Luxury for the Little People
Michael J. Silverstein likes the finer things in life. A practice leader at the Boston Consulting Group in Chicago, he is co-author of Trading Up: The New American Luxury. The forthcoming book argues that selling upscale products in high volume -- and at a great markup -- is the best strategy for growth today. In 23 consumer categories, he notes, "new luxury" products and services account for 19% of sales and are growing 10% to 15% annually. Silverstein explained the strategy to senior editor Mike Hofman.*
What is a new-luxury product?
It provides a superior experience -- functionally and emotionally -- to users, and it's priced accordingly. And though it's distinctly better than the mass product, it's available for mass consumption. Panera Bread, Williams-Sonoma, Coach, and Aveda are new-luxury brands.
How big is the market?
Seventy-seven million Americans are at the sweet spot of new luxury: people with incomes of at least $50,000. But if you go to O'Hare and stand by Starbucks, you'd be amazed at the number of mechanics who come into the terminal to order double lattes. So everybody is a potential new-luxury consumer in one or two categories.
How do new-luxury companies control costs?
Since their material costs are higher, they often invest less in fixed assets. So while Budweiser owns 100% of its U.S. capacity, Sam Adams owns 45% -- but Sam Adams charges $6.99 a six-pack, while Bud is $14 per case.
Your research shows that these companies have a great return on investment.
Yes, the best new-luxury companies earn a 20% after-tax return on sales and a 40% return on equity. Individual Panera stores, which sell warm, handcrafted bread, have roughly the same volume as the nearby McDonald's, and their price point per customer is 50% to 60% higher.
How does a company get on the path to new luxury?
Often, a CEO has a vision of taking his company's mediocre product, ripping it to shreds, and starting fresh. Then you'll see distribution that begins with limited availability and relies on apostle marketing -- people telling friends to try a product.
Are we going to see new-luxury services, too?
You see it already in health care and financial services. Merrill Lynch has a program for the upper-middle market -- people with $100,000 to invest -- that helps them get access to the funds the big boys get.
But isn't luxury undercut by ubiquity? If every teenager has a Burberry scarf and a Tiffany bracelet, don't those brands lose their value?
Well, Burberry recovered by becoming a new-luxury brand -- it was dead 10 years ago. And Tiffany reconnected with a new generation at a low price point. Old luxury was about scarcity, a passé concept. Companies that play that game don't have a bit of growth.