"We may be seeing one of the greatest shifts in consumer buying habits and taste since the 1950s," so says Michael Silverstein, co-author of "The New Luxury: Why the Middle Market American Consumer Wants Premium Goods and How Companies Create Them." Cannondale and Red Bull get nice little mentions in BCG's report...

Sell up, not down, argues Boston Consulting Group

Stuck in a rut selling £79 full-suss alu-framed bikes? Feel your locality won’t sustain sales of high-end bikes? You could be right, but will IBDs currently selling low-end stuff be able to survive competition from the likes of Aldi?

New US research points to ‘another way’, selling upscale products to consumers now more than ever willing to pay upscale prices.

Granted, this isn’t a retail strategy for all, but for some it could be useful ammunition for specialising even further, and ramping up prices to reflect added-value. (And for ‘top-end’, read £200+, not £5000).

According to the Boston Consulting Group, shifting demographics, lifestyles and stress levels are "compelling consumers to ‘trade up’ to ultra-quality refrigerators, vodka, pet food, lingerie and much more. Companies need to act now or face ‘Death in the Middle’

"We may be seeing one of the greatest shifts in consumer buying habits and taste since the 1950s," said BCG partner Michael Silverstein, co-author of "The New Luxury: Why the Middle Market American Consumer Wants Premium Goods and How Companies Create Them."

BCG partner and report co-author, Neil Fiske, said "Despite the recession, the shift to ‘New Luxury’ has been mounting and constant."

"New Luxury" refers to the phenomenon of middle-market consumers’ escaping theextraordinary stresses of modern life by choosing high-quality, high-performance, emotionally satisfying goods and services "once the market of the rich and elite," according to the report.

Middle-class consumers are willing to pay premiums of up to 10-times conventional price levels for many New Luxury items, opening a window for companies to achieve significant margin and profit growth and gain competitive advantage, claims the BCG.

Even in the current downturn, when consumers might be expected to cut back on spending up, many have not, according to the report. In fact, consumers have been gravitating to New Luxury in record numbers. Here are some of the growth stats used in the BCG report:

* Sales in the U.S. of Mercedes cars were up 16% for the first nine

months of 2002.

* U.S. sales of BMW and Mini cars were up 16% for the first half of 2002.

* Starbucks, a New Luxury pioneer, posted sales growth of 24% in fiscal 2002, even topping 22% in 2001. Fiscal 2003 is off to a good start: Revenues were up 24% over October 2001 and same store sales up 10%.

* Panera Bread is a young upstart in the upscale fast-casual dining sector. For the second quarter of 2002, revenues were up 43% over the same period the previous year; same store sales were up 6.7%.

* Volume sales of the top New Luxury vodkas, led by Grey Goose and Belvedere (which are twice as profitable as mass brands), grew at 52% per year between 1999 and 2001.

* Sales of single-serve bottled water continued to grow at approximately 30% per year as consumers responded to enhancements such as herbal extracts, new flavors and vitamin-infusion.

* Between 1999 and 2001, premium chocolates from companies such as Ferrero Rocher and Perugina grew at more than double the rate of mass brands.

The report – US-biased, naturally – points out that many of America’s best performers -Starbucks, Victoria’s Secret, Sub Zero, Bath & Body Works – were trailblazers of the New Luxury phenomenon.

"Many, if not all, of today’s ‘New Luxury’ leaders were formed and led by outsiders who set out to transform their categories. They became highly successful because their passion and gut instincts told them that consumers would ‘trade up’ if they perceived technical, functional and emotional benefits," said Fiske.

As a result, companies, such as Viking, Callaway and American Girl, have transformed their middle-market customers into what BCG calls ‘brand apostles’: consumers who will pay significantly more for products deemed emotionally satisfying, and who will work hard to get their friends, families and colleagues to do the same.

"But the reality is that only a few players in each category will be able to tap successfully into the new consumer mindset. The players that ‘get it’ – often the iconoclasts and often privately owned companies – will enjoy the unusual combination of high volume and wide margins, and those that don’t will lose market share and be forced to continue chasing thin margins and negligible growth with mass-market offerings," warned Silverstein.

Succeeding in New Luxury requires accepting the counter-intuitive, says the BCG report. The trusted, old notion that companies win the mass market via price – low price – is no longer a given. The report points out that the US brands that are currently at the greatest risk – Pontiac, Swanson, Nissan, Ralph Lauren, Smirnoff, Clinique, for example – are those that aim squarely at the middle of market, with average products and pricing.

"Many brand giants are facing death in the middle," said Silverstein.

"If you look at the most successful New Luxury products and services, most resonate with at least one, and often several, of four key emotional drivers: "Taking Care of Me," Questing, Connecting and Investing. For example, the buyer of a $2,000 Cannondale bicycle may view the purchase as an earned indulgence, but also as a way to stay fit, explore new places, commune with nature, meet other bike enthusiasts and make an investment in a product that will retain its value and quality." said Silverstein.

paying off.

"While a traditional mass marketer’s highest-priced product may be three-to-four times its lowest, New Luxury players often have a five-to-tenfold difference. Many companies are finding they can price up, spend back and reap disproportionate profits from higher margin sales," said Fiske.

The BCG’s report said brand-owners and retailers must pay closer attention to consumers’ emotional needs.

New Luxury products aren’t merely technically and functionally superior; they portend health and longevity, suggest intense experiences, acknowledge heightened sophistication and evoke spirituality and sensuality, the report explains.

One of the chief reasons that the new luxury phenomenon has caught so many mass marketers off guard, according to the report, is that traditional market research often misses the emotional underpinnings of consumer behavior. New luxury innovators often rely less on hard data, choosing instead to spend much more time in the market and in one-on-one sessions with consumers in all of their domains.

For example, Red Bull built a $100m "energy drink" empire without any advertising by marketing its product at the hip scenes — gyms, lounges, clubs, MTB events — of its target consumers.

"The lesson for all marketers is to get back down in the trenches and refocus on your core customers’ environments – home, work, play," said Silverstein.

"That will help you understand nuances in the market and shifts in consumer emotion — and give you the perspective to generate next-generation ideas."

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