Management Accounting

The Rich Are Different: They’re Optimistic

Affluent consumers are fast becoming an attractive end-point for corporate supply chains, a new survey suggests.
David KatzJune 17, 2010

F. Scott Fitzgerald famously observed that the attitudes of the wealthy and the not-so-wealthy differ sharply. Perhaps providing a current example of the difference, high-end consumers are displaying a lot more optimism about the state of the economy than average customers are revealing, according to a new survey of consumer sentiment. As a result, CFOs working for retailers may start to steer their companies’ supply chains toward the affluent, consultants say.

While average consumers believe they’re still more than a year away from personal financial recovery, more-affluent ones generally think their situations will get back to normal by the fourth quarter of this year, according to the study by L.E.K. Consulting. Further, the study found that 39% of richer families believe their financial conditions have recovered or were never affected, in contrast to the 22% of the survey respondents as a whole who feel that way.

Of course, the affluent, as they’re defined by L.E.K., don’t really reflect the mind-set of the “very rich” whom Fitzgerald envisioned. The dividing line between haves and have-nots drawn by the study, which is based on an April poll of 2,000 U.S. households, is household earnings of $150,000 a year. Still, the trend is significant enough that retailers have begun to shift the focus of their supply chains from loss leaders to more-profitable goods, according to Paul Matthews, who leads the operations practice at L.E.K.

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Indeed, some retail chains are already adjusting in-store displays to appeal to richer customers. In the women’s lingerie and cosmetics business, for example, it used to be common in certain seasons for retailers to offer low-priced deals in the front of the store, such as six pairs of underwear for $25, to attract customers. But now, “you’re seeing higher-priced displays than that six-for-$25 might have been,” says Matthews, noting that “a $27 lipstick” is more likely to be the main attraction.

To capitalize on the trend, some companies might begin to place specific kinds of inventory in areas of the country that have a greater population of affluent buyers, such as on the East and West Coasts and in Miami. Yet while such a move could be “a very healthy thing to be doing” in the near term, it could distort companies’ supply chains in the longer term, says Matthews, who believes that the phenomenon of the big divergence in demand between more- and less-wealthy consumers is temporary.

If companies shift drastically away from core products to high-end ones, for instance, they could find themselves short on the basics when greater numbers of low-cost consumers return to stores. A longtime supply-chain veteran, Matthews recalls that when retailers he worked for experienced a downturn in sales, they would simply launch two-for-one or three-for-two promotions and quickly make up the lost revenues by selling more products.

Retailers who “cannibalize” their supply chains in an overeager quest for wealthy customers “can tear away one of the core attributes of retail,” says Matthews. His advice to finance chiefs: “Be careful that you don’t go too far.”