Michael Silverstein is coauthor with Neil Fiske of Trading Up: The New American Luxury.
Silverstein is a senior vice president and global consumer retail practice leader at The Boston Consulting Group (BCG) and the co-editor of Breaking Compromises. Neil Fiske, formerly a partner at BCG, is CEO of Bath & Body Works. Collaborating writer John Butman is an established business author and journalist.
The Boston Consulting Group is a $1+ billion, privately held management consulting firm with offices in fifty-six cities worldwide.
tompeters.com asks Michael Silverstein …
What do you mean by “trading up?”
MS: Trading up is a phenomenon where you see middle class American consumers choosing a couple of categories of goods where they can have the very best. You also see these middle class consumers trading down in a dozen to 20 categories to be able to afford that. It’s about 47 million households in America with income over $50,000 that are trading up to products that have technical, functional, and emotional benefits.
And what about this other term, “new luxury.”
MS: New luxury is about affordable, quality luxury goods. It’s Starbucks and Ben and Jerry and the BMW 3 Series. The new luxury is defined as products that have these technical, functional, emotional benefits. It’s about a product that appeals to consumers on an emotional basis. It helps them take care of themselves. It helps them connect. It helps them get individual satisfaction. It allows them to quest.
Let me step back here for a moment because there are some basic background facts that are important to know about this new luxury phenomenon. There are six factors that are the major drivers behind new luxury. The first one is about higher real income. It’s about a doubling of per capita income for these 47 million households over the last 30 years.
The second one is about rising home values. It’s about having $7 trillion in home equity.
Third, it’s about saving money as a result of the growth of discount stores, the Home Depots, the Lowes, the Wal*Marts, the Costcos, the Targets, which puts $100 billion in the pockets of consumers.
Fourth, it’s about women going to work in mass, and contributing 100 percent of the real growth of income.
Fifth, it’s about education. Real income growth at the household level has gone to the households that are better educated. If you wanted to see real income growth in your household, you had to finish college. If you didn’t finish high school, you saw income decline. If you completed high school, you saw income stability. If you had some college, you had income stability. Real growth in income went to educated households.
The last factor associated with this new luxury movement is really targeting women. It’s about emotional awareness. It’s about cultural icons like Oprah Winfrey who has suggested it’s okay to consume. It’s okay to take care of yourself. It’s okay to have a massage. It’s okay to take the family out to dinner. You don’t have to do everything yourself.
There are cornerstones of why people are spending a lot of money in some particular area. Can you talk about those a little bit more, define them a little bit more for us?
MS: Individual style is about the benefit of achievement, security and comfort, sophistication and success. That is the oldest emotional driver for luxury goods. The ones that we consider new are the following three: Taking care of me, which is about well-being, physical and spiritual health, beauty and youthfulness, and making time. Connecting, which is about attractiveness, romance, hooking up, affiliation, membership in a club. And questing, which is about adventure and learning.
Within each of those four emotional spaces, there are a variety of products that have come to be in the last ten years. In total, it’s a $400 billion market growing at 15 percent a year. The questing space, for example, would include travel, adventure vacations. It would include restaurant chains like PF Chang, The Cheesecake Factory, and Panera Bread.
Taking care of me would include the day spa movement where Americans are now spending $10 billion. It would be about all the products that you can use on your skin to make yourself look more youthful. It would be about the revolution that’s happening in healthcare where consumers are saying, “I know that the very rich get better healthcare. And I’m going to put my money on the table to get a better doctor.” The connecting phenomenon is about overt connection in terms of adults. But it’s also about affiliations. It’s two BMW drivers looking at each other on the road and offering a nod.
And thinking what?
MS: And thinking, “That guy is driving a nice car.”
I’d like to backtrack to women and how they’re involved in this trading up phenomenon. You and your coauthor write, “Most observers agree that women have always had a particular ability to judge the value of goods, and especially the goods that make up the bulk of the retail market, and the keen understanding of the complex emotional meanings and social messages contained in them.” Can you elaborate on that?
MS: Let me make it very tangible. The primary categories where we’ve seen this enormous growth in new luxury spending have been durables. The durables are kitchen remodelings, bathroom remodelings, room additions, bathroom additions, window and door replacements, decks, finishing the basement, basically home improvement. That is the single largest category in new luxury spending. That is about $100 billion annually.
That is a category that is dominated by the female. She chooses when it’s time to put in a new bathroom. She chooses when it’s time to get a new kitchen. And she is increasingly saying, “I want to have luxury at home. The home is my cocoon. It’s my protected space. And I’m going to make sure that my family is comfortable and protected, too.”
This trend reinforces the fact that women are important, that they’re the deciders. Women decide that you need a granite countertop. Women decide that you need area lighting outside the house. Women decide that you need commercial grade appliances in the home. You need a Wolf or a Viking oven. Need it. Not want it, need it.
When did this movement begin?
MS: It became material about ten years ago. It has picked up tremendous pace, and there’s been a tremendous acceleration in the last three years.
During the recession, one of the things that we found in our research is that consumers became more and more stressed, more isolated and fearful, more insecure, more underappreciated. We have longitudinal data that supports that.
As a result, they decided that they were not going to be taken care of by anybody else. They would take care of themselves. That’s when this trading up phenomenon became real. Eighty-eight percent of consumers say some products are just too important to scrimp on.
Eighty-eight percent of consumers are trading up in some category?
MS: Yes. Sixty percent of consumers tell us they concentrate their spending on two categories that matter. Sixty percent of consumers tell us they have a category they spend more than they should on. And consumers believe in personal products. If you’re a young man, 18 to 30, the categories where you’ll really spend are personal computers, home entertainment, sit-down restaurants, travel, vacation, work at home. If you are a DINK [Dual Income, No Kids], it’s about furniture, bedding, and home entertainment.
You have a very dim view of market research. A number of times you say that you don’t figure out how to create a new luxury item by going out there and talking to consumers.
MS: The biggest problem with conventional research is that it works with the general population. It doesn’t work with segments. If you go out to middle America and you say, “Imagine this,” middle America actually has trouble imagining this.
What they don’t have any trouble with is seeing something tangible and saying, “That’s fantastic.” But if, ten years ago, you had described a $38 bottle of vodka in a premium class and said, “Would you buy it?” the general population would have said no. In fact, 92 percent of them would have said no. If the marketers had listened to the market research, we wouldn’t now have Belvedere, Ketel One, and Grey Goose.
There are segments for whom vodka is very important. And they will pay $38 a bottle, and they’ll buy a better class of product, and will create a new $500 million segment. Conventional market research against the general population would never have identified that segment.
Can you give me a few examples that you talk about in the book of new luxury companies, and why that is a new luxury?
MS: Sure. Let me rattle off a few. Viking is a new luxury company. Viking created the ultimate oven. A Viking oven delivers 30,000 BTUs in the oven. It has a 15,000 BTU cook top. It says to everyone who visits that there is a very serious cook in that house. That would be number one.
Starbucks is a $4 billion example. Americans have always wanted to drink a better cup of coffee. They just never had the opportunity. Starbucks came into the market, and voila, $4 billion, $3.5 billion in the U.S.
Panera Bread is a magnificent sandwich shop. It’s more than an upscale Subway because it actually is beautifully decorated, and bakes its bread fresh every day. You get a chicken sandwich with grill marks, arugula lettuce instead of iceberg. You get pesto mayonnaise instead of Hellman’s. And, of course, you get it on focaccia bread that’s baked fresh every day. That’s a good example of a new luxury item.
BMW is the world’s most profitable car company, period. It does it totally on the basis of new luxury. It’s about the 3 Series, and the 5 Series, and selling huge quantities. It’s about the aspirational 7 Series and the new 6 Series. But moreover, it’s about the 1 Series, which comes out in 2004, priced at $24,000. And it’s about the Mini Cooper, which sells for $16,750 versus $13,000 for a Honda Civic.
It’s about Godiva chocolates. It’s about buying the world’s best candle at Bath and Body Works. It’s about Eagle Pack dog food, and Williams-Sonoma, and Callaway golf, and American Girl, and things as simple as Crest White Strips.
But you also write that these new luxury products are developed differently. There’s a different process for bringing them to market, and that the normal type of manager in a company isn’t going to be able to deal with how to function with a new luxury item. What’s the difference here?
MS: I wouldn’t say that. That’s a misinterpretation. What we believe is that, in order to create a new luxury product, you need to be able to deliver technical, functional, emotional benefits. There’s a great example of an old-line appliance company being able to do that. That’s Whirlpool.
Whirlpool introduced, about three years ago, a washer and dryer set called The Duet. The Duet sells for $2300 versus a typical washer and dryer set at $600 or $700. Technically, the Duet delivers a larger capacity, horizontal access. It’s 37 percent more water efficient. It’s more effective at washing. It’s gentler on clothes. Those are the technical benefits.
In terms of functional benefits, the average mother with two young children washes 26 loads of laundry a week. If she has a Duet, she can cut that down to 18. She has cleaner clothes. It washes the same amount of clothes in half the time. It is for delicates. And it actually increases the longevity of your clothing.
On an emotional basis, it makes you feel loved and appreciated, and accomplished and proud. It is about being smart. It’s about being environmentally friendly. Duet came out of Whirlpool, the conventional appliance company, saying, “I’m going to take advantage of the premium market. I see how popular front-loading machines are in Europe. I’m going to bring it to the United States.”
But Whirlpool was an exception to the rule. You write how these appliance makers knew washers and dryers get replaced every 14 years. They’ve got a mathematical formula. They see where new houses are being built. And, periodically they threw a new washer and dryer out there. What got these people thinking there was a market for this?
MS: They’re a global company. So they have the experience of participating in the German markets. They saw the technical and functional benefits of a front-loading system. So they said, “Let’s see whether it can happen in the U.S.” They have a CEO in David Whitwam who basically said, “We’re going to innovate. We’re going to grow. We’re going to change the shape of our market.”
A lot of these examples, you say there’s always a narrative tied in with them. There’s a story. People need stories for their products. Why do you think that’s important?
MS: In order for consumers to adopt a new product, they need to know the basis for interest. They need to have a reason to believe. The narrative, and the story, and the history are critical to explaining to the consumer why they should become emotionally involved, emotionally connected with this product. It is a requirement for a new luxury company to be able to describe how did we happen to get where we are, and how did we happen to get to create what you want.
At the end of your book, you actually have a short chapter that’s a preemptive attack on people who will just say this is just the next phase of conspicuous consumption. For instance, the people, I think you even detail them in the book, who will buy a Viking range, and then who don’t actually cook at home, but will spend $4,000 to $6,000 just for look and feel.
MS: There actually aren’t too many people that really do that. I’ve done a number of television shows, talk radio, that sort of thing. The most amazing thing is that you get the high and mighty calling in. These people say, “Well, why are you consuming these products? Why aren’t you giving your money to charity? Why aren’t you doing public good? Why are you self-consuming?” I think that’s the American Puritan ethic coming alive. America is a country where people are deeply rooted in terms of not conspicuously consuming. The truth is that Americans love higher quality goods.
One of the things that’s quite interesting about trading up is that typical trade-up consumers live a very balanced lifestyle. They trade up in two or three categories of goods that are really dear to them. They are expert in those categories. They are descriptive about technical, functional, and emotional benefits. Then they trade down in a wide variety of categories to balance the budget. And on net, if you actually look at the natural resources that they consume, it can be the same or less than a family that isn’t trading up in one or more categories.
MS: They buy quality, not quantity.
What are the future opportunities? Where are we headed with this? You’ve listed a bunch of examples. The home is clearly the center.
MS: The new luxury market is about $400 billion in the United States growing to a trillion. It’s about the same size worldwide.
MS: It’s growing at 15 percent a year. It’s going to be a trillion dollars at the end of the decade. You’re going to see real income growth trickle down to a larger and larger number of households. It’ll be 60 or 75 million households by the end of the decade in the United States that are consuming new luxury goods.
You’ll see it in food. You’ll see that the supermarket sector, which is really under attack by Wal*Mart, will segment. You’ll have growth there. You’ll see it in healthcare where people are going to choose their doctor, and they’re going to pay a princely price. You’re going to see the financial services where the middle class will be able to get the kind of service that’s only available to the really big investors now.
You’ll see that consumers will continue to travel, and will spend money on adventure vacations and luxury resorts, and still economize on airplanes. You’ll see markets bifurcate.
Any particular areas that are particularly ripe for this?
MS: The new categories for new luxury are financial services and healthcare. They are going to develop with a vengeance.
You mention a healthcare service. It sounds like it’s in Boston.
MS: Dr. Jordan Busch in Boston will sell you a subscription to be one of his patients. For $1,500 a year, he will make house calls. He will have a limited number of patients. If you become sick and have to go to a specialist, he’ll come with you to the specialist. If you need an interpretation on reading the medical tests, he’ll sit next to you and explain them to you patiently. That’s a new luxury movement.
You’re also going to see things like The Cleveland Clinic. They have opened up a Miami and a Naples branch. This is about providing branded healthcare to consumers. The Mayo Clinic is now in Rochester and Phoenix. People will take healthcare brand names and extend them out, get a premium price, and deliver premium service.