purple patch of real estate equity growth, enjoyed easy and plentiful access to consumer credit and built up fat and lucrative pension pots. When the bubble finally burst and the walls of once seemingly formidable financial institutions began to crumble, it was their children who bore the brunt.

In particular, access to credit in the world's developed markets became increasingly restrictive. In the UK, for example, not only did it become difficult for Generation Y to get a foot on the property ladder, after 2008 the concept of home ownership – once the bedrock of material ambition – also began to lose its appeal as property prices went into meltdown.

In addition, there seemed little to cheer about in terms of future prospects as pension schemes deteriorated in value and retirement age was pushed back. After 2008, Generation Y was, in short, paying the price for the financial follies of its baby-boomer parents. One could argue, even, that baby-boomers had borrowed, albeit unwittingly, at the expense of their children's futures.

Generation Y engages with the present not the future

Despite coming off much worse from the 2008 financial crisis than their parents, Generation Y consumers have been instrumental in bulking out luxury goods consumption over the interim period. Indeed, twenty and thirtysomethings, in both developed and first-tier emerging markets, are widely identified as the trendsetters of luxury demand, driving products as wide ranging as designer handbags and Italian sports cars.

It is actually not as paradoxical as it might seem. Generation Y's propensity to spend rather than save is indicative of a consumer culture that has lost confidence in the future, or at best has been so badly bruised by global recession that it prefers to enjoy today what it might not have tomorrow. It is not a philosophical shift but an instinctive reaction to the reverberations of the worst global credit crisis since World War II.

Parallels can be drawn with the Brazilian model, where consumer culture over the past six years has been geared towards spending rather than saving (despite having some of the highest interest rates in the world). This has fuelled domestic demand and catapulted Brazil into becoming one of the most attractive fast moving consumer goods market in the worldfor new investment. The propensity of Brazilians to spend can be traced back to the hyperinflation era of the 1980s and 1990s when the value of wages eroded rapidly, encouraging households to offload their cash quickly.

The scars of hyperinflation left on Brazilians have the same effect as the scars of global financial crisis left on Generation Y. In both instances, we see consumers with a reluctance to invest heavilty in the future, preferring instead to maximise their quality of life in the present. It is also striking that Brazil's own Generation Y accounts for 31% of the population, which is one of the highest proportions in the world. In Japan, for example, Generation Y accounts for 20% of the population, and in the US the share is 25%.

Affordable luxury is the sweet spot of Y opportunity

In short, the global financial crisis triggered an intergenerational shift in consumer culture, above all in the world's biggest developed markets, creating a new ethos among young adults to spend their disposable income. This penchant for spending is evident across different socio-economic groups – lower-income tiers of Generation Y have fuelled, for example, upbeat growth in fast fashion in recent years, while Generation Y's high net worth individuals have spent heavily in the luxury goods arena.

We are not seeing luxury spending at any price, however. Generation Y is widely identified as brand loyal, but only if the price fits. As a result, Generation Y has been the crucial driver of so-called affordable luxury. And this is why we are seeing so much investment in affordable luxury price points across a raft of categories. It is also why companies specialising in affordable luxury are outperforming the market. The UK company, Mulberry, for example, posted a jaw-dropping 357% hike in annual pre-tax profits for the year to 31 March 2011.

Generation Y forges a new art of branding

Generation Y has inevitably become a core focus of advertising and marketing investment for the world's leading luxury goods companies. And given that Generation Y is so highly internet capable, with a penchant for social media websites and the blogosphere, there are now huge challenges for marketing strategists as companies seek to entice what are arguably the world's most tech-savvy, sophisticated and demanding consumers. Crucially, Generation Y uses technology to drive quality of life.

What seems clear is that the marketing and advertising of luxury goods needs to engage with Generation Y on a more personable level than was the norm before 2008, developing brands around a more complete interactive experience. Often, this might mean using both real and virtual (internet) platforms. It is a type of branding likely to become ever more visible in categories such as super-premium beauty and personal care and designer clothing. For example, there is growth of in-store beauty pampering boutiques in Western Europe, which has potential to act as a bespoke showcase for super-premium brands.

One could argue that the complex demands of Generation Y have turned the branding of luxury goods into more of an art form. And the more innovative companies are in their branding – from pop-up luxury stores in trendy urban settings to luxury beauty care pampering in department stores - the greater their point of differentiation from competitors.

A double-dip recession will consolidate a culture of spending over saving

Going forward, the emphasis on affordable luxury is likely to become even more pronounced, especially if the global economy sinks into a double-dip recession. A new and potentially more contagious global economic slowdown will hurt Generation Y – just as the 2008 crisis did - but it is unlikely to destabilise its consumption culture.

The US will continue to be a hub of Generation Y opportunity for the luxury goods industry. According to data from Euromonitor International, there are over two million 20-34-year-olds in the US with an income of US$150,000 or more. And China, Brazil and Russia will be the engines of growth among emerging markets. China, in particular, is on course to see an expansion of wealth into the interior over the next five years.

If the world does slip into a double-dip recession – triggered by financial instability in the US and a debt crisis in the EuroZone - luxury goods companies could find it tougher to navigate than the 2008 crisis, not least because China – the key emerging growth market - is less insulated than before, and susceptible to higher rates of inflation. But, Generation Y, unlike the baby-boomers, is becoming accustomed to difficult times. And that, as unlikely as it seems at first sight, is an opportunity for luxury goods players because it implies the consolidation of a culture of spending.

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