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America loves to trade up

A $400 billion business headed to a trillion, the market for "trading up" is not about the rich or well-to-do but the 47 million Americans who comprise the middle class. They disregard regular dog food to buy their pet the premium stuff, for example, or spend thousands of dollars on a stove they'll barely touch.

Emotional needs are at the root of this new luxury spending, and the phenomenon of trading up is the subject of the book "Trading Up: The New American Luxury," by Michael Silverstein and Neil Fiske.

"Between 1970 and 2000, America got rich," Silverstein told attendees during his presentation at SG Cowen's recent consumer conference. Incomes experienced real growth during this period, and the flood of women into the workplace added a huge chunk of change to household, he said.

Discounters like Costco and Wal-Mart also have had a hand in this phenomenon, as their low prices allow customers to save money on some items so they can spend more on others. In 1970, the average purchase was 32 percent of the gross margin — in 2003, it was down 10 points.

Though manufacturers and retailers may feel this pain, customers gain, and Silverstein estimates that in 2001, for example, $100 million was freed up in this way.

The middle class, which he classifies as persons making $50,000 to $150,000, controls 65 to 70 percent of disposable income and is willing to spend. Though they are "very frugal and big savers," he said, they want to buy that home theater, go on vacation, whatever makes them feel good — "and they're doing that in droves."

People usually trade up in two to five categories, while trading down in 20, he added. A consumer may buy cheaper airfare online, for example, but stay in expensive hotels and eat well once he gets to his destination. A shopper at Costco may load up on tomato sauce, meat and paper goods, and then feel she's saved enough money to trade up in wine.

However, the categories a consumer may trade up or down in vary greatly. "There's no average customer — this is about segmentation."

It is applicable to any segment, he said, including such brands as BMW, Martha Stewart Everyday, Porsche, Panera Bread, Pellegrino, and Victoria's Secret. In general, trading up categories hold 20 percent of the market share or volume, 40 percent of the gross margin and 60 percent of the operating profits.

Bedding makes the top 10 in trading up categories, while bath linens fall into an area consumers trade down in, according to a survey from The Boston Consulting Group, where Silverstein is a senior vice president and global consumer and retail practice leader.

In the October 2003 survey, consumers reported bedding/mattresses as the eighth merchandise area they would either "spend as much as they can" or "spend more" on. Bath linens also placed eighth, but on the trading down list, where consumers said they would "spend the bare minimum" or "try to save a little money."

Another area that gets a lot of focus from this group is the home, particularly the kitchen. As incomes grow, so does the appetite for the kitchen, Silverstein said. While a representative kitchen in the 1950s cost $9,000 (in 2002 dollars), it went up to $57,000 in 2002, including custom cabinets and gourmet coffee makers.

The increase is "not because we're cooking more, but we want the comfort. Should we have the time to cook a meal in the future, we want the best oven possible."

Homes overall have doubled in size since the 1950s, though they now sit on smaller lots.

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