Playing the Billionaire Sport:

Debt and the Market for Luxury Goods

By Annamaria Watson

 

This February, rapper and fashion designer, Kanye West revealed his new collection, Yeezy Season 3, at Madison Square Garden. Three days later, he claimed via Twitter that he was $53 million dollars in personal debt. This is not the first time that Kanye has claimed financial woe. Just last month, he claimed that he was $16 million in debt due to his luxury fashion brand alone. Yet, what is more interesting than the alleged debt itself is the reasoning behind it. Kanye explained in an interview, “I was trying to play a sport that’s a billionaire sport. It’s not a millionaire sport and I’m proud of the debt.” The idea of being proud of one’s debt should seem ridiculous. According to a survey done by the National Foundation for Credit Counseling, 37% of respondents ranked credit card debt as the number one source of shame in their lives. Following suit, 30% named credit scores as their biggest embarrassment. It is clear that most people are not proud of their debt. In fact, most people are tormented by it. All the same, could this be different for luxury goods?

Consumer debt and the market for luxury goods have long been issues among economists. Why would a rational person spend $510 on a pair of Yeezy sweatpants when an alternative can be found for $40 online? In other words, how high is the marginal benefit of being fashion forward?

Abandoned shoes found in Downtown, Manhattan, pictured with Tommy Hilfiger brand shoes.

Luxury goods can be defined as products that have at least three of the following distinctions: high prices, superior quality, exclusivity and/or rarity, design and/or technological innovation, and aesthetic qualities. Examples include bags from Prada, a Porsche, a diamond ring from Tiffany’s, and a Rolex watch. According to scholar Hanna Salakari, the market for luxury goods is resilient to economic downturn and has been steadily increasing, even during recession periods, for at least 30 years. Furthermore, growth in the market for luxury goods outpaces the market for commercial goods worldwide. According to a study done by Deloitte, luxury goods sales growth for the top 100 largest luxury goods firms was 8.2% as of 2013, while in the same year the top 250 commercial goods firms grew by only 5.6%.

Why do people buy luxury items at exorbitant prices? According to a 2015 survey by Deloitte, 34%-39% of respondents claimed that “impulse” was their primary reason for purchasing new luxury items. Of course, impulse buying is exacerbated now that the internet has made 24-hour shopping a reality in many American households.  In fact, according to a study by the Federal Reserve Bank of Boston, working-age Americans now spend 4-8 more hours per week on leisure activities than in the past, leaving them more time to browse online stores. Yet, what drives such impulses may be more interesting. Research by Duke University professor of psychology and behavioral economist, Dan Ariely, in his book, Predictably Irrational, shows that consumers can behave irrationally when it comes to luxury goods. People tend to believe that the product they are purchasing is worth its price because of its perceived higher quality. Even when people are aware that prices are inflated, they may still prefer luxury goods because of the benefit it brings to their self-esteem and because it gives them a sense of inclusion. Luxury goods may help consumers in the lower or middle classes feel that they belong in mainstream culture, while a knock-off product may not provide the same sense of accomplishment. The feeling of being on the inside is worth the debt it takes to get there. This may very well be the reason for Kanye’s luxurious spending.

The future of the luxury goods market, however, may not be completely resistant to macroeconomic shocks. While the financial crisis of 2007-2009 did not have a large effect on the market for luxury goods, its aftermath might. Studies by Bain & Company show that millennials who came of age during and shortly after the recession are more money-conscious and less likely to buy items like cars, houses, and luxury goods than the previous generations. Furthermore, increases in tourism and e-commerce have led to greater awareness of international price disparities, leading some consumers to wait to purchase luxury goods at lower prices abroad while on vacation.

If this trend continues, luxury goods producers will have to work harder to continue to attract increasingly price-conscious consumers by lowering production costs. One way this might be done is by eliminating brick-and-mortar stores and going fully digital. Another solution may be for luxury brands to work with commercial outlets, such as Alexander Wang’s luxury brand collaboration with retail-clothing company, H&M.

In a recent interview with online publication Rolling Out, rapper, Nicki Minaj was asked why she was putting out a line of commercial clothing for Kmart instead of going the luxury route.  She responded bluntly, saying, “I know what my fans can afford and I'm going to continue to offer things that they can afford”. It seems that Kanye and Nicki are making opposing bets on the future of luxury, but only time will tell who is right.


Author: AnnaMaria Watson


Annamaria Watson is a senior economics and political science double major at Pace University. She is also a Jeannette K. Watson scholar. In 2015, Annamaria co-authored an essay analyzing China’s Special Economic Zones, which won first place at the New York Chinese Opera Society’s annual contest. Annamaria was recently awarded a postgraduate fellowship through Princeton University’s Princeton in Asia program and will teach English in Penang, Malaysia for the 2016-17 year.

 

Email: aw60789n@pace.edu


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