Yenra : Shopping : New American Luxury : Americans willing to pay extra for premium quality items

Trading Up: The New American Luxury, a new book from The Boston Consulting Group (BCG) that identifies and explains a major shift in consumer behavior that is redefining the middle-market competitive landscape, was released today.

According to co-author Michael Silverstein, partner at BCG, "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." The book says that in 23 everyday categories, from food and clothing to cars, appliances and travel, New Luxury goods amount to $350 billion in annual sales -- and tremendous potential for future growth.

The availability of the book, published by Portfolio and co-authored by BCG partner Michael J. Silverstein, coincides with the results of a new study by BCG confirming that Americans with yearly household income over $50,000 are prepared and want to spend more for selected New Luxury goods - items that are of superior quality, resonate emotionally and cost much more than traditional middle-market items. 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.

While the majority of Americans (67%) with $50,000 or more in household income say the economy is not good or poor, an even larger majority (81%) say that even in this economy it's worth paying more for certain premium quality products because that's a smarter way to spend money, according to the BCG study.

Trading Up employs demographic data, extensive research with consumers and analyses of cutting-edge and traditional producers and marketers to tell a detailed, example-rich story of a major structural change in the market for a continuum of everyday goods. 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," said Mr. Silverstein.

"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. 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."

According to Trading Up, a new class of New Luxury businesses has emerged in certain categories and is capturing up to 20% of the customers, 40% of the revenues and 60% 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. 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, Eddie Phillips of Millennium Imports Company (Belvedere vodka) and Fred Carl of Viking Range Corporation -- who have changed the rules in their categories.

In fact, Americans are taking note of the increasing number of New Luxury items and spending accordingly:

Added Mr. Silverstein, "New Luxury doesn't refer to old-fashioned, traditional luxury goods like furs, jewels and other 'scarce,' extremely expensive items. It refers to a new class of goods that are of superior quality, durability and design but are plentiful, readily available and still affordable."

The study, which was fielded before and after Labor Day, confirms that the "Trading Up" phenomenon is now strongly embedded and weathers - and may even be fed by - uncertain economic conditions.

Even though more than two-thirds of middle-market Americans say the economy isn't so good:

And Americans are convinced that they're discerning, sophisticated consumers who "trade up" and "trade down" responsibly.

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 study, Americans want to "trade up" in nearly every category:

In a separate study, BCG analyzed the first-half 2003 sales performance of 15 New Luxury companies (all of them profiled in Trading Up) for whose goods consumers are willing to pay premiums between 20% and 200%, e.g., $7 for a Panera panini rather than $3 for a deli sandwich, or $29,000 for a BMW rather than $20,000 for a Pontiac.

The 15 New Luxury players posted average sales gains of 17.8% and a median sales gain of 15.1% for the first half of 2003, compared with the first half of 2002. Meanwhile, total personal consumption expenditures in the U.S. increased less than 5% (and less than 3% in real terms) during the same period, according to the U.S. Department of Commerce.

The New Luxury players in the first-half 2003 performance study include Panera Bread, Starbucks, The Cheesecake Factory, BMW, Williams-Sonoma, Bed Bath & Beyond, Restoration Hardware, Boston Beer Company and Callaway Golf.

"There are producers, marketers and retailers who understand that Americans are more inclined than ever to 'trade up' and who have internalized that there's no longer any such thing as the 'average' consumer. These players deliver superior quality and performance; can charge premium prices; can sustain high-volume sales, and, most important, cultivate 'disciples' and devotees among consumers," said Mr. Silverstein.

Trading Up: The New American Luxury is being published by Portfolio, an imprint of Penguin Group (USA) Inc.

The coauthors are Michael J. Silverstein and Neil Fiske. Mr. Silverstein is a senior vice president and director in the Chicago office of BCG and head of the firm's global consumer practice. Mr. Fiske, formerly a BCG senior vice president, is CEO of Bath & Body Works.

The Boston Consulting Group (BCG) is a management consulting firm recognized as a leader in competitive strategy, corporate development and shareholder value. It has 58 offices in 36 countries.