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Rapidly Deflating Richflation

Why are even the talking heads at CNBC getting flustered over the talk of "recession?"  Because, for one thing, the advertising dollars are starting to dry up.   All those "richflation" want-not-need goodies that have been sprinkled with abandon across the pages of fashionista mags and cable networks over the last few years?  Not so necessary, it seems.  Via Brandweek:

…As talk of a recession gathers steam, luxury brands have posted some fairly poor financial results. In the past few weeks, reported concerns about profits have marred the performance of such brands as Burberry, Tiffany, Coach and Polo Ralph Lauren. Some of those brands have already cut their ad spends….

Yet the fact that these consumers’ affluence depends both on holding down jobs and on the equity present in their homes puts them—and the brands that cater to them—at the mercy of economic forces in ways that a consumer like, say, Warren Buffett, would not be. "The brands that you’re seeing now reporting downturns are those who really appealed to that mass-affluent audience," Danziger said.

Those same ripples are likely to be felt on the marketing front, as well. "One of the first areas [where] brands will cut back will be in their advertising and marketing dollars," Cohen said. Indeed, some of that might already be happening. Burberry’s ad spend from January through November 2007 dropped 8.6% to $11.2 million versus the prior 11-month period, per Nielsen Monitor-Plus. Similarly, Neiman Marcus cut its pend by about 9% to $32.7 million, and Saks Fifth Avenue pared its spend 3% to $42.5 million….

…"We’ve never ever focused on tourism marketing before," said Kimberly Grabel, Saks’ vp-marketing. "While we don’t think we need to spend a lot on that, it is something that we’re looking at more seriously now."

Could be a useful strategery, but for that whole shackle shopping Icelandic tourists fiasco last December. But at least retailers still have Condi’s platinum Amex for emergencies, I suppose. (In case of hurricanes, send shoes.)  What has been propping up this whole richflation bubble?  In a phrase, "irrational exuberance," to borrow from Mr. Andrea Mitchell.

Via NYTimes:

But trading up was always a fragile phenomenon. It rested, in large part, on consumer psychology — a feeling of wealth derived from soaring home values and the steady growth of real income, that is, income adjusted for inflation.

Today, any growth in real income is all but canceled out in consumers’ minds by falling home prices and rising energy costs.

Where greed and reality intersect is the come to Jesus moment for the Bush economy. And if the richflation indicators are the leading edge of the recessionary wedge, reality may be awfully painful for a whole lot of folks. For an awfully long time to come.  Perusing Calculated Risk today is a painful read — people who make the decision to walk away from their vast mortagage payment aren’t the sort of folks who will be buying more Jimmy Choos any time soon, now are they? 

But the people who are going to be feeling the pinch most painfully?  They are the folks who weren’t buying the so-called mid-level luxury brands to begin with…because they were too busy trying to scrape together the change to buy their groceries and pay their skyrocketing utilty and medication bills.  Hello, America?  This is your wake-up call…

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Christy Hardin Smith

Christy Hardin Smith

Christy is a "recovering" attorney, who earned her undergraduate degree at Smith College, in American Studies and Government, concentrating in American Foreign Policy. She then went on to graduate studies at the University of Pennsylvania in the field of political science and international relations/security studies, before attending law school at the College of Law at West Virginia University, where she was Associate Editor of the Law Review. Christy was a partner in her own firm for several years, where she practiced in a number of areas including criminal defense, child abuse and neglect representation, domestic law, civil litigation, and she was an attorney for a small municipality, before switching hats to become a state prosecutor. Christy has extensive trial experience, and has worked for years both in and out of the court system to improve the lives of at risk children.

Email: reddhedd AT firedoglake DOT com