Everyday Americans are lapping up luxury, but it’s not what you think. In “Trading Up: The New American Luxury” (Portfolio, $26.95), Michael Silverstein of the Boston Consulting Group and co-author Neil Fiske profile companies and products that allow consumers to feel rich and pampered without breaking the bank.
NEW LUXURY, as they define it, can be found in every corner of our lives. Walk into the kitchen. A Viking range or Williams-Sonoma cookware make you feel like a chef. Thirsty? Starbucks coffee and Belvedere vodka tell fellow drinkers you’re picky about what’s in your cup. High-quality goods at a premium price, the authors argue, offer refinement for those of us who still rely on a paycheck.
They also believe that if old-time luxury was about fur coats and Rolls-Royces for a handful of the super-rich, New Luxury is about average Americans choosing specific goods for which they’ll pay more to get more. How does that work? MSNBC.com’s Jon Bonné spoke with Silverstein.
MSNBC: You talk about one of the keys of New Luxury being that you break the price-demand curve — you have higher price and higher volume.
In category after category, we have manufacturers that are selling high-priced goods and selling more of the high-priced goods than the low-priced goods — so that they are earning a price premium. They are delivering for their consumers a product that has technical, functional and emotional benefits that justify the price points.
Starbucks coffee: It’s $3 for a cup of coffee at Starbucks, it’s a dollar at Dunkin’ Donuts. Starbucks is delivering $2.1 billion in annual sales.
One of the keys seems to be that there’s a difference in how consumers attach themselves to these products, that New Luxury has a different emotional resonance.
There are four sets of emotional drivers.
The first one is “Individual Style,” which is about status and achievement, security and comfort, sophistication and success. The second is about “Questing”: taste and discernment, adventure and learning. The third one is about “Taking Care of Me”: well-being, beauty, youthfulness and making time. And the last one is about “Connecting”: attractiveness, affiliation, part of a club.
Individual Style you see when the guy drives down the street in a BMW [a Boston Consulting client]. ... Questing? Walk into a Panera Bread fast-food restaurant and ask people where they think they are. They will tell you the foccaccia bread, the buffalo mozzarella, the pesto mayonnaise tells them they’re in Italy.
For me, that’s where the analogy fell through. Italians don’t go to a café and have a mocha or a Frappuccino. There is that specific, artisanal quality that I know these folks are trying to emulate, but can you really sell good taste or can you only sell the perception of it?
What the successful New Luxury competitors are doing is that they are in fact Americanizing the experience. And Americans have ... elevated their tastes, their education and the experience they desire. But they do want it in an American package, and so when [Starbucks chief] Howard Schultz brews up an espresso for you and puts it in a paper cup, it’s a different experience than having an espresso in a café in Italy. But it is fast, it is transportable and it is, in fact, a very good cup of coffee.
All about accessibility
It sounds like it’s a suburban model: taking what might be called urbane and transporting it into a venue that’s functional.
I don’t know that it’s necessarily a suburban model.
When Les Wexner bought Victoria’s Secret [another Boston Consulting client], American women wore underwear. He made an observation that European women wear lingerie. And he said to himself, if I make high-quality lingerie, if I move it from being bawdy to being glamorous, if I can make women across America feel sexy, do I have a good idea there? And at that point he said to himself, this is a billion-dollar idea.
Jump forward 10 years. Victoria’s Secret is nearly $3 billion and delivers very high quality lingerie for a very large percentage of American women, both urban and suburban.
One example you mention is of Costco stocking high-end items, and I’m also thinking of your description of the Kendall-Jackson and BMW brands. They have market segments that go from near-budget to real luxury. At some point, does the brand get eaten away at?
Within any given American household, there are a variety of goods that are purchased, and people are doing this trade-up, trade-down phenomenon, and so if you’re making $50,000 a year, there are two or three categories where you’re going to buy the very best.
If your income jumps to $100,000, you’re going to be trading up in five or six or seven categories.
You’re also going to be trading down. You’re going to be looking at everyday goods and you’re going to say is this worth the premium or should I buy the private label?
BMW sells cars today anywhere from $28,500 to $180,000. It’s a really broad range. The 3-series is targeted at a young professional and it’s usually an entry-level car. … I don’t think they’re worried that when they get the consumer in the shop that they’re going to be confused.
What can go wrong
You also mention a couple of cautionary tales, one of them being Cadillac, the other being Martha Stewart going to Kmart with her retail line. What happened there?
At one point Cadillac was the epitome of luxury in America and sold two-and-a-half times as many cars as Lincoln. There was no BMW, there was no Mercedes, there was no Lexus.
We would categorize Cadillac as getting sloppy. They did not invest in engineering excellence, they delivered cars that had relatively low quality, and had significant service issues. Enter BMW and Mercedes in the 1970s and early 1980s. They start to take the market. It doesn’t become a luxury car to drive a Cadillac, in fact it becomes an embarrassment. Enter Lexus and it’s almost like a stab in the heart.
And what happened with Martha?
Martha had a choice. She had a lot of heat around her brand and around her image and what she really needed to do was have someone do a little analysis in terms of the likely going-forward trajectory of the three different mass-market discount stores: Wal-Mart, Target and Kmart. And she signed a contract with Kmart. It was at a point where Kmart was in decline and the shaking around Kmart was visible for those were willing to dig into the details.
Her line, her product, her sales at Target would be three times what they are at Kmart.
You guys note Americans’ problems with debt. And you argue that New Luxury is inherently positive in that it’s a way to accomplish a sense of refinement and taste without digging yourself into a hole. Will it really drive people to spend more affordably?
In the United States, there’s $7 trillion in home equity, $7 trillion in home debt — which is a one-to-one ratio, which in my opinion is not an inordinately high level of debt. … At least 40 percent of the $400 billion spent on New Luxury is at home, and that’s not consumption. That money invested in the home gets translated in terms of resale value. And that has been very good the economy, very good for American housing stock and actually one of the wisest investments that American consumers have made.
And what about some of the smaller stuff — they’re going to that spa, they’re buying Belvedere vodka or a $30 bottle of wine. Over time that starts to add up.
Over the last 30 years, for the top 40 percent of households, average household income in inflation-adjusted terms has increased by 100 percent. That’s a fact that nobody in America really talks about. … Behind that growth in standard of living are women who have entered the workforce and who are now working full-time jobs. They are the primary contributor to the growth in real income in the United States.
For a woman who’s making 45- or 50- or 55-thousand dollars a year to once a month have a massage for 80 bucks and be distressed and relaxed as a result is a perfectly good way to consume.
One of the things these consumers are doing is they are demanding from manufacturers justification for higher quality. … It is a call to action, driven by American consumers, about wisdom: I will spend my hard-earned money if you deliver for me something that’s good. I will spend my hard-earned money if you deliver for me something that is unique. I’m going to look at every dollar that I spend very carefully because I don’t have unlimited resources and I’m going to spend my money on the best goods.