Daily Research News Online no. 2583 - American Consumers Seek Out Little Luxuries

American Consumers Seek Out Little Luxuries

September 5 2003

'New Luxury' companies, with high-quality premium-price products targeted to middle-market consumers, are posting growth rates well above that of the overall US economy, according to new research from management consulting firm The Boston Consulting Group (BCG). The 15 New Luxury companies studied averaged 18% sales gains in the first half of 2003.

Consumers pay premiums between 20% and 200% for goods from these companies - for example $6 for a Panera panini rather than $3 for a deli sandwich, or $28,600 for a BMW rather than $20,000 for a Pontiac. The 15 players posted mean sales gains of 17.8% (median 15.1%) for the first half of 2003 compared with the first half of 2002. By comparison, total personal consumption expenditures in the US increased less than 5% during the same period, according to the US Department of Commerce.

The 15 'New Luxury' companies are JetBlue Airways; Coach (handbags, accessories); P.F. Chang's China Bistro; Panera Bread; Starbucks; The Cheesecake Factory (casual dining); Restoration Hardware (speciality retail); Bed Bath & Beyond (speciality retail); Williams-Sonoma (speciality retail); Lowe's (home improvement); Costco; Limited Brands (fashion and personal care); Callaway Golf; Boston Beer and BMW. With a couple of exceptions (notably the last), these are smaller luxuries - an interesting contrast with the plight of 'old' luxury goods companies and brands in the UK, much discussed in its marketing press this year (Rolls Royce, flights on Concorde...).

'This new research reinforces that it's the American consumer's increasing desire - and willingness to pay more - for quality and something special that provides continued buoyancy for the economy', said Michael J. Silverstein, BCG vice president and co-author of Trading Up: The New American Luxury (Portfolio, October 13, 2003). The book analyses why and how middle-market Americans are increasingly spending more for selected products and services that deliver superior quality and 'a new level of emotional resonance'.

Says Silverstein 'The performance during the first half of 2003 of companies such as Panera, JetBlue and Starbucks forces two conclusions: that Americans' appetite for New Luxury is recession-proof, and that this consumer behavior is one of the biggest opportunities in business today - to realize high-volume sales and higher net operating margins by making and marketing products that prompt consumers to 'trade up'.

'Consumers' desire for this kind of quality and emotional reinforcement through goods is the result of demographic and cultural shifts - rising household incomes and home equity, high divorce rates, the changing role of women and an increased awareness of 'self.''

The 'New Luxury' companies' sales gains posted for the first half of 2003 - respectable for any economy - occurred against a backdrop of continued economic sluggishness. Real gross domestic product increased 2.2% during the first half of 2003 (compared with the first half of 2002) - an improvement over the 0.7% and 1.8% increases in first-half 2001 and 2002, respectively but still modest relative to the late-1990s. Meanwhile, according to BCG, 'New Luxury' goods overall represented about $400 billion in sales in 2002 and continue to grow at 10% to 15%.

BMW's car volumes in the US increased 10.1% during the first half of 2003 to more than 137,000 vehicles, while total car volumes in the US dropped 5.9%. General Motors sold 8.6% fewer vehicles during the first half, while Toyota Camry volumes declined 9.4%.

JetBlue, the 'New Luxury' airline with low fares and free DIRECTV at each leather seat, saw 64% revenue growth for the first half of 2003 and announced its 10th consecutive quarter of profitability. In comparison, revenues at Northwest and American were down 1% and 3%, respectively.

Silverstein says that regardless of a strong or weak economy, middle-market consumers practice 'rocketing' - trading up in categories, such as clothes or food, that really matter to them and trading down in others, such as vacations or cars. 'There's no longer any such thing as the 'average' consumer'.

BCG have been researching 'the New Luxury phenomenon' since 1998 - this involves consulting work, the gathering and analysis of socio-economic data, in-depth interviews with company leaders and consumers, polls of consumer attitudes and behaviour, literature review and analyses of a sectors including apparel, appliances, automobiles, cosmetic surgery, cruises, electronics, food and beverages, personal care, pet food and travel.