Thirteen

A Call to Action

It takes committed leaders and bold execution to seize the trading-up opportunity. But, as a result of the work we’ve done with our clients and the research we’ve conducted into the power of New Luxury brands, we’re convinced that the management methods, the product development processes, and the general operating style of many traditional consumer companies are not suited to the creation of New Luxury goods.

The time frames are too short and there is too much turnover in the management and functional teams. Too often, the people guiding the new product-development effort have an eighteen-month time horizon. They want to get in, make their mark quickly, and get on to their next promotion.

Managers are also compelled to plan using flawed consumer and market research. They try to find opportunity and achieve growth by asking consumers what they want instead of developing a better vision for the category and involving the consumers in refining that vision. Ask consumers what they want, and they will stare blankly at you. Engage them in the category and ask for improvements, and they will work with you. Most of the innovations in the thirty categories we have studied would have been killed by traditional customer research. There is an important role in connecting and understanding and involving the customer, but it’s a very different role than has historically been played in large packaged-goods companies.

Managers spend too much time analyzing their nearest competitors and developing new promotions to respond to the promotions their competitors are running. The really important competitors are off their radar screen. Managers are often unable to see their category in context and to understand major shifts in their consumer base.

Is a Premium Price Strategy Risky in the Current Global Economy?

The economic forces that permit trading up are not subject to moderate business-cycle forces. More than 25 million households in the United States have incomes over $75,000; these are the households that are driving the New Luxury movement. The men and women in these households are educated, well traveled, adventurous, and seek responses to their emotional needs. Although they may have suffered economically in the downturn, their overall net worth is slightly up, their incomes are growing in real terms, and they have been insulated from changes in the unemployment rate.

The forces that fuel trading up have been gathering steam for decades and will continue to gain power for decades to come. Women will continue to play an important role. People will continue to be pressured by the demands of work and family. On the supply side, global sourcing costs will continue to fall. Technology will continue to drive down product cost and features. The cascade of innovation from the high-end market to the middle market will grow increasingly shorter. The polarization of retail will continue to permit consumers to trade down and trade up.

Now is the best time to invest for growth in the coming upswing in the economic cycle, because it takes twelve to thirty-six months to develop a powerful, technically true, emotionally engaging New Luxury product. Consumers in the target market may be anxious, but they have money in their pockets, and they want to press forward. They will buy at any time and in virtually any economic cycle.

During the downturn from 2001 through 2002, for example, the dividing line between New Luxury and Old Luxury became clear. Many Old Luxury brands showed substantial declines while most New Luxury brands demonstrated their resilience and were able to grow. Why? Because they tapped into the emotional needs of their customers. And, as we’ve said, the performance of New Luxury companies has held during both weak and strong economic times. In 2003, the companies that constitute the New Luxury 15 achieved an average sales increase of 19 percent. From 2001 to 2003, they yielded a 26 percent median annual total shareholder return (TSR).

What Can Companies Caught in the Middle Do?

Ask yourself the difficult questions now.

Which side of the road do you want to play on? Who are your customers, and what are their hopes and dreams? Have you patterned the world, looking for solutions better than yours? Have you dumbed down your product in an attempt to maintain profitability? Have you stripped the competitors’ solution and rigorously gauged relative performance? Have you asked your product-development teams to dream? Have you pressed your organization for incremental profit growth and squeezed, squeezed, squeezed?

One of the biggest dangers for companies in the middle is the rules of thumb they develop about what can and cannot be—in terms of profitability, sales per square foot, and consumer experience. They define for themselves a very narrow range of possibilities, and that pushes them to reinforce the currently eroding position. They can’t break away and imagine a different world. But that’s what you have to do—imagine a completely different world where sales per square foot are higher than you’ve ever seen before, a higher profitability in percentage of sales and a higher consumer draw, higher repeat rate, higher loyalty.

Bring in new talent and tell them to create a business that’s going to make your current business obsolete. Become the outsider who attacks your own business. Give your team a chance to take whatever resources they want and to reject any resources they don’t want. Make them entrepreneurs and offer them tantalizing rewards to make it happen.

Most important for executives of companies caught in the middle: You need to dream about a different, better way.

The Urgency to Act

We hope readers will respond to the case studies and relate to the individuals highlighted in this book. But we hope for even more than that. Our wish is that many of you will start a New Luxury initiative in your own companies, and start it now. It might seem as if it would be easier and less costly to lie low and hope the New Luxury phenomenon passes by without affecting you or to wait for it to hit and then respond.

There are many proud and currently successful companies with wonderful histories who are choosing to ignore the New Luxury phenomenon, but they do so at their peril. Middle-market consumers have tremendous resources and can make trading up happen in any category. Entrepreneurs have great access to capital and can quickly and cheaply prepare prototypes, test the market, gain first mover advantage, and own New Luxury.

It is hard to make an early move, but it is much harder to react to someone else’s well-developed, clever, emotionally gripping initiative. All too often you lose share, lose momentum, lose confidence, and lose customers.

So, we implore you, our reader, to sound the trading-up rallying cry with conviction, with purpose, and with all your heart.