It's Official! Trading Down Is The New Cool
by Alf Nucifora
For the past decade, an analysis of retail data has shown a clear propensity on the part of America's retail shoppers to cross-shop within general merchandise categories. Even the rich and affluent will buy their high-involvement couture outfits from Neiman-Marcus while shopping at Target for everyday kids clothing which is destined to be outgrown within the month. But now comes the phenomenon of "the treasure hunter" so ably described by Boston Consulting Group's Michael Silverstein in his new book "Treasure Hunt: Inside the Mind of the New Consumer".
While economists have noted, with nodding heads, the continuing upward climb of the "trading up" segment, expected to be a $1 trillion category by 2010, few, until now, have recognized the more powerful growth rate of the "trading down" segment which is growing at double the rate of its "up" counterpart and is projected to hit $1.5 trillion by the end of the decade.
Who are they and why do they buy?
According to Silverstein, 86% of Americans "trade down" in five or more categories while 62% "spend up" in a handful of categories that matter most to them. Interestingly, the top categories in both segments are the same: homes; transportation; dining out; food and beverages; and personal items including apparel and personal services.
Consumers will "treasure hunt" for varying reasons. For some it's the willingness to "trade down" on non-essential purchases (e.g., inexpensive, everyday wine at Cost Plus) in order to "trade up" for more expensive, "reward" buying decisions (e.g., a Prada handbag). For others, it's the pure thrill of the hunt, rooting out a prestigious luxury brand treasure at a factory outlet store, a marked down Armani suit, for example. Some will also buy in bulk for a rainy day, hence the need to stockpile 12 packs of Bounty kitchen tissue.
Silverstein also maintains that marketers spend too much time marketing to men, and ignoring women who either control or significantly influence the purchase decision in the home. In fact, the book points out that not only are women's earnings growing faster than men's, women now account for 75% of discretionary spending in developed markets.
Irrespective of who's doing the buying, the desire nowadays is to find the "treasure" and not just the "bargain" as in yesteryear. Consumers define "treasure" as a combination of "best value", "best quality" and "best price", or in other words, determining right price for the right product at the right time and place.
Why is it happening?
Silverstein has coined the phrase "artful consumerism" to summarize the influences that have helped form today's "treasure hunter" personality and mindset. These include the doubling over the past 30 years of real income which has, in turn, released more funds for discretionary spending; the rapid take-off of "big box" discount retailers like Wal-Mart and Costco with their emphasis on everyday low pricing; the continued rise of an affluent middle class that has the willingness, desire and ability to travel and sample life's experiences; and the growth in home values that has inspired Americans to invest more heavily in their homes and place more emphasis on life in the home and the art of cocooning.
What about the middle?
While the traditional mid-level marketer is hardly doomed, the future is not rosy. In spite of collapsing sales volumes, revenues and profitability, the mainstream supermarket and department store emporiums will continue to survive and generate cash flow. Some of the smarter performers in the segment, like Nordstrom, HEB Supermarkets in Texas and Publix Supermarkets in the Southeast have developed the art of maintaining customer loyalty by providing superior customer service while reaching out emotionally and empathetically to the buyer.
For the majority of the still-vast middle market, the future is one of shrinkage. As an example, while Wal-Mart and other price-oriented retailers have experienced annual growth rates of 20%-40%, traditional supermarkets have lost 30 market share points, with the average department store losing 50 share points since 1970.
The lesson out of all of this for marketers and retailers is to escape the no-man's-land of the middle. At one end there's the emerging "new luxury" category where goods and services are priced 20% to 40% above average and where the category continues to grow at astonishing rates up from $400 billion in 2003 to $605 billion in 2005. At the other end, there's the even faster growing "treasure" segment. "Target one or the other or both," says Silverman, "But don't get caught in the middle."
What's a marketer to do?
According to Silverstein, marketers are failing to exploit the emotional bond between consumer and brand. "Most companies have too superficial an understanding of who their customers are. They focus on "markets", not real people. They need to come from behind the one-way mirror of market research and feel the emotion of shopping and spending." Silverstein's point has been backed-up by the late retailing genius, Stanley Marcus who decried the current practice in department store retailing whereby merchandisers responsible for product selection and ordering no longer touch the customer, but instead, rely primarily upon computer data to do the job. Understanding of customer emotion plays second fiddle to regression analysis. No wonder the excitement has vanished in most mainstream department stores.
Silverstein advises marketers to leverage the emotional side of spending by creating a regular cycle of innovation for premium-priced, "trading up" products, (as in the case of Coach leather goods and accessories), or relentlessly driving down costs while still offering a product that's good, satisfying and appealing, (as in the case of Trader Joe's). Says Silverstein, "The new cheap is not just cheap; it's good."