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Mark Lennihan  /  AP
Starbucks' latest sales report shows that customers who swore off frivolous spending during the recession are flocking back for their $4 caffeine fix.
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updated 12/7/2010 9:10:37 AM ET 2010-12-07T14:10:37

Few companies were clobbered harder than Starbucks in the recession. The coffee chain with outposts on every corner came to represent all that was wrong with American businesses and shoppers: unchecked expansion, self-indulgence and mindless credit-card swiping.

But now customers who swore off frivolous spending during the recession are lining up again for their $4 caffeine fix. The company's net income nearly doubled and revenue rose 17 percent in the most recent quarter compared with a year earlier, as more Americans allowed themselves a small treat.

After seeing their retirement funds and home equity shrink severely, consumers tightened their belts in a shift some economists dubbed the New Frugality. Fortunately for the world's largest latte purveyor and other peddlers of small luxuries, Americans have a short memory when it comes to the economy.

Affordable luxury goods like gourmet coffee, lingerie and high-end skin cream have been enjoying a comeback since the stock market began to rally in August and higher-income Americans started feeling better about their finances.

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At Estee Lauder Cos., whose brands include Clinique and MAC cosmetics, CEO Fabrizio Freda says customers who traded down to drug store brands when times were tough are returning. Revenue was up 14 percent last quarter, driven by brisk sales of high-end moisturizers and eye creams.

Specialty items like the "Miraculous" push-up bra have buoyed the company that owns Victoria's Secret and Bath and Body Works. Revenue rose 12 percent last quarter at Limited Brands Inc. as shoppers treated themselves to its stock in trade.

"People didn't feel good about having little indulgences" in recent years, says David Palmer, an analyst with UBS Investment Research. "The Suze Orman-type talk shows were telling you to kick your Starbucks habit."

Now, he says, austerity fatigue may be setting in.

For Michele Burkhammer, a nurse clinician for the Montgomery County Fire and Rescue Service in Rockville, Md., austerity was the only option after she was furloughed and her husband lost his job. She started buying groceries at Walmart and pared her list to the essentials.

These days, her husband is back to work, and she's fed up with pinching pennies. She still doesn't splurge on herself, but she recently bought Ralph Lauren khakis and other high-end items for her 3-year-old son. She's also returning to upscale and organic grocers.

"Shopping is starting to be enjoyable again," Burkhammer says.

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Trading back up has raised hopes for the holiday season. Research firm ShopperTrak bumped up its holiday sales growth forecast to 3.2 percent from 2.9 percent after a solid start in November. Store owners were encouraged to see more holiday shoppers buying that little something extra for themselves over Thanksgiving weekend, a practice that had evaporated in the recession.

The recession technically ended in June 2009, but the recovery has been fitful. Manufacturing has been stronger, though hiring has not. Home prices have stabilized somewhat since bottoming out in the spring of 2009. A 17 percent gain in the Standard & Poor's 500 stock index since the end of August has helped raise consumer confidence, and with it spending, particularly among the upper class.

"When people feel their household wealth rising, they're more confident and that has a dramatic impact on consumption," says Chris Christopher, an economist with IHS Global Insight.

Still, it's unclear whether this signals the beginning of a broader retreat from thrift. Shoppers still are making lists and, for the most part, sticking to them. The unemployment rate rose to 9.8 percent in November, holding a damper on spending in millions of households.

Frank Mangini, who lives in the Queens borough of New York, is back to making regular trips to Whole Foods, but only for specialty items he can't find at his local supermarket.

"I was trying to lay off a little bit" during the recession, he says. Even with the economy picking up, he says he's "trying not to overdo it." But he's happy to shell out for his favorite organic green tea.

After taking a drubbing during the recession, Whole Foods Market Inc. has been luring back shoppers. Revenue rose 15 percent last quarter. The company, the biggest national seller of organic and natural groceries, says shoppers are buying more higher-priced brands and trading up on pricey items like seafood, cheese and housewares.

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"Middle-class people want to make these little splurges on basic luxuries like Victoria's Secret so that they're not breaking the bank or the wallet but are getting out of the doldrums of the recession," said Sherif Mityas, a partner in the retail consultancy firm A.T. Kearney.

These small splurges are unlikely to spark a broader recovery. After all, Starbucks or Whole Foods binges set shoppers back just a few extra dollars.

You'd have to see sales of bigger-ticket items like automobiles, designer handbags and extravagant vacations rebounding — and see people racking up credit-card debt again — to say Americans' frugality has ended, says Kenneth Goldstein, an economist at the Conference Board. And that's unlikely as long as unemployment remains stuck above 9 percent. Even with car sales improving, the industry will sell 4 million fewer cars in the U.S. than it did in 2007.

Alan Levenson, chief economist at T. Rowe Price, says Americans couldn't revert to old spending patterns even if they wanted to because banks aren't willing to lend. The personal savings rate remains high, and although consumer spending rose an annualized 2.8 percent in the third quarter, the biggest bump since 2006, that's not enough to rev up the overall economy.

Certainly there's pent-up demand, Levenson says, but shoppers are "not blowing anybody's doors off."

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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