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Luxury goods customers fall into two camps:  the truly wealthy, and aspirational buyers.

The difference is this:

For the truly wealthy, price isn’t a determinant of what they buy.  The truly wealthy choose, say, a Bentley rather than a Hyundai because they like the way the motor sounds or because the seats are comfortable, or because it’s what they’ve always bought.  The fact that the Bentley costs 5x+ what the most expensive Hyundai sells for makes no difference.  Why?  It’s because the amount of money involved is–for them–insignificant.  It’s the same as the choice  between buying a so-so $5 t-shirt vs. a cooler $15 one as a travel souvenir might be for most of us.

Aspirational buyers, in contrast, are conscious of the price they’re paying.  And it may well be more than they can really afford.  But they buy the luxury brand anyway, as a way of announcing to the world that they have the wealth, or good taste or high social standing they aspire to.

For luxury goods companies, the wealthy remain steady customers through thick and thin.  Aspirational purchases ebb and flow with the economic cycle.

what’s happening today

By the way, Chinese customers, who have been avid buyers of most American and European luxury goods are beginning to turn to their own domestic brands.  I’m not sure how to make money from this, so for now it’s only an (interesting, I think) observation.

In the US, even as the economy continues to plod ahead–and evidence is accumulating that it may be shifting into a higher gear–aspirational buyers appear to be spending less on luxury goods rather than more.  Not so good for luxury goods companies, as we’ve seen in recent earnings reports from TIF, COH and AAPL.

But the more important investment question is:

–given that the aspirational buyer will have more money this year than last, and

–given that his largest source of wealth, his house, is starting to rise in value after five years in the doldrums,

where is he now spending his discretionary income?

I don’t know for sure.  If you have any ideas, please post a comment.

My preliminary guess is that aspirational buyers are doing home renovations and buying furniture.  This is what usually happens at the very start of an economic upturn, where Americans typically buy a house in year one and divert a lot of their income to fixing it up in year two.

Vacations?

At any rate, recent earnings reports from luxury goods companies seem to me to be another sign that the market pattern of focusing on companies that cater to the wealthy as hotspots of growth is over.