Study: Luxury Segment of Economy Hits $525B in 200
New York, NY, January 28--The "New Luxury" phenomenon has become such a defining force in the consumer economy that it represented approximately $525 billion in sales in the U.S. in 2004, up from $450 billion in 2003, and will probably reach $1 trillion by 2010.
That's according to research by The Boston Consulting Group (BCG) presented to the National Retail Federation this week by BCG Senior Partner Michael Silverstein, co-author of Trading Up: Why Consumers Want New Luxury Goods -- and How Companies Create Them (Portfolio, January 2005), a new edition of the best-selling 2003 book.
The phenomenon is, in part, a result of middle-market consumers' increasing, and now entrenched, pattern of "trading up" and "trading down" in order to acquire and enjoy New Luxury goods that matter to them. A consumer might buy grocery staples at Wal-Mart and sports clothes at Target in order to afford other goods that cost 200% more than average ones but have real technical benefits that satisfy emotional needs. These New Luxury items range from entry-level BMW cars, esoteric teas and Coach bags to spa vacations.
"New Luxury is affecting -- and disrupting -- just about every category. Each consumer has her own personal calculator to help her trade up in a few categories and trade down in others. Everyone does it in her or his own way," said Mr. Silverstein.
"The upshot is that the traditional mass market category will hollow-out: Growth will be, nearly exclusively, in the New Luxury end and in the low- price, value end of the consumer market," he added.
The more than half a trillion dollars that Americans spent on New Luxury goods last year were spread among a continuum of categories. Mr. Silverstein cited the following estimated breakdowns of spending including $100 billion on homes and new luxury home renovations.
"Nowadays, the middle-market consumer is just as likely to spend $3.49 on a bag of fresh fixings for Caesar salad than $0.99 on a head of iceberg lettuce," said Mr. Silverstein.
According to Mr. Silverstein, New Luxury goods account for 20% of category's unit sales, but 40% of its dollar volume and 60% of its profits.
"Take a look at the pet food segment. Premium players, like Diamond Dog Food, account for quarter of the segment's sales but more than half of its profits," he said. "New Luxury is the one place where strong volume and exceptional margins can converge."
"Along with the upside for committed New Luxury players -- ones that understand and respect how sophisticated consumers are today -- there's a tremendous downside for other players, including some of the great mass market names," Mr. Silverstein said.
In 1985, the top-three retail players, in terms of market capitalization, were mass market stalwarts: Sears, Roebuck and Co. ($14.2 billion market cap); Wal-Mart ($9.0 billion market cap); and McDonalds ($6.9 billion). In 1995, the top three were Wal-Mart ($46.7 billion); McDonalds ($31.6 billion) and New Luxury upstart Home Depot ($21.6 billion).
But in 2004, the top-three were: Wal-Mart ($233 billion), which is at the center of the trading down part of the New Luxury trend; New Luxury player Home Depot ($81.3 billion), and Target ($41.5 billion), which offers both high-design
New Luxury products and is a center of fashionable trading down. McDonald's ranked only sixth, with $34.7 billion in market cap. Four of the other top-10 2004 retailers are New Luxury purveyors: Lowe's ($40.8 billion); Amazon.com ($18.7 billion); Costco ($17.2 billion) and Best Buy ($16.1 billion).
"A truly historic realignment of consumer needs and business capabilities are behind the New Luxury phenomenon. There are drivers on the demand side and on the supply side," said Mr. Silverstein.
