APPLIANCE Line
Trading Up (or Down?)

Editorial from Diane Ritchey, Editor, APPLIANCE Magazine

There appears to be a new marketing phenomenon affecting the inside of the average American home: middle-market consumers are increasingly willing to pay significantly more for ultra quality, especially with appliances.

According to the book Trading Up: The New American Luxury, by Michael J. Silverstein and Neil Fiske, with John Butman (to be published in October, 2003), a redefinition of luxury taking place in the home is one that is happening fast in the U.S., and it’s driven by the enormous spending power of households earning more than U.S. $50,000 per year. The New Luxury, the authors say, is the phenomenon of middle-market consumers escaping the stresses of modern life by choosing high-quality, high-performance, emotionally satisfying goods and services. The authors say that it will give America a competitive edge advantage vis-à vis other countries, but not for long.

The authors report that kitchen remodeling has topped the list of home improvements, with more than 65 percent of all projects in 2000 involving a kitchen renovation. The new kitchen is now the primary space for connecting - the command center of family interaction and coordination, which is why professional-grade appliances such as Sub-Zero refrigerators, Miele dishwashers, and Viking ranges - and corresponding products from Whirlpool, GE, Maytag, Jenn-Air, and others - have grown so quickly in popularity. In refrigerators for example, the premium and super-premium segment (units more than U.S. $1,000) grew from 18 percent of units sold in 2000 to 26 percent in 2002, with an annual growth rate of 15 percent. “For the most part,” the authors say, “the innovation underlying this trading-up activity has been driven by category outsiders who have challenged and redefined the market, or by established players responding to their actions.”

Ultimately, the authors suggest that those appliance companies who fall into the “average consumer” trap will miss opportunities. “The new generation of appliances fulfills a compelling emotional need, and they [consumers] will trade up to it,” the authors say. “The result is the market polarization we have seen in every product category in which a New Luxury product has had success - growth at the extremes of the market and a declining middle segment.”

The winning practices of New Luxury home players, the authors propose, will be those who never underestimate the customer; shatter the demand curve; create a ladder of genuine benefits; escalate innovation, elevate quality, and deliver a flawless experience; extend the price range and positioning of the brand; customize the value chain to deliver on the benefit ladder; use influence marketing; and casually attack the category like an outsider.

When U.S. appliance retail giant Sears, Roebuck & Co. announces that it is cutting appliance prices to remain competitive, how does that not fall into the average consumer trap? Once upon a time, Sears was the undisputed king of the retail world. Now, after losing market share, the department-store chain is looking to reclaim its position. It recently announced that it is making major changes in its appliance business to win back customers, which includes price cuts on some appliances and the expansion of its offering of “value” (low-end) products to give consumers a broader selection of appliances at opening price points. It has reconfigured how appliances are presented on the sales floor, and is testing layouts such as an expanded value center, with value products grouped in one area of the department, and a “good,” “better,” “best” presentation of appliances. In addition, it recently introduced a 110-percent price match policy, which means that consumers shouldn’t be able to find a better price at any other retailer, but if they do, Sears will match it and give the customer 10 percent of the difference in price.

Appliances are the biggest revenue generators at Sears’ 870 full-line department stores, but the retailer reportedly has lost ground as Home Depot and Lowe’s have devoted more floor space to appliances. Sears has reported that its industry-leading appliance market share has fallen to 39 percent in 2002 from 41 percent in 2001. In particular, the retailer has said that it has lost share in low-end appliances, so it is seeking to ensure that consumers look to Sears when they want to purchase an appliance - anywhere that appliance might be in price point. It will, of course, continue to try to increase sales with high-end appliances.

But that low price point may be shrinking, according to a report by the North American Retail Dealers Association (NARDA). It says that independent retailers today are reporting that while a few years ago, sales of high-, middle-, and low-end products could be depicted in the form of a pyramid, now, sales are looking like an hourglass, with the tops becoming higher end. The report, Profiting from the Hourglass Effect, states, “Consumers who traditionally bought within the middle market are now aspiring to affluence and purchase more high-end merchandise.”

The reason, according to the report, is the big increase in wealth during the 1990s. Despite the stock market downturn, most of the wealth has survived. The report’s author cites quotes from several small appliance retailers across the U.S. echoing his sentiments, including one appliance salesperson that stated that if 10 years ago someone had told him that he would sell washers for $1,000, he would not have believed them. I think that many other retailers most likely feel the same.

In addition, the author says, baby boomers are fueling the high-end boom because they have more discretionary income, as they soon will become empty nesters as their children leave home. They have thus become big spenders and can afford the best. How is the biggest U.S. retailer, and one that hopes to remain in that position, going to cater to their needs? How will other appliance retailers do the same?

Are U.S. retailers on track with this new high-end marketing phenomenon? We can only wait and see. It appears that ultimately, any company within the appliance industry, if they have not done so already, needs to ignore the “average consumer” sentiment. Those who will succeed are those companies that make the right investments to attract an increasingly powerful consumer with more spending power than ever.