The Spinal Tap economy.

Commentary about business and finance.
Oct. 18 2007 6:44 PM

The Spinal Tap Economy

The real problem with the ultra-wealthy.

Nigel Tufnell of Spinal Tap. Click image to expand.
Christopher Guest in This Is Spinal Tap

About 10 years ago, a new idea emerged about luxury. Luxury was no longer the exclusive preserve of the very rich. Thanks to rising incomes, greater access to credit, and increased connoisseurship, Everyshopper could consider herself a luxury customer. People might buy their basics at big-box retailers, but they'd splurge on selected items that were meaningful to them in boutiques. The theory of trading up, espoused by consultants from Boston Consulting Group, held that luxury businesses should lower their sights and expand their vision of the potential customer base.

But now the credit crunch, poor housing market, and slowing economy may bring a halt to the trading-up trend. Luxury is no longer something that unites Americans, but rather something that separates them. Robert Frank of the Wall Street Journal coined the term Richistanto describe the world that the wealthy inhabit among us today. "Lower Richistan is under increasing financial pressure while Upper Richistan continues to live the good life," Frank notes. "The consumer economy is no longer about the haves and have-nots: it's about the haves and have-mores." We've spoken for years about two Americas shopping, but now it seems there may be three. For when the economy catches a cold, working-class consumers cut back, middle-class consumers trade down from cashmere scarves to cotton—but the truly rich just fly in their private physician for an executive checkup.

Savvy marketers are seeking out the one group of consumers who are truly immune to macroeconomic issues: the ultra-rich. A few weeks after it slashed prices on holiday toys, Wal-Mart this week launched an "aggressive holiday pricing plan," with price reductions 20 percent greater than last year. The upshot: If Wal-Mart were to hold the line on prices, it would find itself stuck with gads of inventory come Dec. 26. But companies that sell toys to a select few are facing no such pressures. Some are finding they literally can't keep enough goods in stock. Robert Frank reports that the wait for a new Gulfstream 550 is about three years. Tiffany, whose same-store U.S. sales rose 17 percent in its most recent quarter, this week announced plans to expand its retail footprint significantly. It plans to open several small Tiffany Collections stores and as many as five to seven new Tiffany & Co. stores per year.

The Big Three automakers have been scaling back production, and dealers are pushing incentives at customers. But Marty Laliberte, a Ferrari salesman at Wide World of Cars, in Spring Valley, N.Y., says that a customer, provided he has the means to buy a new Ferrari (which can run from $190,000 to $260,000), should expect to wait three years for a new car. "Everybody has to wait, and the build process takes some time. The customer order bank is so extensive." Tesla Motors, the Silicon Valley electric sports car startup, last month outlined its production schedule (PDF): 50 cars in the first quarter of next year, and 600 more to follow. And they're pretty much sold out. "We will soon stop taking reservations for 2008 Roadsters and start a traditional waiting list for people interested in reserving a car in the future."

In many markets, home-builders are throwing in extras or holding fire sales to get rid of excess inventory. But as New York real estate maven Jonathan Miller notes, the Manhattan market is holding up just fine, especially the higher end. Miller says that in the 2007 third quarter, prices for studio apartments fell from 2006, while prices for one-bedroom and two-bedroom apartments rose at slightly above the rate of inflation. However, the average price of a three-bedroom apartment in Manhattan ($4.4 million) rose 17.9 percent, while the average price of a four-bedroom apartment ($8.5 million) rose 16.4 percent. "The top six percent of the market is still going at a housing boom pace," Miller notes.

In the trading-up mentality, the key to successful luxury retailing was pricing the product at a high point—but not so high that it pushed aspirational customers away. Now, high-end retailers are sending the message that people who don't come heavy shouldn't come at all.

Some marketers are taking their cue from the mockumentary Spinal Tap. In one priceless moment, Nigel Tufnel (Christopher Guest) describes how the dial on his amplifier goes up to 11, for when he needs "that extra push over the cliff." Luxury businesses are now going to 11. This fall, a new resort, the Setai, opened in Miami Beach, offering unprecedented luxury and service (PDF). Some luxury watchers have dubbed it America's first "six-star hotel." And here, as in so many other areas, American luxury aficionados are taking their cues from foreign goods. There's already a six-star casino/hotel in Macau, and a seven-star hotel in Dubai. For the ultra-rich these days, too much is never quite enough.

Daniel Gross is a longtime Slate contributor. His most recent book is Better, Stronger, Faster . Follow him on Twitter.