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  • Luxury spending drives recovery
    By IBISWorld Retail Analyst Nikoleta Panteva


    In December of 2010, luxury jewelry retailer Tiffany & Co. (TIF) proved that analysts’ earnings forecasts were grossly underestimated. And the company’s earnings were not a fluke: year-end financial data shows that Tiffany grew 13.9% in 2010, despite the fact that its jewelry sells for an average price of $1,802. Lower-tier jewelry brand Zales (ZLC), whose average price point is a much lower $730, actually recorded revenue decline in 2010. From 2009, company revenue fell a significant 9.2%. The Jewelry Stores industry also declined over the year at a rate of 2.5%, so while Zales continued falling, Tiffany actually outperformed its lower-end counterpart and the entire industry. At the same time, Americans’ per capita disposable income inched up only 0.3% during the year (compared to prerecession growth of 3.0% in 2006) and unemployment grew to a new high of 9.6%. Nevertheless, an elite set of companies like Tiffany & Co. fared rather well. These contrasting trends then spur the question: Is luxury spending leading the economic recovery?

    Jewelry Stores isn’t the only industry displaying this trend. For example, luxury brand Coach Inc.(COH), part of the Handbags, Luggage and Clothing Accessories Stores industry, also outperformed its competition. Coach grew 11.7% in 2010, far faster than the industry’s 2.4% rate. Likewise, luxury department retailer Saks Inc. (SKS) grew a strong 5.9% during the year. Meanwhile, Department Stores industry revenue dropped an estimated 1.8% in 2010, following a 6.6% drop in 2009. Even high-end furniture purchases have rebounded quicker than their lower-priced competitors. For example, Williams-Sonoma (WSM) – the parent company of brands like Pottery Barn and West Elm – recorded a sales increase of 12.9% in 2010 (its most recent financial data available) to $3.5 billion. By contrast, the Furniture Stores industry only grew 0.5% over the year to $59.8 billion.

    Car company Toyota Motor Corporation (TM) has displayed a similar trend, with its Lexus division rebounding much quicker than its Toyota division.

    Despite Lexus’ higher starting price (about $33,000 for the base IS model versus Toyota Camry’s $19,000 starting price), the brand’s US sales increased 6.2% in 2010, while Toyota’s US sales actually declined 0.5%. IBISWorld estimates that Lexus and other luxury car brands are responsible for pushing New Car Dealers industry revenue up to 9.2% in 2010. Could this mean that consumers are shifting gears toward luxury goods?

    Gen Y in the driver’s seat
    Generation Y consumers – people born between 1979 and 1993, roughly between the ages of 17 and 32 – are notorious for shopping. Despite the ensuing recession, data from the Bureau of Labor Statistics shows that 25- to 34-year-olds continued to increase their total spending over the five years to 2009 (the latest data available). This age group’s expenditure grew at an average annual rate of 2.3% to $931.9 million, while their older counterparts – namely, those between the ages of 35 and 44 –increased total expenditure at a much slower 1.0% per year to $1.3 billion.

    Perhaps this spending increase is due to Gen Y’s income growth. After all, a greater number has entered the workforce over the past five years. The data, however, indicates otherwise. Average post-tax annual income for 25- to 34-year-olds grew at an annualized rate of 2.4% to about $57,000 over the five years to 2009. This rate is well below 35- to 44-year-olds’ income growth of 3.5% per year to $75,000. In fact, Gen Y income increased slower than the income of any other age group, including those younger than 25, whose average annual income grew by 2.5% to $26,000. Despite Gen Y’s lower after-tax income, these consumers still outspend their older counterparts.

    This trend is largely due to the rise of the aspirational shopper, which is a middle-income earner who displays high-end taste. The Gen Y group is littered with aspirational shoppers, which explains their expenditure trends. This type of consumer typically makes single purchases averaging $300, so their luxury options are limited. Luxury brands have noticed this pattern and altered their product lines to capture Gen Y’s dollar. Is this just the beginning of a new standard?

    The future of luxury brands
    Successful luxury brands that are leveraging Gen Y’s spending patterns include high-end handbag maker Coach. In July 2009, the company debuted a brightly colored, age-appropriate line of purses and perfumes under the less-pricey Poppy brand. Poppy is aimed at the Gen Y consumer and retails for as low as $198. Likewise, fast-fashion retailers like H&M and Forever 21 have partnered with well-known designers in high-low collaborations. In 2010, H&M’s Lanvin collection boosted the retailer’s revenue 15.0% from 2009. The most expensive item in the collection was a $350 coat, which still accommodated the expensive-taste Gen Y shopper.

    Mass merchandiser Target (TGT) has also made efforts to bridge the gap between high-priced luxury and affordable fashion through limited-time designer collaborations in its stores. The clothes are typically carried in the store’s juniors section, which targets the hip Gen Y consumer. Target’s program Go International kicked off in 2006 with a special line by Luella Bartley. Prices for the line stayed below $150 and targeted the young aspirational shopper. Since then, the retailer has carried a myriad of other designers, including Alexander McQueen, Zac Posen and Thakoon. In early 2011, Target even rereleased some of its most popular lines. Also, on April 13, department store Macy’s (M) released its exclusive collaboration with designer Matthew Williamson.

    During this transitional year, will more high-end brands take on similar approaches to reach their young, yet budget-conscious audience? The answer is most likely! Demand for luxury items stems from consumers’ perception of their quality. Gen Y spenders, especially, are aware of brands and the messages they send. But because many in this age group will remain unemployed in 2011 due to their general lack of experience, brands and retailers alike will lower the prices of their luxury items and make them more accessible to these avid shoppers. This, in turn, will build loyalty and create return shoppers out of the still-young Gen Y consumers. As their budgets grow, so will the sizes and frequencies of their purchases.

    IBISWorld estimates that Gen Y spending grew about 2.0% in 2010, despite counterintuitive economic factors. The increase is forecast to be even greater through 2011 – an expected 3.4% – as unemployment drops 4.2% and consumer confidence climbs 7.0%. Luxury brands and mass markets will continue to join hands to deliver high-end goods at affordable prices.
    Apr 29 12:06 PM | Link | Comment!
  • Automaker Industry Winners & Losers: Quarterly Earnings Report
    By IBISWorld Senior Analyst Casey Thormahlen


    Industry Overview
    Faced with a plethora of problems and unfavorable demand conditions, automakers have struggled to make ends meet since 2005. Consumer confidence has fallen since 2006 because of the subprime mortgage crisis that is the leading factor for the current global recession. Credit availability and disposable income similarly contracted during the recession, making it difficult to finance a new car.
    In 2011, consumer confidence is expected to make its first meaningful gains following the recession. Credit availability is recovering (though depressed by 2007 standards) and disposable income is rising, increasing the Car and Automobile Manufacturing industry’s revenue by 8.5% to $83.2 billion, and boosting the Light Truck and Sport Utility Vehicle Manufacturing industry by 14.9%, to $108.8 billion.

    The sharp rise in gasoline prices between 2004 and 2008 shifted preferences from sport utility vehicles (SUVs) and other gas-guzzling automobiles to smaller and greener cars. Light truck and SUV manufacturers have struggled to make a profit since 2004. Expensive labor contracts and idle production capacity led to years of losses in the 5% range, as truck and SUV sales slowed. Industry companies have engaged in restructuring plans and aggressive union negotiations to get costs under control and revive profit. Of the US-based automakers, Ford was the first company to successfully return to profit in 2009 (on a 2.3% margin), and it did so without bankruptcy restructuring or government loans. IBISWorld estimates that the industry’s overall profit will be 3.9% in 2011. This newfound enthusiasm for small vehicles is not permanent, though. More efficient engines in trucks and SUVs have mitigated the financial penalty for driving these vehicles.

    Major Industry Players

    Toyota Motor Co. (TM): Industry Loser
    The past two years have been especially difficult for Toyota. In 2009 and 2010, the US National Highway Transportation Safety Administration (NHTSA) investigated alleged defects in a range of Toyota vehicles that supposedly caused unintended acceleration. Ultimately, the NHTSA investigation found no defects, suggesting driver error as the primary cause, but Toyota was found guilty in the court of public opinion. The scandal has put crushing weight on the company’s US sales. In the first quarter of 2011, Toyota is on pace for a US market share of 14.0%, an astonishing drop from its 2009 peak of 17.0%. The lasting effects of the Sendai earthquake and Fukushima nuclear disaster will only deepen the hole in Toyota’s sales. The disaster, which began March 10th, did not affect first quarter sales, but it is expected to cause supply shortages in the second and third quarters of 2011. Thus far, the company’s truck and SUV sales have led the decline, falling 13.8% compared with the same period of 2010. Toyota’s full-year 2011 market share will almost certainly continue falling. IBISWorld expects that Toyota’s fiscal year 2011 results (for the 12 months ending in March 2011) will show revenue decline and a net loss, amplified by the expense of massive recalls.

    General Motors (GM): Industry Average
    The saga of “Government Motors” finally ended in November 2010 with GM’s new IPO. The company’s stint in chapter 11 bankruptcy trimmed a lot of the fat that slowed the behemoth manufacturer, particularly with its debt and pension obligations. Better still, GM negotiated less expensive contracts with the United Auto Workers (UAW), reducing production expenses and paving the road for more sustainable union benefits. New contract negotiations are expected to take place in 2011, with a resurgent UAW under the leadership of President Bob King. These factors will be a critical determinant of GM’s continuing performance. For the first quarter of 2011, GM’s sales were up a healthy 9.9% over 2010, to about 206,600 vehicles. While any growth is a positive sign, GM’s sales growth is still far slower that what other manufacturers have achieved, causing the company’s market share to continue declining. Furthermore, GM has outspent other manufacturers on vehicle incentives lately, cutting into profit. Incentive spending has been somewhat ineffective, because GM’s first quarter sales put the company on track for a market share of 16.8%, its lowest in decades. For its first quarter 2011 earnings release, IBISWorld expects the company will display modest revenue growth and a slimmer profit margin.

    Major US Automakers Benchmarked Against Industry Average

    Ford Motor Co. (F): Industry Winner
    Ford is still the industry darling and a clear turnaround story. As the only one of the Big Three to avoid chapter 11 bankruptcy and large government bailouts, Ford also benefits from extraordinary goodwill in the eyes of the public. Under the leadership of Alan Mulally, Ford was the first of the US automakers to take steps to turn the company’s operations around back in 2005. While Ford’s turnaround has been slower than GM’s or Chrysler’s, the company’s head start allows it to sell more recently refreshed vehicles. Ford’s 2010 profit margin, at 5.1%, edged ahead of rival GM even with GM’s shrunken liabilities. Ford is continuing to outperform in 2011 and is on pace to grab a 17.4% market share, its best showing since 2006. Ford’s truck and SUV sales are soaring, rising 20.8% from Q1 2010 to Q1 2011. Ford is expected to post solid revenue and profit growth in its first quarter earnings release.

    Honda Motor Co. (HMC): Industry Average
    Honda has always done business differently than its larger rival, Toyota. Honda never made the aggressive push for sales volume that Toyota pursued for the last decade. As a result, Honda’s performance has been less volatile. The company’s US market share peaked in 2009 at 11.0% and is on pace for 10.6% in 2011. Honda has not suffered the reputation damage Toyota has, but it has similar supply chain vulnerabilities that emerged from the aftermath of the Sendai earthquake. Supply chain disruptions are expected to plague Honda in the second and third quarter of 2011. IBISWorld expects that Honda will post modest revenue and profit gains for fiscal 2011 (ending in March 2011).

    Volkswagen AG (OTCQX:VLKAY): Industry Winner
    Volkswagen remains an automaker in the US market, but the company has ambitious expansion plans. On a global basis, Volkswagen is the largest automaker and the largest foreign automaker operating in China. In 2010, Volkswagen took the first steps in its US expansion plans, opening new plants in Tennessee and Puebla, Mexico, to pursue local production. High labor costs and unfavorable exchange rates have historically put a “German premium” on Volkswagen models in the United States. The launch of the redesigned 2011 Jetta, its bread-and-butter compact sedan, is a taste of what local production and design changes can achieve for the company: the 2011 Jetta starts at just $14,995, compared with $17,335 for the 2010 model. During the first quarter of 2011, Volkswagen’s small car sales rose 22.7% compared to 2010. Overall Volkswagen’s market share dipped to 2.9% for the first quarter, from 3.1% during the full year of 2010. Volkswagen’s US market share is expected to build momentum as the company continues to expand local production and lowers prices, which has proven effective with the 2011 Jetta. Volkswagen is anticipated to post solid revenue and profit growth in its first quarter earnings release.

    US Automakers Market Share Over Time (2006-2011)

    Industry Outlook
    Through 2016, automakers will find the light at the end of the tunnel, with uninterrupted growth in the forecast. The consumer sentiment index is expected to rise 4.3% annually over this period, reaching 95.0, up from 76.8 in 2011. Continuous improvements in credit availability and disposable income will encourage spending on new vehicles. Rising oil prices, which are expected to increase 5.9% annually through 2016, will have mixed effects on the industry. Higher oil prices will temper growth in demand for new vehicles, but they will also make smaller cars more appealing relative to trucks and SUVs. During the five years to 2016, industry revenue is expected to rise annually by 4.2% to $102.2 billion for the Car and Automobile Manufacturing industry and 5.3% to $140.6 billion for the Light Truck and Sport Utility Vehicle Manufacturing industry. In 2012 specifically, IBISWorld anticipates revenue to grow by 8.5% and 6.0%, respectively.
    Apr 28 12:18 PM | Link | Comment!
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