Luxury consumers could reshape the retail landscape

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By: Wise Marketer Staff |

Posted on June 3, 2004

Buyers of 'new luxury' goods and services are restructuring and polarising many product categories, and this evolving segment is expected to grow to some US$1 trillion by 2010 in the USA alone, according to a new research update from the Boston Consulting Group (BCG).

The firm's latest research suggests that the so-called New Luxury phenomenon is starting to restructure entire markets and is likely to accelerate and expand in influence for the remainder of this decade.

The research report, entitled 'Trading Up: Trends, Brands, And Practices - 2004 Research Update', brings new information on how and why companies pursuing new luxury strategies seem to consistently outperform competitors. These players' premium quality, higher-priced goods and services not only win devotees among middle-market consumers but also compel them to spend more on certain items than they have ever done before - consequently spending less on other items that are less important to them.

In particular, the research update explains:

  • How the 'trading up' phenomenon is polarising entire product categories, creating opportunities for growth almost exclusively at the top and bottom ends of affected markets.
  • Why a steady flow of new luxury brands continues to emerge and meet with consumer enthusiasm rather than price-sensitivity.
  • Why the spectrum of product and service categories vulnerable to new luxury entrants will continue to expand.
  • How the consumer behaviours associated with trading up are apparent and growing in major economies beyond the USA as well.

Long term changes
"It's now clearer than ever that the new luxury phenomenon is not an anomaly but rather a structural, long-term shift that will continue to reshape the consumer economy for the foreseeable future," explained BCG partner Michael Silverstein. "In fact, the socio-economic drivers of new luxury - including increased wealth, changes in family structure, and the heightened influence of women - are persisting and accelerating globally."

Moreover, according to Silverstein, companies that deliver superior offerings in their categories will increasingly outperform their competitors in terms of sales growth, market share, profitability, and total shareholder return.

Key findings
Among the report's key findings are:

  • New luxury goods typically account for 20% of a category's unit volume, 40% of its dollar volume and 60% of its profits.
  • A new luxury 'pioneer' in a particular category (e.g., Starbucks in premium coffee) stands to reap 80% of that category's profit pool.
  • The size of the new luxury market in the USA in 2003 topped US$400 billion, and will continue to grow at approximately 15% per year.
  • BCG predicts that the total new luxury market value will reach US$1 trillion by the end of the decade.
  • The top 15 new luxury players in the USA (including companies such as Coach, Starbucks, BMW, and Williams-Sonoma) reported annual sales growth of 19% during 2003 compared with only 3% growth in the nation's GDP for the same period.
  • Over the past three years, the same 15 players delivered to their shareholders a 26% median annual return, compared with a 4% median annual return for the S&P 500.

Other top players cited in the report include PF Chang's, Jet Blue, Panera Bread, Callaway Golf, Cheesecake Factory, Bath & Body Works, Lowe's, Costco and Boston Beer.

Middle-market squeezed
As more new luxury goods flow into the market, they polarise entire categories, sending nearly all of the growth and profit opportunities to the high and low ends of the price spectrum, according to the report. This means that companies offering conventional goods will increasingly become 'stuck in the middle', and may struggle to survive.

"Middle-market consumers pay significant premiums for new luxury goods because they can also 'trade down' in other categories that are less important to them," concluded Silverstein. "For example, a high-school teacher may save up to buy a new BMW 300 series convertible but choose the cheapest socks and t-shirts available at Wal-Mart."

European markets
The report estimates the size of the new luxury market in Europe to be some US$400 billion - approximately the same as it is in the United States. But there are some notable differences. In Europe, there are still fewer households with incomes equivalent to US$50,000 or more, which means that fewer Europeans regularly trade up in multiple categories.

There is also a higher percentage of senior citizens in Europe; this group retains a significant amount of purchasing power and is likely to play a more influential role in the adoption and acceptance of new luxury brands than seniors are in the USA - for the short-term, at least.

The report's findings build on concepts that BCG has been examining for the past decade through research and client work, and which were the subject of the recent book, Trading Up: The New American Luxury (published by Portfolio).

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