Financially insecure high earners see no reason not to spend

American consumer behavior is often explained in acronyms. There are yuppies (young urban professionals), dinks (dual income, no kids), and Henrys (high earner, not rich yet). This moment of economic uncertainty and anxiety may be creating a new category, HIFI — high income, financially insecure — who increasingly crave more-affordable luxury. 

The emergence of HIFI shoppers may be the result of what some economists coined the YOLO economy, a pandemic-era trend where more people were staying home and saving more, but also using their government stimulus money for luxury retail spending. During this period, young, affluent consumers racked up some of the biggest income gains and drove luxury spending. Millennials and Gen Z accounted for all of the 22% gain in luxury spending in 2022, Bain & Co. analysts said, reflecting a more “precocious attitude toward luxury.” “If 18 months ago, you’d have said the Federal Reserve Bank could raise interest rates by 500 basis points, and the consumer would chug on, relatively unfazed, I would have been extremely surprised,” economist Ellie Henderson told the BBC last year.

Despite recent waves of inflation and significant rent growth, spending continues apace. Pandemic-era government cash infusions are long over, and HIFI consumers find themselves in a much different financial place because of surging student loans and credit-card debt. But younger adults may also still harbor a financially dangerous combination of lifestyle creep — rising discretionary spending as incomes increase — and more FOMO. A recent Charles Schwab consumer survey suggested that Gen Z and millennial consumers were significantly more likely to say they define wealth by being able to keep up with friends and routinely compare their lifestyle to those they see on social media.

A recent report by Pymnts, which covers financial and fintech news, found that while higher-income urban millennials have been affected by rising housing and food costs — 36% of those making $200,000 a year or more live paycheck to paycheck — they still spend an average of 28% of their budget on recreation, personal care, and everyday transactions. Despite the slowly increasing financial pressure and even moves to cut back on spending, this demo still has lots of discretionary dollars at its disposal. Pymnts also found that this income group was much less likely to compromise on quality, suggesting there’s lots of opportunity in lower-priced luxury. 

When Pymnts polls consumers about spending habits, the expected challenges tend to come up for those in the high-income bracket, such as carrying lots of debt and covering family expenses like school, said Scott Murray, Pymnts’ head of analytics. But about a quarter of them say they’re buying a lot of unnecessary stuff. Part of the problem is the way that new payment technology — such as buy now, pay later services and credit-card installment programs — encourage spending. 

“Even if people say insufficient funds, a lot of them still report splurging,” Murray said. 

The result might be a lot more “responsible” methods of splurging, like comparison shopping or what Murray calls “more efficient methods of purchasing.” Amazon’s recent quarterly results, driven partly by discounting, have surged, which to Murray indicates consumers searching around for a better deal on something they’d already wanted to buy. According to a recent analysis of luxury retailers from real-estate brokerage Colliers, “micro-indulgences” will rule the day. That is, buyers will try to save on basics so that they can spend on a few expensive purchases.

Even big box and discount stores are getting in on the action. Last month, Walmart rolled out a new in-house brand called Bettergoods featuring high-end items such as bronze-cut pasta from Italy and plant-based mozzarella. During a recent earnings call, Dollar Tree’s CEO said that the discount chain’s 3.4 million new customers in 2023 primarily came from the consumer segment making over $125,000 annually, a demographic increasingly attracted to the store’s efforts to expand the number of $5 and $7 items on sale, like personal-care products and gourmet snacks. 

Retailers, especially luxury stores fearful of losing shoppers, will adjust their product lines accordingly, Julie Van Ullen, chief revenue officer at Rakuten Rewards, said. Retailers need to focus on segmentation and help luxury brands develop “tailored shopping experiences for different consumer bases.” 

“Luxury retailers should start to consider aspirational luxury shoppers as part of their core audience if they want to remain competitive,” she wrote. “Getting creative with pricing strategies and investing more in incentives will be crucial to appeal to this audience.”

Retail may even shift the look and experience of shopping in response to these consumer shifts, not just the items for sale or marketing tactics. Colliers predicts stores will focus on experiential shopping, making indulging in a new handbag or a $400 pair of sneakers more of an event. It explains why the world’s luxury brands have engaged in a race to spend billions of dollars to upgrade their stores. 

Restaurants have also struggled with how to retain these customers, who still want to go out despite looking for ways to cut back. Richard Delvallée, VP of consulting at Revenue Management Solutions, a consultancy that aims to help restaurants maximize revenue, said that all customer segments are dining less, but the loss of high-income diners who would buy high-ticket items is hurting business.

“Owners are asking, ‘What brings people through the door?’” he said. “But I also don’t want to devalue my brand. So it’s kind of a struggle. Nobody wants to lose those customers who pay full price, who won’t retreat down to lower-priced items. They’re more profitable.”

Delvallée said part of the answer comes from a renewed push toward apps and loyalty programs, which studies suggest add 15 to 20% to each transaction for engaged shoppers. Fewer visits but higher cost per visit can help make up losses (and apps create labor savings for the store, which benefits the bottom line). There are also efforts to create promos or sales days to bring people back for one more visit. Pymnts’ Murray said the success of these programs is clear, and he expects that existing efforts to cultivate loyalty will likely be supercharged by AI. Both fast-food icon Wendy’s and French supermarket Carrefour already use the tech to create custom goals and rewards, in effect applying gamification and behavioral patterns to shopping. 

“They know they can squeeze a few more dollars from those who can afford it,” Delvallée said. “It’s not a price increase. You’re being suggested to spend more. Nobody is forcing you.” 

Patrick Sisson is a reporter covering cities, technology, and business.