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.