Alf's Articles

Consumers Can't Resist the Lure of Luxury

by Alf Nucifora

In spite of recent insecurities driven by a US economic downturn, global outsourcing and the 911 catastrophe, American consumers are exhibiting a growing commitment to luxury brands and products, and spending more in the process. A recent report from the prominent Boston Consulting Group (BCG), testifies to a "New Luxury" phenomenon that prizes premium quality, higher-priced goods and services among middle-market consumers. Notes Michael J. Silverstein, BCG Partner and co-author of the Trading Up research study, "It's now clearer than ever that the New Luxury phenomenon is not an anomaly, but rather a structural, long-term shift that will continue to reshape the consumer economy for the foreseeable future. In fact, the socio-economic drivers of New Luxury, including increased wealth, changes in family structure, and the heightened influence of women, are persisting and accelerating globally. And companies that can deliver superior offerings will continue to outperform their competitors in terms of sales growth, market share, profitability and total shareholder return."

A behemoth in the making

The BCG study puts shape and dimension to the claim. New Luxury goods now typically account for:

• 20% of a category's unit volume
• 40% of its dollar volume
• Up to 80% of a pioneer category's profit pool (think Starbucks)
• Total annual sales of more than $400 billion, and growing at a rate of 15% a year, resulting in a trillion dollar market projection by the end of the decade

Top luxury brand performers such as Coach, BMW and Williams-Sonoma posted annual sales growth of 19% in 2003 and form a fraternity of top performing brands playing in the New Luxury space, including PF Chang's, Jet Blue, Panera Bread, Cheesecake Factory, Bath & Body Works, Lowe's and Costco.

Feeling the change at both ends

Not only are New Luxury products scraping off the juiciest sales and profits, their growing incursion into the marketplace is helping redefine the marketplace itself. As the BCG report indicates, the introduction of New Luxury goods into a category results in a polarization of consumer buying behavior as growth and profit opportunities flow to the high- and low-ends of the pricing spectrum. The result is a tightening vise on goods in the middle which struggle to survive, a phenomenon not dissimilar to that which has taken place with traditional department store chains like Macy's who have to combat specialty retailers at one end and big box discounters at the other. Says Silverstein, "Middle-market consumers pay significant premiums for New Luxury goods because they can also trade down in other categories that are less important to them". That's why they'll purchase that expensive designer suit or couture ensemble at Neiman-Marcus and follow it up with a visit to Target for a child's clothing, which will be outgrown in a matter of months.

Where will it happen next?

Expect this polarization to continue in a number of sectors from automotive to appliances, from pet food to ice cream. In the travel industry, the effect is already underway as air travelers trade down to discount airlines like Jet Blue at the growing expense of the mainline vanilla carriers. These New Travelers scour web sites for the best discounts and last-minute deals. At the other end, they seek out expensive exotic locales, pricey spa resorts, super-premium cruises and eco-travel.

The brewed tea category shows similar potential for break-out. Sales in the category grew from $2 billion in 1990 to $5 billion in 2002. Yet much potential remains to excite consumers with marketing that gets at the emotional core of the tea experience (Coffee beware!). Silverstein cites Tazo and the Republic of Tea as brands that have seized on shortfalls in the tea category. "For a premium price, both brands offer consumers more quality, variety, technical enhancements, esthetically superior packaging, and eco-friendly sensibility. By tapping into the emotional drivers of tea drinkers, both companies have the potential to transform the tea category," notes Silverstein.

The BCG report notes that New Luxury brands will continue to spring forth from any number of different and unexpected places. The red-hot American Girl, a doll company, was a small private company founded by a singular entrepreneur before it hit the big time. The popular Duet washer-dryer exists as progeny of the Whirlpool Company. As the report states, "This diversity in pedigree means that emerging New Luxury brands can be difficult to identify early on."