Luxury on the shopping list

By T.K.MALOY, UPI Deputy Business Editor  |  Oct. 22, 2003 at 2:52 PM
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WASHINGTON, Oct. 22 (UPI) -- Increasingly, the average American shopper has been showing their tendency toward the purchase of various "mass-market" luxury items -- from $34-a-bottle Belvedere vodka to $4-a-cup Starbucks coffee -- which is redefining the middle-market, according to "Trading Up: The New American Luxury," a soon to be published book by members of the Boston Consulting Group.

"Demand on the part of Americans for a new breed of mass luxury goods, and the growing club of producers who understand how to satisfy that demand, will fuel innovation in America and help the economy grow," said co-author Michael Silverstein, who is a partner at management consultants the Boston Consulting Group

These items are what he refers to in "Trading Up" as the "New Luxury."

"New Luxury doesn't refer to old-fashioned, traditional luxury goods like furs, jewels and other 'scarce,' extremely expensive items." Silverstein said. The book reports that in 23 everyday categories, from food and clothing to cars, appliances and travel, such luxury goods amount to $350 billion in annual sales -- and, Silverstein adds, a tremendous potential for future growth.

Examples of "New Luxury" products include $4 cups of coffee from Starbucks; $7 sandwiches from Panera Bread; $34 bottles of Belvedere vodka, and $29,000 BMWs, Silverstein notes. It should be added that of these items cited, their respective companies have all been clients of the BCG, which has studied shopping trends on behalf of these companies.

According to the BCG, Americans with yearly household income over $50,000 are prepared and want to spend more for selected new luxury goods -- items, which the company says, "resonate emotionally and cost much more than traditional middle-market items."

For these consumers, despite the ongoing slowed economy, it's worth paying more for certain premium quality products because that's a smarter way to spend money, a recent BCG survey reports.

The consulting firm asserts that individual consumers are more sophisticated and less "average" than ever - making decisions every day to "trade up" to new luxury in categories that matter to them on an emotional level and "trade down" in lower-priority categories.

"On the same street, one family might 'trade down' on vacations and clothes and buy high-end Viking and Sub-Zero kitchen appliances, while the person in the next house drives a BMW, pursues adventure travel and wears Tiffany jewelry, while not bothering to renovate her kitchen," Silverstein said.

"We're seeing a new and remarkable American consumer -- who confidently pays large premiums for things that matter to him or her and, on the same day, hunts for bargains for necessities that are less important," he said. "This is a real wake-up call to producers: They can achieve that rare high-volume, wide-margin combination if they can make and market the right kind of 'New Luxury' product."

Silvertein adds: "If they don't, and continue making run-of-the-mill products, they'll see sales and margins shrink. For them it's death in the middle."

Economist Robert Frank, a professor at Cornell University's Johnson School of Management, and the author of "Luxury Fever," said what is driving purchases of mass luxury items has both a great deal to do with income redistribution and with each income demographic emulating the group earning a greater amount next up in the income hierarchy.

"People ask themselves -- 'how am I doing,'" Frank said.

"We (human beings) are very sensitive to context in all things. If everyone is drinking coffee out of an urn we do that. If people are drinking $4 coffee, we do that. We are influenced in countless, subtle ways," Frank said. "Why weren't we (all) drinking cappuccino 30 years ago -- people at the top weren't."

Income earners "just below the top are influenced by people at the top" and so on down the income chain, Frank noted.

A recent survey by the Boston Consulting Group found that:

-- 84 percent of Americans with household incomes of $50,000 or more say there are more premium-quality products that are affordable to them than there used to be.

-- 87 percent say they're willing to economize in some areas in order to spend more on higher-quality products that matter to them.

-- 90 percent say even if you have to pay more for premium-quality products, it's more enjoyable and satisfying to have better quality.

Further, middle-market Americans say they "trade up" because it makes them feel better; it makes hectic lives more enjoyable and "enhances time spent with people they care about," according to the BCG.

-- 73 percent of middle-market Americans say they're willing to spend more for things like food, sit-down meals or wine that "enhance my social life or time with my family."

-- 67 percent say owning a premium brand or high-quality products is "one of the ways I reward myself for working hard."

According to "Trading Up", a new class of businesses have emerged in the various new luxury categories which are capturing up to 20 percent of the customers, 40 percent of the revenues and 60 percent of the profits. These companies earn pricing power by developing products that deliver on different levels -- technical, functional and emotional.

Their customers are "incredibly loyal", the book says.

The book notes that often these businesses were started by outsiders -- like Jess Jackson of Kendall-Jackson Wine Estates, Ely Callaway of Callaway Golf, Les Wexner of Victoria's Secret, Edward Phillips of the Millennium Imports company (Belvedere vodka) and Fred Carl of Viking Range Corporation -- "who have changed the rules in their categories."

Ed Phillips, who helped to breakopen the luxury vodka category with his introduction of Belvedere vodka in 1996, said that the category has undergone rapid growth in the ensuing seven years.

Describing the epiphany he had while on a local tour of small premium distilling centers in Poland, Phillips said, "It became clear to me that there could be a market for luxury vodka."

Since the introduction of the brand by his company Millennium Import LLC, "There has been a tremendous acceptance," of the category Phillips said.

Belvedere has achieved over $1 billion in retail sales to date.

"The category is far wider in terms of male/female, socioeconomic and ethnic demographics than expected," he added.

Phillips noted, however, that in building the Belvedere brand and marketing the luxury vodka category, "a pretty bottle is not even the beginning" of creating a premium product which will sell and keep customers coming back.

It takes, he said, a great deal of work.

("Trading Up: The New American Luxury," by Michael Silverstein and Neil Fiske, 320 pp., $26.95, Portfolio/a Division of Penguin Books.)

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