Introduction to the Paperback Edition

We wrote Trading Up in 2002 and the hardcover edition was published in the fall of 2003. It was a time when the United States was preparing for, and then conducting, war in Iraq. One of my partners at The Boston Consulting Group (BCG) called me during that period and said, “Michael, do you really think this trading-up phenomenon is going to last? The world is in crisis.” I replied, “Trading up is one of the most powerful and durable economic phenomena of our times.”

Even then, as we were entering this period of great change and disruption, we were certain that America’s middle-market consumers would continue to pick one, two, or three categories of goods in which they would “distort” their spending to a higher percentage of their disposable incomes than one might expect.

As much as we believed in the phenomenon, however, we were a little cautious in predicting what would happen over the next five years. In fact, we were in for some big surprises about just how much the phenomenon would grow and how intense the movement (we didn’t call it a fad) would become. We couldn’t predict, for example:

• The buoyancy of spending. We were surprised by how people continued to spend on premium goods, no matter what was happening in the political, economic, or social environment.

• The lack of dependency on housing value increases. Many observers argued that trading up was largely fueled by an unsustainable increase in housing prices. But even when housing valuations took a hit, trading up continued.

• Continued real income growth based on education. There is a direct correlation between education level and income. Trading-up consumers tend to be well-educated and, thus, command higher incomes and maintain higher spending levels. They “protect” the luxury items in their household budget so they always have a taste of the good life, but they also are able to save some money every month.

• The ferocity with which women drove and defined the market, propelled by education and earning power.

• The impact of younger and older consumers on trading up. Teenagers who have as much as $600 a month to spend on whatever pleases them, and baby boomers whose wealth is increasing and expenses are decreasing, are big trading-up consumers.

Underlying it all was the pull of the four emotional forces—the need to “take care of me,” to connect, to quest, and to seek individual style—that have become the siren songs for so many. Trading up, as the world came to understand, is not about wanton self-indulgence, materialist lust, or thoughtless consumerism. It is about consumers buying a few goods that make a difference in their lives.

Trading Up Continues and Becomes More Complex

Leaders who opened their eyes to the movement when it was still in its infancy grew their companies, expanded whole categories, and helped create an explosion of trading up.

In 2003 we estimated that the twenty-three categories of goods and services that constituted the heart of the New Luxury segment accounted for sales of $400 billion in the United States. We predicted it would grow at the rate of about 15 percent per year and would reach $1 trillion by the end of the decade. We developed The New Luxury 15 Index, a group of fifteen publicly traded companies that create premium goods in a variety of categories. We found they achieved an average annual sales growth of 19 percent from 2002-2003, significantly higher than the 3 percent growth in the GDP. These companies also did well by their shareholders, achieving a median total shareholder return (TSR) of 26 percent for the three-year period of 2001-2003, versus a 4 percent median annual TSR for the S&P 500.

Since 2003, the trends have continued more or less as we predicted. Wealth and discretionary income have steadily climbed in this country. There are 10 million households that take in more than $100,000 each year. Trading-up spending accounted for about 21 percent of the $3.5 trillion Americans spent in 2006—some $730 billion, up from $670 billion the year before—in key New Luxury categories, including homes and home renovation, transportation, food and beverage, travel and entertainment, personal items, dining out, home goods, and apparel and other fashion items. And New Luxury is becoming a presence in many categories beyond the twenty-three we originally studied, such as financial services and health care.

The trading-up phenomenon has proved to be not only fast-growing, durable, and widespread, but it has also become more complex. As we described in Treasure Hunt, the follow-up book to Trading Up published in 2006, consumers have become so savvy that they are scrutinizing every purchase they make with tremendous care and discernment. They regularly trade up, as we know, but they also have no compunction about trading down—spending the least amount possible for the goods and services they need. The trading-down market also expanded, rising to $1.2 trillion in 2006, from $1.1 trillion in 2005. It accounted for 33 percent of discretionary spending last year, compared with 32 percent in 2005 and 31 percent in 2004.

As trading-up and trading-down activity became more and more widespread, however, another phenomenon began to intensify: “death in the middle.” We saw that discretionary spending on traditional, middle-market products and services—like jeans and cars—was spiraling downward. In 2004, “middle” products accounted for 51 percent of consumer spending. That figure dropped to 48 percent in 2005 and to 46 percent in 2006.

But those companies that have escaped the “middle” and been successful at creating New Luxury goods have continued to outperform their competitors. One of the companies featured in this book, Coach, had a market value of about $2 billion when we first began discussing them. Coach executed a trading-up strategy with incredible boldness, vision, and relentlessness, and has become one of the iconic brands of New Luxury with $2 billion in revenues, a 77 percent gross margin, and market valuation of some $14 billion.

Trading Up in Markets Outside the United States

We have seen that trading up is not a United States-only phenomenon. It is as relevant and powerful in Europe, Canada, Australia, Japan, China, and India as it is in the United States. The socio-demographic trends that drive trading up in other geographies are similar, with only minor differences in degree and rate, to those that drive trading up in the United States. And the size of the trading-up segment in these geographies is about the same as it is in the United States.

In 2006-2007, we conducted a large-scale, quantitative survey of consumers in China, supplemented by in-depth interviews with women and men throughout the country. Consumers there have experienced tremendous growth in personal income and have enough discretionary wealth that they are beginning to spend on premium goods and services that they believe will help them fulfill their dreams. The greatest opportunity in China is for trading-up goods, particularly in consumer electronics, personal care, apparel and footwear, and food and beverage. As Chinese consumers become more and more focused on issues of product quality and safety, the value of well-known and trusted brands has grown dramatically.

Around the world, then, companies are looking for the New Luxury “sweet spot” that enables them to move off the traditional demand curve and achieve high margins and high volumes at the same time.

A Strategy and a Set of Practices

How do they accomplish their goals?

We have been lucky enough to work with many companies as they have turned their attention away from the “middle” and focused instead on trading up, and helped them create several billion dollars’ worth of premium products and services for the trading-up consumer. We saw entrepreneurs who demonstrated energy and imagination in the pursuit to become rich, successful, and highly influential. Large incumbents, too, found they could energize themselves by creating goods that trading-up consumers eagerly want to buy.

Leaders in companies around the world have adopted the ideas presented here, adapting them as needed to their industries and markets, and have developed a systematic management process— based on the ladder of technical, functional, and emotional benefits— for creating premium goods and connecting them with consumers. They see trading up as a strategy and consistently follow a small number of practices:

• They deliver genuine technical, functional, and emotional differencesin every product or service they offer.

• They target their consumers tightly, ignoring traditional market segmentations and looking for common attitudes, spending patterns, and habits.

• They create appealing identities, rich graphics, stunning retail presentations, and engaging shopping experiences.

• They produce a stream of innovation.

• They put cost into their products—investing in better raw materials and imaginative design—and gain a return on the investment on the sell side.

• They create product apostles early, during or before the launch of their goods and services. The apostles act as their compass for market truth.

Looking Forward

Now, with five years of longitudinal data under our belts, we are more convinced than ever that the trading-up phenomenon is a fundamental, ubiquitous, and long-lasting aspect of our consumer-driven global economy.

Trading up is driven by the middle-class consumer who is educated, discerning, and ready to engage in the goods and services they consume. They are relatively affluent—earning $50,000 and above a year. They balance their budgets and trade down in more categories than they trade up in. They use goods to help alleviate the stresses of modern life and to help realize their aspirations, but, for the most part, they do not fool themselves that such goods solve their root problems or take the place of essential needs such as wellness and human connection.

We continue to believe that trading up is a positive phenomenon. The presence of New Luxury goods brings benefits to people at all income levels. By polarizing the market, low-cost goods become more available and are of higher quality. And the pressure from the most affluent consumers stimulates and accelerates innovation, particularly at the high end, which cascades downward to lower-priced products—making innovation more affordable and available to more people.

Trading up is not only a positive force, it’s global and here to stay. For business leaders, it can represent a competitive threat. Or, it can be seen as an opportunity to grow your business, transform your category, and connect with consumers worldwide.

The best is yet to come.