Preface
First, let me say right up front, Im a believer in this book. In one way or another, Ive been practicing the principles Michael and Neil describe since I opened my first Limited store in Columbus, Ohio, in 1963. Iknow these ideas work. And I believe they are the sweet spotin virtually every significant brand success today, and well into the foreseeable future.
Before I get into why Im so enthusiastic about these ideas, a little background on my relationship with Michael, Neil, and The Boston Consulting Group.
Several years ago, I could see that the business model we had used so successfully for over twenty yearsone that revolved around fast fashion, significant promotions, and dominant real estate positionswould not sustain us into the future.
The future was in brands.
At that point, I had never really talked to any business consultant or group. A classic entrepreneur, I relied on my instincts and the things that had made us successful.
Having determined that fundamental change was a must, I scheduled meetings with a few of the major business consultancies. Iwas looking for some outside objectivity. BCG sent Michael Silverstein, and Iliked him immediately. Michael is wise, pragmatic, funny, and practical. He gets right to the heart of the issue, and he has sound business judgment. Michael brought in Neil, and theyalong with a number of other bright, energetic BCG peoplebecame solid contributing strategic partners.
They still are.
Our business has made the shift to brands, and Fortune recently named us the worlds most admired specialty retailer. Our business model works, and Im very pleased with the progress that continues to be made.
So, back to the beginning. Michael and Neil are right: the customer is more sophisticated than ever. But Ive always given our customer credit for having the same taste that I have. Nothing is more annoying to me than sitting in a merchant meeting and hearing some buyer say, I like it, but the customer wont. Bull. Ive been shopping the world for over forty years, and Ive never overreached our customer. They stay with you if you pay them the compliment of acknowledging their good taste. Of course price points are an issue. That goes without saying. But they will reach, in virtually any category, if you create demand.
Clearly, Victorias Secret is an examplethe worlds best-known, bestselling, most- profitable lingerie brand. But analysts thought we were crazy when we bought the business. Like most people, all they could see was that American women shopped for underwear in department storesand, therefore, they always would.
That was not my experience. I had seen women in Paris, London, Vienna, and Milan buying lingerie in marvelous little boutiques. They saw it as fashion. I was convinced that American women would, too. And Iwas determined to design and market a specialty lingerie boutique that would be the best in the world. Over the past twenty years, Ibelieve weve managed to do just that. And, as the business has grown, weve continued to increase margins by constantly presenting fresh lingerie and fashion and beauty offerings. By creating demand.
Im happy that Michael and Neil chose to share the Victorias Secret story in their book. And Ifind it comforting to see so many stories here that echo my philosophy. Ifound myself wondering whether Howard Schultz of Starbucks was sitting in the same Italian coffee shop Iwas, thinking to himself,This is great. Theyd love this in America. He applied it to coffee. I, to lingerie and fashion.
But we were both right. And, clearly, weve managed to trade up the customer. Today its more prevalent than ever. And trading upis happening across virtually every product category. The evidence is everywhere.
To their credit, Michael and Neil have managed to succinctly crystallize it in this important book.
Leslie H. Wexner
Chairman and CEO
Limited Brands
One
Trading Up to New Luxury: An Overview
Americas middle-market consumers are trading up.
They are willing, even eager, to pay a premium price for remarkable kinds of goods that we call New Luxuryproducts and services that possess higher levels of quality, taste, and aspiration than other goods in the category but are not so expensive as to be out of reach. So many middle-market consumers want to trade up, and so many can now afford to, that New Luxury goods have flouted the conventional wisdom that says, The higher the price, the lower the volume. They sell at much higher prices than conventional goods and in much higher volumes than traditional luxury goods and, as a result, have soared into previously uncharted territory high above the familiar price-volume demand curve. In category after category of consumer goods and services, New Luxury winners have emerged, traditional leaders have been dethroned, and the entire category has been transformed. The phenomenon forces us to think in new ways about the relationship between consumer needs and consumer goods, and it offers a huge opportunity for business leaders to pursue their own aspirations and realize growth and profit as well. America is trading up, and its good for both business and society.
The trading-up phenomenon is happening in scores of categories of goods and services, at prices ranging from just a few dollars to tens of thousands. It involves consumers who earn $50,000 a year and those who earn $200,000. Single moms do it, retired couples do itworking singles, families with kids, and even their pets do it. We have interviewed hundreds of middle- market consumers, observed hundreds more in their homes and workplaces, and conducted a survey of more than 2,300 people earning $50,000 and above. Ninety-six percent of them say they will pay a premium for at least one type of product. With forty-seven million households in the United States with incomes of $50,000 or more, and an average household size of 2.6 people, thats nearly 122 million Americans with the means and the desire to trade up.
Who are these consumers and what are they buying? All kinds of people trade up every day to many types of goods and for many reasonssome of them unexpected and counterintuitive. Perhaps the most startling traders up we talked with were a group of consumers who were ecstatic about a product category that most people would like to forgeta washer-dryer combination from Whirlpool® called Duet®. The pair sells for more than $2,000, compared to about $600 for a conventional washer-dryer combination. Believe it or not, consumers made the following comments about these European-styled front-loading machines: I love them. They are part of my family. They are like our little mechanical buddiesthey have personality. We are not making this up, and these people are not paid spokespeople or company employees. These are both women and men, with a range of demographic characteristics, who told us, again and again, that Duet makes them feel happy, like a better person, less stressed, prouder of their children, loved and appreciated, and accomplished. In our fifty combined years of listening to consumers, we have never heard more heartfelt expressions of emotion about a product that even industry insiders think of as mundane and unworthy of much attention. Five years ago, the Whirlpool brand managers, in their wildest dreams, had not imagined there could be that much unit volume for a washer-dryer at that price. Even today they are astonished by their own successand are struggling to build enough machines to keep up with consumer demand.
Another trader up who stands out is Jake, a thirty-four-year-old construction worker earning about $50,000 a year, whose great passion is golf. It took Jake a year to save enough money to buy a complete set of Callaway golf clubs$3,000 worth of premium titanium-faced drivers, putters, and wedgesalthough he could have bought a decent set from a conventional producer for under $1,000. During the eight-month golf season in Chicago, Jake works the 6 a.m. shift so he can be on the course by 2 p.m.; he plays eighteen holes nearly every weekday after work andagain, believe it or nottwice on Saturday and twice more on Sunday. He is a three-index golfer, which means he is in the top 1 percent of all recreational golfers in terms of skill. We played a round of golf with him at a public course, during which he described in detail the technical differences and performance benefits of his Great Big Bertha clubs. But the real reason I bought them, he told us at last, is that they make me feel rich. You can run the biggest company in the world and be one of the richest guys in the world, but you cant buy any clubs better than these. Then, looking at us with a hint of a smile, Jake said, When I kick your butt on the course, I feel good. I feel equal. I may make a lot less money than you do, but I think I have a better life. After the round (during which he did, in fact, kick our butt), Jake carefully placed his clubs in his pickup truck and said, Thank you, Mr. Callaway, for another fine day. In 1989, Callaway Golf was not a top-ten golf equipment supplier. Within three years of the introduction of the Big Bertha driver in 1990, Callaway soared to number one in the world.
Not all traders up are driven by feelings of happiness and accomplishment; many trade up to manage feelings of stress and difficulty. Frances, a divorced art director earning more than $100,000 a year, had been dating a guy for three years. On the eve of her fiftieth birthday, he told her he was leaving her for a thirty-year-old woman and they were going to start a family. It sounds like a bad novel, Frances told us. I was unhappy. During that time, I bought a lot of jewelry, not only because it was beautiful and I loved it, but because I knew there wasnt anybody who was going to buy it for me. She realized what she was doing, and she didnt jeopardize her financial well-being to do it. At that particular time, she said, I just felt like I needed to give myself a happy pill. With more women working in the United States, divorce rates on the rise, people marrying later, and more singles choosing to stay that way, there are a lot of consumers men and womenlooking for an emotional lift in the form of a New Luxury purchase.
Trading up spans so many categories and appeals to such a broad range of consumers, that it has come to represent a major and growing segment of the economy. In twenty-three categories of consumer products and services worth $1.8 trillion in annual sales, New Luxury already accounts for 19 percent of the total, or about $350 billion per yearand its growing 10 to 15 percent annually. And the demand is highly elastic because it can be created in categories that have never had a premium offering before and because even a category that has been transformed by a New Luxury product can be traded up again.
The Characteristics of New Luxury
From our analysis of the most successful New Luxury goods in more than thirty categories, we have identified three major types.
Accessible superpremium products are priced at or near the top of their category, and at a considerable premium to conventional offerings. They are still affordable to the middle-market consumer, however, because they are relatively low-ticket items. For example, Belvedere vodka sells for about $28 a bottle, an 88 percent premium over Absolut at $16. Nutro pet food sells at $.71 per pound, a 58 percent premium to Alpo at $.45 per pound. Almost anyone can afford a bottle of Belvedere or a bag of Nutro if those categories are emotionally important to him or her.
Old Luxury brand extensions are lower-priced versions of products created by companies whose brands have traditionally been affordable only for the richhouseholds earning $200,000 and above. Mercedes-Benz, for example, has dramatically changed its product mix in the past ten years, with continual reductions in the price of the entry-level C-class coupenow about $26,000and a steady increase in revenue from this model. Mercedes-Benz has also worked to keep the brand aspirational by extending it upmarket as well. The Maybach sells for over $300,000more than ten times the price of the entry-level C-class coupe. Such Old Luxury brands have mastered a neat trick: becoming simultaneously more accessible and more aspirational.
Masstige goodsa neologism for mass prestigeare neither at the top of their category in price nor related to other iterations of the brand. They occupy a sweet spot in the market between mass and class, commanding a premium over conventional products, but priced well below superpremium or Old Luxury goods. Bath & Body Works body lotion, for example, sells at $9.00 for an eight-ounce bottle ($1.13 per ounce), a premium of about 275 percent over Vaseline Intensive Care, which sells at $3.29 for 11 ounces, or $.30 an ounce. But it is far from the highest- priced product in the categoryKiehls Creme de Corps, one of many superpremium skin creams, retails at $24 for the eight-ounce bottle, a 167 percent premium over the Bath & Body Works product, and there are many other brands that sell for far more.
Despite the wide price range of New Luxury goods and the variety of categories in which they appear, they have particular characteristics that are common across all categories and pricesand they are different from those of superpremium or Old Luxury goods, and also from those of conventional, midprice, middle-market products. Most important, New Luxury goods are always based on emotions, and consumers have a much stronger emotional engagement with them than with other goods. Even relatively low-ticket items, such as premium vodkas that sell for around $30 a bottle, have a well-defined emotional appeal for their consumers. The engagement tends to get more intense and long lasting with big-ticket items, such as home appliances and automobiles. BMW drivers, for example, are particularly engaged with their cars. Dr. Michael Ganal, a BMW board member, told us that BMW owners wash their cars more frequently than owners of other cars do. They park them on the street and then turn back to gaze lovingly at them as they walk away. They say that the first sight of their BMW in the airport parking lot is like a warm welcome home. By contrast, very expensive Old Luxury goodssuch as Chanel handbags and Rolls-Royce carsare based primarily on status, class, and exclusivity rather than on genuine, personal emotional engagement. And the appeal of traditional middle- market goods is based more on price, functionality, and convenience than on emotional connection: its a rare Taurus driver who can be found gazing fondly at his parked car.
Emotional engagement is essential, but not sufficient, to qualify a product as New Luxury; it must connect with the consumer on all three levels of a ladder of benefits. First, it must have technical differences in design, technology, or both. Subsumed within this technical level is an assumption of qualitythat the product will be free from defects and perform as promised. Second, those technical differences must contribute to superior functional performance. Its not enough to incorporate improvements that dont actually improve anything but are intended only to make the product look different or appear to be changed. (American carmakers played that game for years.) Finally, the technical and functional benefits must combinealong with other factors, such as brand values and company ethosto engage the consumer emotionally. Most consumers make one dominant emotional connection with a product, but there are usually others involved as well.
When a New Luxury brand solidly delivers the ladder of benefits, it can catch fire. It will take hold in the minds of consumers, quickly change the rules of its category, grow to market dominanceas Starbucks, Kendall-Jackson, and Victorias Secret haveand force a redrawing of the demand curve. As that happens, the category tends to polarize. Consumers shop more selectively. They trade up to the premium New Luxury product if the category is important to them. If it isnt, they trade down to the low-cost or private-label brand, or even go without. They scrimp and save across a broad swath of spending in order to afford their New Luxury purchasespolarizing the household budget. Almost every American engages in this practice of rocketingspending a disproportionate amount of his income in a category of great meaning. The combination of trading up and trading down leads to a disharmony of consumption, meaning that a consumers buying habits do not always conform to her income level. She may shop at Costco but drive a Mercedes, for example, or buy private-label dishwashing liquid but drink premium Sam Adams beer.
As consumers buy more selectively, trading up and trading down, they increasingly ignore the conventional, midprice product that fails to deliver the ladder of benefits. Why bother with a product that offers neither a price advantage nor a functional or emotional benefit? Companies that offer such products are in grave danger of death in the middlethey will be unable to match the price of low-cost products or the emotional engagement of New Luxury goods. They will lose sales, profitability, market share, and consumer interest. To survive, they must lower prices, revitalize and reposition their products, or exit the market.