The Latte Era Grinds Down

Brian LaCroix, a 34-year-old computer engineer, developed a taste for expensive coffees. Earlier this year, however, he stopped frequenting a French coffee shop in Dallas and bought an espresso machine, slashing the daily cost for deux lattes from $8 to $1. The newlywed and his wife, who have a combined income of about $200,000, have also cut spending by mowing their own lawn. And Brian asked to work from home two days a week to save on gas for his 2002 Ford Ranger. The LaCroixs have been motivated by a combination of factors: frugality, environmentalism and concern about the job and real-estate markets. (Earlier in the decade Yvette, now an operations manager for Fannie Mae, lost her job in the telecom bust.) "We want to be sure that we can afford our home on just one salary without having to dip into savings," says Brian.

For the past several years, American consumers at every rung of the income ladder have been trading up—splurging on a growing array of luxury products, from $4 lattes to $4,000 handbags. With easy access to credit, especially home-equity loans, middle-class Americans began regularly trading up for items that appealed to them, buying food staples at Kroger but splurging on Kobe beef at Whole Foods. Suddenly, everybody was a luxury consumer—for certain items.

But as the saying goes, what goes up must come down. Now many of those same Americans who traded up are shunning luxuries and returning to basics. The upshot: many of the companies that expanded in the hopes of reaching a mass audience of luxury consumers are suffering. Blame the overall slowdown in economic growth, the growing scarcity and cost of credit, and, above all, the sad-sack housing market. "The top 20 percent of households haven't seen a decline in real income, but the bottom 20 percent is suffering and the middle 60 percent is getting by," says Michael Silverstein, senior partner with Boston Consulting Group and co-author of "Trading Up."

Across the economy, consumers are now opting for smaller, less expensive items. In the past three years, sales of compact cars—cheaper to buy and operate than SUVs—have risen from 13.6 percent to 17.7 percent of total U.S. auto sales, even as automakers' incentive spending per compact car fell by 55 percent. Leasetrader.com, a 10-year-old company in Miami that helps people get in and out of car leases, says that up to 15 percent of its customers are seeking to trade down to smaller cars. "This is the first time in at least six years that we've noticed people wanting to do that," says Leasetrader.com spokesman John Sternal.

Mark and Erin Reed Adams, wedding photographers who live in Reynoldstown, a neighborhood near downtown Atlanta, have kicked this trend down a notch. This spring, they bought a pink 2005 Stella scooter on eBay for $2,300. By using the scooter for most transportation, the couple has cut its monthly gasoline bill by $250. "It's also nice that we're doing our part to reduce our dependence on oil and help the environment a little bit," says Adams.

Like the Adamses, many consumers who are trading down are influenced by the trend toward environmentalism. But for others, simple economics is the main motivator. In October, Alex Yakulis, a 47-year-old marketing executive, and his fianc?e, Meg Stewart, put their million-dollar mega-manse in the affluent Dallas suburb of Frisco on the market, posting on a real-estate blog. While he loves the home, and the gated community in which it sits, it was more than they needed, especially with a variable-rate mortgage about to reset. "I find myself going into rooms I haven't been into in a couple months, in a home that's too big with a mortgage payment ready to double," he says. Yakulis still wants his granite countertops and travertine tile—but in a house half the size and half the cost.