Consumers Are Finding Cash for 'Small Luxuries'

Americans have begun splurging again, but they're limiting their indulgences to small items, like haircuts and coffee, rather than big items, like vacations and fine dining.As the economy improves, Americans are beginning to splurge again -- but in a small way.

Meals at casual sit-down restaurants, a daily cup of gourmet coffee and personal-care services, such as haircuts, hair colorings, manicures and facials, are among the so-called "small luxuries" that are trickling back into Americans' budgets as job prospects improve and the economy expands, according to a report released last week by the National Retail Federation's Stores Magazine. Others include department-store purchases, new shoes and even fancy handbags.

But Americans remain cautious about big purchases, considering specialty-store items and vacations just about as expendable in 2010 as they were in 2009.

The Untouchables

In the NRF's survey of more than 5,000 adults in December, approximately 42% called haircuts or hair colorings an "untouchable" part of their budget in 2010, up from 37% in 2009. The "untouchability" of manicures and facials also grew by 3 percentage points and 2 percentage points, respectively.

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Additionally, about 32% of those surveyed said a casual sit-down meal was a necessary part of their budget, up from 29% in 2009, while department-store purchases' "untouchability" jumped 4 percentage points last year, according to the NRF.

"As consumers cut back on bigger-ticket items, they typically still 'spoil' themselves with such treatments," says John Long, retail strategist at Kurt Salmon. "It makes them feel better about themselves and their appearances even if they can't spring for a new suit or dress."

The report provides some insight into consumers' changing spending habits as the economy slowly recovers. U.S. unemployment fell to 9% last month after stalling in the 9.5% range for the previous year-and-a-half. The Federal Reserve predicts that the economy could grow as much as 3.9% this year.

Not "The Fuel of Life"

The restaurant industry may be seeing the biggest change from the increased spending so far. Americans are coming back to casual sit-down restaurants, such as Darden Restaurants's (DRI) Olive Garden and DinEquity's (DIN) Applebee's; coffee shops, such as Starbucks (SBUX); and even fast-food chains.

Fine-dining restaurants, however, haven't yet seen the rebound, for the most part. Americans considered them just about as expendable in 2010 as in 2009, according to the survey.

"Casual dining is an affordable indulgence. A $12 to $14 price point won't break the bank," says Darren Tristano, executive vice president at Chicago-based hospitality consultant Technomic. "As for fine dining, we're all still adopting more frugal spending behavior."

As Harry Balzer, chief industry analyst at NPD Group, puts it: "Fine dining is really the art of food. It's not the fuel of life."

What expenditures are safest from consumer budget cuts? Internet and cell-phone services. Both categories became even less expendable to consumers last year, according to the NRF. Almost two-thirds of the respondents called mobile-phone service an "untouchable" part of their budget, while more than 80% called the Internet a must.

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