Opportunity Knocks as Consumers Embrace 'Trading Up'

There has been a dramatic paradigm shift in consumer behavior and spending that benefits the decorative plumbing and hardware industry, related Michael Silverstein to nearly 400 industry professionals attending the September 16-18 Decorative Plumbing & Hardware Association Annual Conference in Palm Springs, CA. Silverstein is recognized as one of the foremost authorities on luxury marketing and retailing, having penned, with co-author Neil Fisk, the ground breaking work entitled Trading Up: The New American Luxury.

Based on more than 10 years of consumer research and as head of the Boston Consulting Group's worldwide retail and consumer practice group, Silverstein explained the shift that has occurred. "As never before, America's middle market consumers are trading up. They are willing, even eager, to pay a premium price for a remarkable kind of good that we call New Luxury - products and services that possess higher levels of quality, taste and aspiration than selling conventional goods." Products featured in a decorative plumbing and hardware showroom appeal to the new luxury consumer.

A central theme of Silverstein's keynote address at the DPHA 2005 Conference was that conventional thinking in the manufacturing, representation and retailing of luxury products no longer applies. The middle market is trading up to higher levels of quality, and this is a phenomenon that cuts across every product category. There are more than 47 million households in America with incomes of more than $50,000 that have the means and desire to trade up to new luxury products. Trading up occurs in scores of categories, at prices ranging from just a few dollars to tens of thousands.

Determining Factors

A number of social, demographic and economic factors are responsible for the new luxury phenomenon. Silverstein explained that there has been a historic realignment of consumer needs and business capabilities. Real income from 1970 to 2000 climbed at the fastest rate in history. Home equity has exploded. The average net worth of the American homeowner is the highest in the world, and most trading up consumers have more disposable income thanks to Home Depot, Wal-Mart, Target, Costco and other discounters that have shattered traditional supply chains and accessed global resources to lower costs for all product categories. Just as significant to those willing to trade up or "rocket" - that is, spend a disproportionate amount of their income for products that provide technical and emotional benefits - is that consumers at all income levels desire to trade down for products that either are viewed as a commodity or perceived as having little to no value.

Trading down is an important concept for decorative plumbing and hardware professionals to understand because it provides the resources for the middle market to trade up. When consumers trade up, the place where they trade up the most is the home. The kitchen is the number one venue for trading up, followed by the bathroom. Silverstein related that, since 1970, there are 45 million bathrooms in American homes that have not been renovated. Consumers will continue to upgrade because they realize that they can make more money by investing in their home than by buying stocks or mutual funds.

Key Connections

Silverstein explained that new luxury has little to do with luxury at all. Old luxury is aristocratic. Old luxury products connote status and wealth and are purchased by a small slice of the demographic pie. New luxury is the by product of a consumer-driven transformation that delivers premium prices and premium profitability because the products deliver "real" technical, functional and emotional benefits.

Consumer research Silverstein conducted at the Boston Consulting Group clearly reflects that consumers will pay more for superior products. The figures he cited are that 20% of purchases are in the premium category, representing 40% of the category volume and 60% of the category profits.

Superior is the operative word here. Today's consumers are smarter. They come to showrooms better prepared - either with a third party consultant (decorator or designer) or with an abundance of research garnered from the Internet, magazines, cable television and other sources. Granted, most consumers will not have the range of technical experience and expertise as a seasoned showroom professional. However, they are not clueless, either, and they can spot a phony a mile away.

A lesson that Silverstein taught DPHA members is the need for showroom staff, representatives, customer service personnel and others who interact with the consumer to be on the top of their games. The industry needs to train staff members to use superior knowledge of products and performance capabilities to succeed in the new luxury world. He used the phrase "knowing it cold."

The Internet is not the threat that many believe it to be. Silverstein said less than 15% of new luxury products purchased for the home are sold online.

The lesson for decorative plumbing and hardware professionals is to understand that consumers go to the Internet to quest and connect. New luxury consumers who trade up want products that deliver technical, functional and emotional benefits. The four significant emotional drivers that fuel the new luxury consumer are: taking care of me, connecting, questing and individual style. Products sold in decorative plumbing and hardware showrooms fit into all four categories. Trading Up explains, "The emotional spaces are closely related and do not have sharp boundaries between them. The woman soaking in the bath not only is taking care of herself, she also may be preparing for a moment of connecting, wanting to feel, look and smell good before dinner with a date."

Silverstein noted that the 47 million trading up consumers will pay a premium to recreate a wonderful emotional experience. Online retailing does not as yet deliver the emotional gratification that new luxury consumers demand.

That also may explain why Silverstein noted that traditional advertising and marketing approaches do not necessarily work for new luxury products. Silverstein advised decorative plumbing and hardware professionals to understand the importance of cultural icons such as Oprah Winfrey. Oprah tells her audience that it's okay to "take care of me," to spend on yourself and live your life to the fullest. The cover of the October 2005 issue of O (The Oprah Magazine) speaks volumes. "Age Brilliantly! From Your 20s to your 80s…

Live a love-filled life, learn something thrilling, knock someone's socks off, get smart about money, be your healthiest, most beautiful self." In other words, take care of yourself, quest, connect and make a personal style statement. Live the new luxury life.

Customer Attraction

Silverstein offered DPHA members many ideas for reaching the new luxury consumer. He stated that the new luxury winners offer rich and graphic consumer targeting that tells the story behind the product to make the important emotional connection.

The lesson for manufacturers, representatives and dealers is to make the showroom and displays visually stunning. Silverstein offered that the visually stunning retail experience is exemplified by the A+ shopping centers. For the decorative plumbing and hardware industry, displays are a big determinant in getting people to buy. Displays provide the opportunity to stand apart, to engage consumers and to make connections. Each player in the supply chain has an opportunity to contribute. Representatives who constantly visit showrooms can create value by offering advice to make the showroom more dynamic and offer feedback to manufacturers for display programs that are more compelling. Silverstein related that 60% of consumer decisions to purchase were influenced by the retail environment and displays. That may serve as another reason why Internet sales do not play a significant role in the new luxury home market.

Silverstein claimed that total customer satisfaction is another factor to winning in the new luxury environment. He dismissed the notion that a kitchen or bath renovation is a once-in-a-lifetime event. For the next five years, the trading up category will increase. The continuous stream of innovation and technological improvement will bring products to market that provide superior technical, functional and emotional experiences. New luxury consumers will be drawn to new products and quest for new experiences.

Current customers are the best source of market information for showrooms. Silverstein recommended that new luxury players continuously survey customers to determine satisfaction levels and verify whether they would repurchase the products again from the same showroom. Understanding degrees of customer satisfaction, the causes of consumer pain and the reasons for a dynamic retail experience will position new luxury winners to capture a larger segment of the market.

By no means did Silverstein relate that the process was easy. However, he also dismissed the idea that a small business was not capable of dominating a market segment. The examples he used as new luxury winners started as small businesses. Victoria's Secret was a small lingerie store. Viking had humble beginnings in a quiet Mississippi town. Williams Sonoma began as a single specialty store in northern California.

Trading up and new luxury are not about size. Michael Silverstein concluded, "We are in a unique industry, in a unique place and a unique time. We are in the center of the opportunity."

See related Industry Update, DPHA's Babitt is First Sales Rep to Lead Association.

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