Business

When affluent pinched, others are squeezed

President Jeff Landis of Montopoli custom Clothiers in Chicago caters to consumers willing spend $3,000 to $30,000 for a custom-made suit.  He has seen sales drop 10 percent in October and November.
President Jeff Landis of Montopoli custom Clothiers in Chicago caters to consumers willing spend $3,000 to $30,000 for a custom-made suit. He has seen sales drop 10 percent in October and November. AP

NEW YORK — It's hard to feel sorry for well-heeled shoppers whose idea of tough economic times is passing up $1,000 Burberry raincoats or that $300 limo ride while the working poor skimp on vegetables and take the bus.

But economists say recent signs of cutting back by the affluent could hurt the economy and deliver even more pain to lower-income workers who are dependent on their business and fat tips.

In Chicago, Montopoli Custom Clothiers, a tailor to consumers willing to spend $3,000 to $30,000 for a custom-made suit, has seen business suffer. Sales dropped 10 percent in October and November from the year-ago period, according to President Jeff Landis. He noted that 20 percent of his clients, who include commodity traders and chief executive officers of Fortune 500 companies, delayed buying suits for fall.

"I consider them a leading economic indicator," said Landis.

He's taken aggressive measures such as increasing calls to clients to get them into the store, but hasn't laid off anyone.

"I'm not at the point of panic," he said.

Nathan Warren, a limo driver, has seen his monthly wages drop 40 percent to about $1,800 since late last year. His work week at Newport Beach-based Classy Ride Limousine Service was reduced to three days from five amid slow business.

"I have to struggle to get by. I'm pinching pennies," said Warren, 30, a Costa Mesa resident. "I'm eating more cereal and am not buying clothing."

Cutbacks by the wealthy have a ripple effect across all con- sumer spending, said Michael P. Niemira, chief economist at the International Council of Shopping Centers. That's because American households in the top 20 percent by income, those making at least $150,000 a year, account for about 40 percent of overall consumer spending, which makes up two-thirds of economic activity.

Niemira expects the retail sector, the growth of which was fueled in part by strong gains at luxury chains, will struggle to eke out a 1 percent sales increase in stores opened at least a year during the next few months. That's below the 2.1 percent average for 2007 and 3.7 percent for 2006.

Just look at the cutbacks by Dali Wiederhoft, a 52-year-old marketing executive from Reno, who was made skittish by a volatile stock market, a 20 percent decline in her home value and recession fears.

Over three months, Wiederhoft pared her spending on clothes to $500 per month from about $3,000. That means no more Jimmy Choo shoes and David Yurman jewelry. She canceled the services of a cleaning woman and a lawn care company and plans to trade in her BMW for a Ford when her lease expires in about a month.

"This is a time to have cash, not to spend. So, I'm cutting wherever I can," she said.

Such reined-in spending seems to be the end of a winning streak for luxury retailers that once appeared immune to the economic slowdown. Tiffany & Co. and Williams-Sonoma Inc. reduced their earnings outlooks and Burberry PLC said it may miss its 2008 profit forecast. Coach Inc. reported a 1.1 percent decline in same-store sales at its North American stores for the second quarter ended Dec. 29, and Compagnie Financi Gere Richemont SA, the Swiss parent of Cartier and Baume & Mercier, reported a slowdown in holiday sales growth.

Soaring home values had made upper-middle-class shoppers feel wealthy in recent years, causing them to trade up to $500 Coach handbags and $1,000 espresso makers. But a housing slump has wiped away their paper wealth. The woes are creeping into even the high-end luxury sector, as affluent shoppers are rattled by the turbulence in the financial markets.

American Express Co., whose customers generally are affluent, said it expects slower spending and more missed payments on credit cards throughout 2008.

The economy needs affluent shoppers to spend with enthusiasm.

According to the government's latest survey of consumer expenditures, the top 20 percent of households spend about $94,000 annually, almost five times the bottom 20 percent and more per year than the bottom 60 percent combined.

Then there's the multiplier effect. When shoppers splurge on $1,000 dinners and $300 limousine rides, that means fatter tips for the waiters and the drivers. Sales clerks at upscale stores, who typically earn sales commissions, also depend on spending sprees on mink coats and jewelry. But the trickling down is starting to dry up, threatening to hurt a broad base of low-paid workers such as Warren, the limo driver.

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