Consumers are swapping everything from Lululemon leggings to Natori underwear for cheaper alternatives
4 min
Many shoppers are trading down to less expensive clothing and accessories—swapping Lululemon leggings for Uniqlo and expensive lingerie for Target bras and panties—as inflation eats into their disposable income and a rocky stock market erodes their wealth.
The downshift raises concerns about the coming holiday season, historically a time when many people splurge on designer handbags, fine jewellery and other extravagant purchases for themselves or loved ones. Investors will get updates on shopping attitudes this week when Ralph Lauren Corp., Michael Kors parent Capri Holdings Ltd. and Tapestry Inc., the owner of Coach, report their latest results.
“I’m skipping the splurge this year,” said Kate Cheng, who owns a jewellery store in San Francisco. Ms. Cheng said she normally treats herself to a designer handbag or another luxury item during the holidays, but is holding off this year over concerns about a looming recession.
She has noticed a shift in her customers’ buying habits in recent months to less-expensive silver jewellery from gold. That has prompted her to curtail her own spending. She switched to Uniqlo leggings instead of products from Lululemon, which cost about twice as much. She also canceled a trip to Maui, which would have cost about $4,000, and instead plans to take a road trip to New Mexico for about half the price.
Seventy-two percent of consumers plan to look for less expensive alternatives this holiday season as a result of inflation, according to a survey of 2,200 U.S. adults by Morning Consult, a research company.
With inflation at a four-decade high, consumers have been trading down to less-expensive groceries and other necessities for the better part of this year. Now, with the stock-market plunge of recent months further eroding the wealth of middle- and higher-income households, the penny-pinching is extending to more discretionary purchases.
Holiday retail sales in November and December, excluding spending on cars, gasoline and restaurants, is slated to increase between 6% and 8% from a year ago, after a 13.5% jump last year, according to the National Retail Federation, a trade group. The labor market is strong, and NRF expects some consumers will tap their savings and credit cards to deal with price increases.
U.S. consumers slowed their spending on luxury goods in recent months, according to credit-card data from Mastercard Inc., Citigroup Inc. and BofA Securities Inc. Spending over the summer and into September fell from the same period a year earlier, after posting double-digit percentage gains for most of the past two years.
Thomas Chauvet, who heads Citi’s Europe luxury goods equity research, said the slowdown was driven by a deceleration in transaction values, suggesting that even affluent consumers are trading down. According to BofA Securities, middle-income consumers, those making $50,000 to $125,000, slowed their spending the most.
Marc Metrick, chief executive of Saks, the online platform of the Saks Fifth Avenue brand, said customers with household incomes of about $100,000 are still spending but at a slower rate. These customers spent 20% more at Saks in recent months compared with the same period in 2021, but that is down from the 40% increase during the first six months of this year. As a result, Saks is selling fewer wallets, belts and other items bought by entry-level shoppers. “They are the canary in the coal mine for sentiment at that aspirational level,” Mr. Metrick said.
Jean-Marc Duplaix, finance chief for Gucci parent Kering SA, told investors in October that entry-level shoppers are buying less. “Among certain categories of products, which are maybe more appealing to a more aspirational clientele, there is some more pressure,” he said.
The slowdown has also hit American jeweller Tiffany, according to its parent, LVMH Moët Hennessy Louis Vuitton SA. “The business in the U.S. is a bit less strong than it used to be,” but it is still growing at a double-digit percentage, Jean-Jacques Guiony, LVMH’s finance chief, told analysts in early October.
Kering and LVMH executives said some U.S. shoppers shifted spending to Europe given the strength of the U.S. dollar. LVMH said its overall business with American shoppers in the third quarter was similar to the first and second quarters of this year.
Mr. Chauvet said the U.S. slowdown in Citi’s data, which started in May, wasn’t the result of purchases shifting overseas because it captures spending by U.S. consumers regardless of their location.
Luxury brands have been among the most aggressive in raising prices. HSBC estimates the sector raised prices around 5% since April, on top of an 8% increase starting in September 2021.
David Hampshere, who owns a real-estate investment company, switched from Ralph Lauren button-down shirts to Costco Wholesale Corp.’s Kirkland brand earlier this year. “With the stock market tanking and mortgage rates rising, I’ve definitely been cutting my expenses,” said Mr. Hampshere, who is 55 years old and lives in Freeport, Fla.
Mr. Hampshere recently returned a pair of $300 noise-canceling headphones and is instead using an old pair that he already owned. He plans to give friends and family $30 gift cards this holiday season rather than the $100 cards he doled out last year.
Stacie Krajchir, 54, a publicist who lives in Los Angeles, has stopped buying Natori underwear and now gets her bras and panties at Target. “I don’t need a $110 bra,” said Ms. Krajchir. “A $12 bra is good enough.”
She recently returned a $300 blouse she bought at Nordstrom. “I can buy a blouse, jeans and a dress at Zara, and it still won’t add up to $300,” Ms. Krajchir said. She plans to trade down in her gift-giving, too. She is getting her sister one gift this year, instead of the five gifts she normally gives her.
Brett Glickman started swapping lower-priced items for high-end ones in her San Francisco boutique after she noticed consumers becoming more frugal in recent months. She is pulling $198 French silk nightgowns off the shelves and replacing them with $24 sweaters and $65 baby-doll dresses. “I had to flip about 30% of my inventory to less- expensive prices,” the former Levi Strauss & Co. executive said.
JCPenney and Kohl’s Corp. said they are seeing consumers switch to private-label brands, which tend to be more affordable than national brands. “They were definitely trading down,” Jill Timm, Kohl’s finance chief said at a conference in September, referring to Kohl’s shoppers.
Vered DeLeeuw, of Washington, D.C., used to buy most of her clothes at Bloomingdale’s, but has switched to Nordstrom Rack for its bargain prices. “Bloomingdale’s was my mother ship, but it is too expensive now,” the 51-year-old food blogger said.
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Multinationals like Starbucks and Marriott are taking a hard look at their Chinese operations—and tempering their outlooks.
4 min
For years, global companies showcased their Chinese operations as a source of robust growth. A burgeoning middle class, a stream of people moving to cities, and the creation of new services to cater to them—along with the promise of the further opening of the world’s second-largest economy—drew companies eager to tap into the action.
Then Covid hit, isolating China from much of the world. Chinese leader Xi Jinping tightened control of the economy, and U.S.-China relations hit a nadir. After decades of rapid growth, China’s economy is stuck in a rut, with increasing concerns about what will drive the next phase of its growth.
Though Chinese officials have acknowledged the sputtering economy, they have been reluctant to take more than incremental steps to reverse the trend. Making matters worse, government crackdowns on internet companies and measures to burst the country’s property bubble left households and businesses scarred.
Now, multinational companies are taking a hard look at their Chinese operations and tempering their outlooks. Marriott International narrowed its global revenue per available room growth rate to 3% to 4%, citing continued weakness in China and expectations that demand could weaken further in the third quarter. Paris-based Kering , home to brands Gucci and Saint Laurent, posted a 22% decline in sales in the Asia-Pacific region, excluding Japan, in the first half amid weaker demand in Greater China, which includes Hong Kong and Macau.
Pricing pressure and deflation were common themes in quarterly results. Starbucks , which helped build a coffee culture in China over the past 25 years, described it as one of its most notable international challenges as it posted a 14% decline in sales from that business. As Chinese consumers reconsidered whether to spend money on Starbucks lattes, competitors such as Luckin Coffee increased pressure on the Seattle company. Starbucks executives said in their quarterly earnings call that “unprecedented store expansion” by rivals and a price war hurt profits and caused “significant disruptions” to the operating environment.
Executive anxiety extends beyond consumer companies. Elevator maker Otis Worldwide saw new-equipment orders in China fall by double digits in the second quarter, forcing it to cut its outlook for growth out of Asia. CEO Judy Marks told analysts on a quarterly earnings call that prices in China were down roughly 10% year over year, and she doesn’t see the pricing pressure abating. The company is turning to productivity improvements and cost cutting to blunt the hit.
Add in the uncertainty created by deteriorating U.S.-China relations, and many investors are steering clear. The iShares MSCI China exchange-traded fund has lost half its value since March 2021. Recovery attempts have been short-lived. undefined undefined And now some of those concerns are creeping into the U.S. market. “A decade ago China exposure [for a global company] was a way to add revenue growth to our portfolio,” says Margaret Vitrano, co-manager of large-cap growth strategies at ClearBridge Investments in New York. Today, she notes, “we now want to manage the risk of the China exposure.”
Vitrano expects improvement in 2025, but cautions it will be slow. Uncertainty over who will win the U.S. presidential election and the prospect of higher tariffs pose additional risks for global companies.
For now, China is inching along at roughly 5% economic growth—down from a peak of 14% in 2007 and an average of about 8% in the 10 years before the pandemic. Chinese consumers hit by job losses and continued declines in property values are rethinking spending habits. Businesses worried about policy uncertainty are reluctant to invest and hire.
The trouble goes beyond frugal consumers. Xi is changing the economy’s growth model, relying less on the infrastructure and real estate market that fueled earlier growth. That means investing aggressively in manufacturing and exports as China looks to become more self-reliant and guard against geopolitical tensions.
The shift is hurting western multinationals, with deflationary forces amid burgeoning production capacity. “We have seen the investment community mark down expectations for these companies because they will have to change tack with lower-cost products and services,” says Joseph Quinlan, head of market strategy for the chief investment office at Merrill and Bank of America Private Bank.
Another challenge for multinationals outside of China is stiffened competition as Chinese companies innovate and expand—often with the backing of the government. Local rivals are upping the ante across sectors by building on their knowledge of local consumer preferences and the ability to produce higher-quality products.
Some global multinationals are having a hard time keeping up with homegrown innovation. Auto makers including General Motors have seen sales tumble and struggled to turn profitable as Chinese car shoppers increasingly opt for electric vehicles from BYD or NIO that are similar in price to internal-combustion-engine cars from foreign auto makers.
“China’s electric-vehicle makers have by leaps and bounds surpassed the capabilities of foreign brands who have a tie to the profit pool of internal combustible engines that they don’t want to disrupt,” says Christine Phillpotts, a fund manager for Ariel Investments’ emerging markets strategies.
Chinese companies are often faster than global rivals to market with new products or tweaks. “The cycle can be half of what it is for a global multinational with subsidiaries that need to check with headquarters, do an analysis, and then refresh,” Phillpotts says.
For many companies and investors, next year remains a question mark. Ashland CEO Guillermo Novo said in an August call with analysts that the chemical company was seeing a “big change” in China, with activity slowing and competition on pricing becoming more aggressive. The company, he said, was still trying to grasp the repercussions as it has created uncertainty in its 2025 outlook.
Few companies are giving up. Executives at big global consumer and retail companies show no signs of reducing investment, with most still describing China as a long-term growth market, says Dana Telsey, CEO of Telsey Advisory Group.
Starbucks executives described the long-term opportunity as “significant,” with higher growth and margin opportunities in the future as China’s population continues to move from rural to suburban areas. But they also noted that their approach is evolving and they are in the early stages of exploring strategic partnerships.
Walmart sold its stake in August in Chinese e-commerce giant JD.com for $3.6 billion after an eight-year noncompete agreement expired. Analysts expect it to pump the money into its own Sam’s Club and Walmart China operation, which have benefited from the trend toward trading down in China.
“The story isn’t over for the global companies,” Phillpotts says. “It just means the effort and investment will be greater to compete.”
Corrections & Amplifications
Joseph Quinlan is head of market strategy for the chief investment office at Merrill and Bank of America Private Bank. An earlier version of this article incorrectly used his old title.
