Michael Silverstein -- Trading Up: The Consumer-Driven Revolution

Rotman School Lifelong Learning 2004, June 6, 2004, 10:05 a.m.

These participant's notes were created in real-time during the meeting, based on the speaker's presentation(s) and comments from the audience. These should not be viewed as official transcripts of the meeting, but only as an interpretation by a single individual. Lapses, grammatical errors, and typing mistakes may not have been corrected. Questions about content should be directed to the originator. These notes have been contributed by David Ing (daviding@systemicbusiness.org) at the IBM Advanced Business Institute ( http://www.ibm.com/abi).

Introduction by Roger Martin

• Senior with BCG, Chicago
• New book:  Trading Up, The New American Luxury
• • Companies creating premium brands that appeal to the mass market

[Michael Silverstein]

About frugality, not excess consumption

• Deciding categories that are personally important, and becoming an expert.
• Trading down in categories that are not important.

Need to get inside the heads of a small number of individuals

Framework:  technical, functional and emotional benefits

Premium market (20% to 100% higher price) is growing

• Mass market is dying.

Real technical benefits:

• Adding back cost
• Spending more to deliver better
• Raw materials, design, authenticity, being real and powerful
• This translates into functional benefits.

Consumers can describe functional benefits

• This allows an emotional halo.

Not a static position:  it's a perpetual war.

• Winners are taking 20% of volume, and 40% of profits, taking 60% of category profit.
• BCG was doing a study of a troubled food company, and this translated into a $200M opportunity.
• Then did work for Victoria's Secret, which was reaching a plateau
• • Already had 2/7 share:  weekends going out, weekdays being comfortable.
• Introduced Body by Victoria.
• • Microfibre, comfortable, sexy and glamourous.
  • Women though probabilities were lower on Sunday to Thursday.
  • This is all about insurance, because you'll never know what will happen.

Consumers decide what's important.

• They trade up in 3 or 4 categories
• $50K to $150K incomes
• 52M or 53M households, that control 70% of discretionary income.
• Households:  Internet-savvy, read, tell others people
• Homes, kitchens, home theatres, luxury cars, eating out at slightly better restaurants, because she's too busy to cook.
• • e.g. P.F. Chang:  most profitable restaurant change.
  • • 100% cash return
    • Healthier food, family eating together
• Organic, spending money on yourself.
• Distortion of your income:  what's important
• 1973 to 2003:  middle class got rich
• • Newspapers say they got stress, but they did get rich.
• 100% recession proof
• • 2002, trade-up category had 30% growth, while middle market had -1%
• Sucking sound at the top and bottom of market.

Son Charlie came into office on Sunday morning

• Doing e-mail.
• Golf is Charlie's favourite sport.
• • When we're older, we're not going to have anything to do together.
  • Charlie might become a golf pro.
• Went to golf school
• • Charlie had a natural swing.
  • Other person put ball into woods, threw down clubs.
• Have now become a golf nut
• At 2 p.m., snuck out to Glencoe golf course.
• • Wanted to play a fast game, met Jake
  • Has Callaway, etc., Jake hits 330 yards
  • Got golf anxiety, managed 150 yards
• Jake is a carpenter, 6 a.m. to 1:30 p.m., making $52K per year, and he's single.
• • Plays golf 9 months per year, twice on Sunday
  • Jake distorts his income:  $7K on golf, on $40K net income
  • He buys the clubs that any CEO can buy, but he can hit them better.

Ely Callaway:

• Was CEO of Burlington Industries.
• Got a $2M golden parachute.
• • Divorced wife.
• Move to Temucula (near San Diego), where no one creates wine.
• • Created a new technology, created a wine.
• Sells winery for $80M.
• • Divorced second wife.
• On golf course, buys Hickory Stick golf club.
• • Found designer, who had greater oversized tennis head.
  • Built a club with a 25% larger head, different way of putting shaft into
  • Demonstrably superior, pleasingly superior.
  • Club is easier to hit.
• Titlist had most expensive driver, $200
• • Callaway priced at $399
• Goes from #445 on equipment manufacturing to #1 in four years.
• • Goes IPO, has $1.6B

Proceeds for the book go to the Rotman School

[Tapes not shown]

This phenomenon is happening in a wide variety of products, from durables to disposables.

Chart:  consumers are trading up, trading down, or not buying at all.

• In sit down restaurants, people are trading up.
• In cars, an escalation up.
• • Moving from Pontiac to BMW.
  • BMW from $5B sales to $50B

Dogs:  have a $2000 dog, 4 centuries of breeding

• You don't feed this dog Purina.
• He gets a kibble that is 3x more expensive than Purina, plus white meat chicken because he likes it.

Realignment of consumer needs and business capability

• 53M household is not spending out of league, not crazy consumption.
• It's about consumers deciding that they like Starbucks, or Second Cup.
• • Maxwell House and Folgers are competitors.
  • Starbucks makes more money that Maxwell and Folgers.
• Mass markets:  Walmart, Costco, have lowered costs of most goods.

Women are the driving force behind luxury.

• In household where only the man works, zero increase in real income.
• Women increase the real income, but do 85% of household chores.
• • 28 hours per week of home work, in addition to 40 hours in day job
• Encouraged by Oprah:  girl, it's okay to take care of yourself.
• College
• Growth in travel
• • Come home and want to change the way we live.

Barriers to entry in markets is declining

• Requires conviction.
• Big companies are ignoring this.
• Have inventors with passion.

Fred Carl, who lives in Jackson, Mississippi.

• A home builder
• Building a home, wants to make the kitchen beautiful.
• • GE ovens are $350, control temperature plus or minus 30 degrees
  • Cooking a turkey with 30 degree variance:  only 10% cooked perfectly
• Viking oven:  an insurance policy, $4125 for oven
• • 15,000 BTU on each cooktop
  • Some single ovens, some double ovens.
• Less utilization than GE ovens
• • Women are deskilled, and don't use the oven
• Base technical:  a commercial grade oven
• Functional:  fast heat
• Most important:  puts a crown on the owner

Why the movement now?

• Stressed and tired
• Insecurity
• Isolated and fearful
• Underappreciated

Emotional drivers

• Individual style
• Taking care of me
• Questing
• Connecting

Panera Bread:  came out of no where

• Was going to BMW, went to Woodbridge NJ
• Place was packed at lunch
• Sat with three women, all admin assistants, all had boyfriends, not happy in relationship, not happy in jobs, yet happy and smiling
• • Asks why are you here?
  • Spent $8 or $9 for lunch.
  • The chicken in the sandwich has grill marks for me; not iceberg, arigula; not Hellman's mayonaise, but pesto mayonaise made today; and foccacia today.
  • Thought of lunch in Italy a year ago on a mountain -- don't have the boyfriend.
• The "me" button.
• • Women in sequential divorces.

Questing:  my home is my castle

• Home Depot in the sweet spot.

Individual style

• Armani slacks, as opposed to Tiger Woods
• Financial Times "How to Spend" section:  this is trading up

Exploiting trading up:

• Emotional, functional and technical benefits.
• Can also trade down:  from BMW 5-series, make 3-series and 1-series
• Mastige:  mass with prestige
• • Today, $2.5B category in prepared salads -- not great yet -- but has interesting packaging
  • $5.58/lb vs. $0.99/lb

Neil Fisk, co-author, went to the Limited, Bath and Body Works

• Was selling apple shampoo to babysitters
• Wexner put together a strategy, and after 1-1/2 years, the CEO did nothing.
• • Hired Neil to do it.
• Created the world's best candle, $25, when nothing else sold above $16
• • Candles cost $2.10 to produce
  • Candle sold $400M in 4Q, comp-store sales up.
• Now into aromatherapy, skin care
• • Columbus Ohio, Easton Mall, experimental store.
  • • Non-proprietary, massages and facials

A lot of market research will reveal nothing about trade-up opportunity.

• Don't need to splash, need to place product in consumer's hands.
• Need to be precise in target
• Need to find cravers:  people who will spread the word.
• Can be fearless in pricing.

Checklist for growth:

• Deliver technical, emotional and funcdtional benefits.
• Rich and graphic consumer marketing.
• Visually stunning at retail.
• Continuous stream of innovation
• Have to constantly look out in the world:  competitive patterning.
• Don't have to first, but have to be fast.
• Extend, dominate.
• Own everything about this consumer.
• Engage, with the consumer saying yes.

[Questions]

Upscale products, upscale marketing

• Yes, visually stunning
• Want consumer to understand emotional, functional, technical benefits.

Demographics.  Observations beyond consumer goods to business-to-business?

• Demographics:  narrowly define the market
• • Goes against convention
  • Victoria's Secret, by being narrowcast to an attractive market (26-year old single profesional women), will get everyone.
• e.g. Goldman Sachs
• • Target to wealthy people, hang up on others
  • Need to target 7% to 8% of the market.
• B2B:  e.g. independent trucker
• • Spends $100 per week on truck, sleeps there
  • Willing to pay 100% premium for his cab.
  • There will be other product categories, where end users are involved.
  • e.g. premium tools, 400% price premiums.

Financial services?

• Some becoming more commodity.
• Need a better service bundle.
• Preferred mortgage vendor, but people on the Internet
• This isn't a sweet opportunity

If have 5-series and then 3-series, how to deal with cannibalization if the 3-series is too good

• BMW is a great example.
• Later this year, will have 1-series at $24K, Pontiac killer
• Also have invested at getting features to 6-series and 7-series
• • Technically better cars.
• Very segmented in marketing
• • 5-series and 7-series are 10 year different
  • 1-series will be different
  • Mini Cooper is an icon car

Shift to emotional needs?

• Focus groups:  don't find them useful anymore
• • One or two people dominate conversations
• Have moved to one-on-one conversations
• • Dissecting individual preferences
• e.g. went to women, had them open up the lingerie drawer
• • Occasion of use framework that can from one-on-one interview, that wouldn't have got from a focus group.
• North Americans will reveal themselves
• Also, participation research:  go shopping with consumers, see what they do
• • Halter monitor, measuring pulse rate
  • What stimulation in the store is causing a raised pulse?