America’s divide into the haves (top 10%) and have nots (everybody else) has exploded in news coverage. It’s very warranted, as this divide is having fundamental and profound consequences for our country. For example, when the top 10% is no longer seen simply as a luxury segment but as the market itself, a result of that group having about 50% of all spending power, it upends much of the model of American institutions. The new true luxury segment is the ultra-rich.
I have a number of recent pieces on this to share with you.
First up are two Wall Street Journal pieces that ran at almost the same time. The first is about how wealthy travelers are spending on luxury hotels like never before.
America’s increasingly polarized economy is leaving its mark on the lodging business, where luxury hotels are charging a record-high premium. Luxury-room prices have defied a drop-off in foreign tourists to the U.S. and a job slump among white-collar workers. Affluent travelers, made wealthier in recent years by stock-market rallies and real-estate gains, have splurged on their stays with abandon.
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The average daily room rate at a U.S. luxury hotel is a record high at $394 this year. It is also $168 more than the average cost for a room in the next-priciest tier, according to CoStar. The divide has been widening since 2008, when the difference was $60, but it has grown sharply in recent years to its largest ever.
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Higher room rates did little to dull demand for oceanside resorts, exclusive mountaintop inns and city-center grand hotels. Bookings for luxury properties were up 2.5% this year through September, according to CoStar. Demand for lower-scale and midtier hotels, by contrast, was slightly lower than last year for that period.
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Having already accumulated a stash of fancy cars and watches, wealthy Americans today are spending even more on experiences, including travel. Multigenerational trips are more popular than in the past, with grandparents paying for accommodations large enough to include their children and grandchildren.
The piece also notes that “luxury” is not just a unitary segment, but that there’s still an “ultra-luxury” above that which is growing even faster.
The higher up the luxury ladder, the steeper the price gains. The daily room rate of the 10 most expensive hotels in major markets worldwide is often more than double the typical luxury hotel, said Freitag. He calls this group ultraluxury.
The existence of the ultra-luxury segment, and the way billionaires are pulling away from the rest of us (see more on that below), help blind the merely luxury travelers to how far above the middle class they are.
The second Journal piece is about the penny pinching moves many Americans are now making to get by.
Saddled with ever-ballooning grocery bills, Julie Simpson decided to take matters into her own hands. She started to dilute.
Simpson, a software marketer in Mississippi, added water to her Dawn dish liquid and her Clorox floor cleaner. She stopped buying aerosol glass cleaner and replaced it with a bottle of Windex so that she could add water to make the solution last longer. She even thought about diluting her treasured Sensodyne toothpaste, but drew the line there. She squeezes out every last bit instead.
Americans are increasingly experimenting with frugality. In addition to stretching household staples, some are shopping at less expensive grocers and buying pantry products on Facebook Marketplace.
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Consumer companies are getting hit by the frugality. As families like Simpson’s get more creative in pinching their pennies, the companies are seeing dimmer sales compared with the steady growth they have enjoyed in recent years.
Procter & Gamble reported volume declined 2% in the latest quarter in its home and fabric-care division, which includes brands like Tide detergent, Dawn dish liquid and Swiffer dusters. Meantime, private-label brands that make cheaper generics haven’t seen a corresponding increase, the company said last week, suggesting consumers are using up their inventory and making their existing stock last longer, rather than trading down.
Many of the people featured in this article are not poor or working class. They are solidly middle class or even a bit higher than that. One person is saving money by buying half a cow, for example. That means he has the capital to tie up in buying that amount of beef in advance.
While they may not realize it yet, many people in this category are now being proletarianized. The two tier economy is putting the squeeze in people who may have once felt themselves safely above the median income, but who are now being subjected to downward lifestyle mobility.
This sort of economy and society comes through in almost all the articles you read. Mansion Global has a piece about Raleigh’s booming luxury home sales.
Demand is huge for homes over $2.5 million, which would’ve been almost unheard of seven years ago. We were “discovered” around 2018–19, and during Covid many realized Raleigh was a value. A lot of older properties in what we call “inside the Beltline,” which is the urban core, are being scraped and rebuilt in the city’s best neighborhoods because land near the city center is scarce.
This is coming from luxury real estate people, so of course they will say this. But there’s no reason to believe it isn’t directionally true.
Brooke Masters in the Financial Times wrote about how the American Dream turned into a pay to play enterprise.
The US used to see itself as a middle-class country, united by common aspirations, shared pastimes and mass-market brands. Now companies are working overtime to stratify consumers, separating the haves from both the have nots and the have yachts, as they seek to extract as much money as possible.
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The American economy is deeply split, with those at the top enjoying unparalleled prosperity and the rest of the country struggling to make ends meet.
The top 10 per cent of earners now account for almost half of all spending, up from about a third in the 1990s. Many are feeling particularly flush as they enjoy the fruits of a strong stock market — the S&P is up more than 15 per cent this year, despite a few wobbles.
For everyone else, the picture is gloomy. Lay-offs are surging, consumer sentiment has fallen by 30 per cent year on year to near-record lows, and three out of four Americans tell pollsters that the economy is in fair or poor shape.
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Using artificial intelligence to comb through reams of data has made it significantly easier for companies to identify desirable — that is to say rich — customers and target them with specific offers. That makes it awfully tempting for companies to concentrate on the wealthiest decile, or even just the top 1 per cent.
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But a growing section of US society no longer feels plugged into that upwardly mobile vision. The share of Americans who describe themselves as middle class has dropped from 85 per cent a decade ago to 54 per cent. Over 40 per cent of Americans consider themselves lower or working class, suggesting that many of the finer things feel completely out of reach.
The FT also ran a story about the company behind the Priority Pass airport lounges. The top 10% have so much money that they’ve overwhelmed the lounges that Amex and others have set up for their top customers. Their solution? Build even more exclusive ultra-luxury lounges.
Imagine bypassing the crush at many airports by being chauffeured to a private VIP suite and onward to the steps of your aircraft when the flight is ready. It is a far cry from having to line up for a busy terminal lounge and being refused entry because it is full.
The experiences are at opposite ends of the travel spectrum, yet they are now spanned by one brand. Priority Pass, the world’s largest airport lounge network, with more than 30mn members and 1,800 lounges and other facilities, was joined in September by an elite offshoot called Priority Pass Private.
The WSJ also had an article about how the ultra-rich have now created a parallel private world so that they never have to interact with regular people.
On a business trip to Dubai last month, the Shojaees exited their Bombardier Global jet and later stepped into a waiting Maybach that zipped them to a lavish hotel. They went through a private entrance that bypassed the lobby and took an elevator straight up to the Royal Suite, where a staffer checked them in and presented their butler….The ultrawealthy are wielding their growing fortunes to glide through a rarefied realm unencumbered by the inconveniences of ordinary life. They don’t wait in lines. They don’t jostle with airport crowds or idle unnecessarily in traffic.
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The Miami area provides a window into this world. Long a destination for wealthy elites from the Northeast, Europe and Latin America, it has become an even stronger magnet for the affluent in recent years, fostered by pandemic-era migration and the region’s emergence as a technology and finance hub. “There’s been an explosion of wealth creators,” said Patrick Dwyer, a managing director at NewEdge Wealth, a wealth-management firm, in Miami. “Now they have enough money to live exactly how they want to live.”
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When the ultrawealthy choose to socialize, they often seek circles that are meticulously selected, said Gregory Pool, a managing director with NewEdge Wealth in Miami.
Faena Rose is a private social club in Miami Beach focused on art and culture, whose members are vetted by a committee and pay $15,000 initially and another $15,000 annually. They get VIP access to the beach club, spa and other amenities at the Faena Miami Beach hotel, and admission to roughly 80 cultural events a year, held in intimate settings for members only.
Those include dance performances by Alvin Ailey American Dance Theater and recitals by the Metropolitan Opera. “That level of access is really, really compelling,” said Pablo De Ritis, president of Faena Rose.
Again, the existence of this class - the 0.1% - is what allows the 9.9% to think of themselves as ordinary people rather than the rarified luxury class they now are.
And, of course, there are more examples from the world of sports. The Athletic reported on how college football is now becoming luxurified, with a focus on Florida State.
What started in 1960 with Whitehead in the student section has grown into a three-generation congregation in the west stands at Doak Campbell Stadium. Through scorching heat and pounding rain, the Whiteheads had a 28th-row seat for the glory days of Bobby Bowden and the up-and-down tenure of Mike Norvell.
“We love to go,” said Whitehead’s daughter, Alyson Stone. “It’s just, I don’t know how much longer we’ll be able to.” The costs have swelled out of control around sports, an industry of inherent leisure spending. What was once an affordable autumn excursion for a family of four has become a series of $1,000 (or more) weekends.
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The thirst for greater revenue has led to more premium amenities and premium offerings at premium prices — often at the expense of patrons beneath the top tax bracket.
That tension is part of the backdrop at Florida State. As the Seminoles fight for every dollar to compete with wealthier programs in the SEC and Big Ten, they recently finished a nine-figure stadium update that reduced capacity by 12,000 while turning cheaper bleacher seats into pricier club areas and loge boxes.
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Whitehead initially paid $110 in booster fees, which include required contributions to buy football tickets plus benefits like parking. By 2019, she was paying $960. This year, it’s $3,845 for football and softball. After adjusting for inflation, her contribution has tripled in the last six years and increased 12-fold since her family became fixtures on the west sideline.
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Walk through the doors where some of FSU’s west side bleachers once stood, and you’ll enter one of the nicest viewing areas in college football. The founders’ loge boxes have cushy seats and plentiful TVs. The aisles are intentionally lowered so servers scurrying by with food and drinks won’t block patrons’ perfect sight lines of the field.
The suites are even more lavish: 1,100 square feet of climate-controlled, VIP-only comfort. They’re some 30 rows up from the field — not too high, not too low — with spacious tables for dining (the floor’s buffet area has a carving station, charcuterie board and shrimp ceviche). The eight boxes were customizable, down to the seating options (plush couches or roomy chairs) and the color palette for the countertops. There’s even a business boardroom down the hall.
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Florida State’s move reflects what Federal Reserve chair Jerome Powell recently called a “bifurcated economy.” As low-income families spend less, the wealthiest households spend more. Companies and colleges cater their offerings accordingly.
And this video with nearly one million views talks about similar themes with regards to the new Buffalo Bills stadium. Many of the city’s long time and long suffering fans are going to be priced out - some after decades of being faithful season ticket holders.
It seems like every day there’s another article along the lines of these. This isn’t a new trend. It’s been going on for sometime. But it’s now reached critical mass such that businesses and institutions are able to reorient their business model to match new demographic and economic realities. This suggests some type of populist politics are going to remain a force for some time.
Cover image credit: Kiran891/Wikimedia, CC BY-SA 4.0
This has a lot to do with policy decisions and taxes. To simplify, the transformation from the Greenspan put to the 2000s bailouts to COVID policy signaled a commitment to abolish stock market downturns. 1929 can’t happen again in the asset markets generally.
This risk gets shifted to the income generating but asset limited population (middle class). This type of arrangement, broadly speaking, can get more extreme; aristocracies of 10% or less have and can wind up with almost all the valuable assets. Effectively one class of person can just say like a bratty child “it’s against the rules for me to lose” and then make it so. Then when someone else says “the game should be fair” they can say “nuh-uh, I’m the best and I can never lose.”
I'll be honest that I played a small role on the college sports front. As a favor, I helped a friend, a D1 college baseball coach, conduct a review of his program to try to bring it closer to breakeven for the university. The conclusion I arrived at was he needed to add an expanded luxury seating area, which he did, and the ROI instantly exceeded even my optimistic expectations. The groundwork had already been laid by a new luxury area created for the football team, so many of those same fans, who might have skipped the baseball games in the past, started flocking to them.
The math there is pretty simple: baseball wasn't selling out its seats and couldn't realistically raise prices much for the typical seats. They could tweak a few things, but it was hard to make the mass market product better. But people will pay up for a luxury experience. At the price point we arrived at, it's competitive with standard seating at the closest MLB stadium, especially if you buy food there. You're probably still paying a little more, and of course seeing worse baseball, but the rest of the experience is much better.
But now, let's talk about the real success story in the space: the Savannah Bananas. I really admire its founder, Jesse Cole: the man built Banana Ball out of nothing but an idea, and now it has become a phenomenon. It's also heavily under-monetized at this point. The games now sell out years in advance, with anti-scalping measures in place. So I suppose it's a rare example of a quality mass market product -- and from the few games I've been to, the quality has improved significantly over time -- except you can't actually get tickets anymore. That low pricing has earned it some fanatical fans, for sure, at the expense of a lot of potential earnings. We'll see how that all works out in the end, but I can admire the spirit that made that choice, even though I don't think I have it in me as a businessman to leave that much money on the table.