A major shift has occurred in consumers' buying behavior that is having a dramatic impact on all consumer businesses. David Brooks, in his 2001 book, Bobos in Paradise, first identified the trend among what he called the bohemian bourgeois class. Then, in 2004, Michael J. Silverstein, a senior VP of the Boston Consulting Group (BCG), and Neil Fiske, now CEO of Body & Bath Works, picked up where Brooks left off with bobos in their book, Trading Up: Why Consumers Want Luxury Goods. What Trading Up brought to light was the phenomena of consumers trading up by purchasing more higher-priced quality goods and services that are important to them while at the same time trading down to low-cost alternatives such as generic products and services that are not important to them. Silverstein cites the example that, "a high school teacher may save up to buy a new BMW 3 series convertible but choose the cheapest socks and t-shirts available at Wal-Mart." Trading up, or what has also been called 'affordable luxury,' is responsible for the success of a whole new category of companies including Starbucks, Lexus, Williams-Sonoma, Victoria's Secret, Panera Bread, Callaway Golf, PF Chang's China Bistro and Restoration Hardware.
Most consumers are not shy about investing in quality, but at the same time, they insist on value. Silverstein and Fiske describe a contemporary marketplace that is "knowledgeable, selective, affluent and discerning." What has happened is that New Luxury brands have caused polarization in just about every consumer category, with entire categories moving to the high and low ends of the price spectrum. Meanwhile, companies offering conventional goods and services are stuck in the middle struggling to succeed.
Silverstein explains, "It's now clearer than ever that the new luxury phenomenon is not an anomaly but rather a structural, long-term shift that will continue to reshape the consumer economy for the foreseeable future. In fact, the socio-economic drivers of new luxury - including increased wealth, changes in family structure, and the heightened influence of women -- are persisting and accelerating globally." Silverstein says that companies that deliver superior offerings in their categories will increasingly outperform their competitors in terms of sales growth, market share, profitability, and total shareholder return. BCG predicts the New Luxury market will continue to grow at about 15% per year.
New luxury turns the traditional demand curve on its head. In the classic Economics 101 demand curve, sales volume increases as prices and margins decrease. New Luxury has a unique sweet spot where higher quality generates both higher prices and higher margins. Silverstein and Fiske's research shows that New Luxury goods typically account for 20% of a category's unit volume, but 40% of its dollar volume and 60% of its profits.
Exactly who is the New Luxury consumer? The definition varies a little based on who is defining the category. Silverstein and Fiske identify the market as "middle-class consumers who are educated, discerning and ready to engage in the goods and services they consume." Basically, that's the approximate 40% of all households that have $50,000 and higher incomes (these households control 61% of all food spending away from home and 70% of all entertainment fees and admissions). Some marketers equate this category more to the upper 24% of all income households with $70,000 and higher incomes. However, the concept of Affordable Luxury extends to lower incomes, as well, although not to the same extent, where lower-income households will also trade down in a number of categories in order to save enough to trade up in a category important to them.
Marketers basically divide New Luxury and luxury customers into four household income categories.
|Middle Market||$50,000 - $74,999|
|Near-Affluent||$75,000 - $99,999|
|Affluent||$100,000 - $149,999|
New Luxury has its primary appeal to Middle-Market through Affluent households ($50,000 - $149,999 income households).
The phenomenon of New Luxury can be seen even among mass merchandisers. The difference between Wal-Mart and Target is just one example. Wal-Mart has positioned itself on price, appealing to cost-conscious customers. "Rather than focus primarily on price, Target strives to differentiate," said Sandy Skrovan, vice president for Retail Forward, Inc., a market research and consulting firm. "Target brings panache to the most mundane merchandise." Target has positioned itself by offering style and quality as an affordable luxury at a higher price than Wal-Mart.
As a result of their different market positioning, the two stores attract customers from different demographics. For Wal-Mart, 31% of its customers have annual incomes of $25,000 or less, and only 23% earn $75,000 or more. Whereas Target attracts a more affluent customer, with only 20% earning less than $25,000 and 37%, or 60% more than Wal-Mart, earning $75,000 or more a year. So while Wal-Mart sells a $1.50 towel to its demographic, other customers forgo the savings at Wal-Mart to purchase a higher-quality $4 towel at Target.
So what do New Luxury towels, automobiles and coffee have to do with location-based entertainment (LBE) centers? The same Affordable Luxury phenomenon that affects consumer goods is also having an impact on consumer entertainment experiences, including those at LBEs. You only have to look at what happened to the movie theatre industry over the past few years, and you will see how New Luxury is affecting all consumer expenditures. It wasn't that many years ago in 1995 that AMC Theatres opened the first multiplex screen cinema in Dallas, Texas, that featured stadium seating: the AMC Grand 24. Soon, every theatre chain in the country was developing new stadium-seating multiplexes that offered the public a far superior movie experience compared to the older sloped-floor theatres. So even at a slightly premium price, moviegoers flocked to the new cinemas and the old ones lost business. The market became polarized, with stadium-seating theatres at the top and the dollar houses at the bottom. The older conventional sloped-floor first-run cinemas were squeezed out. In fact, the theatre chains actually made a large number of their older theatres obsolete while building the new ones, resulting in a large number of theatre chain Chapter IX bankruptcies and the closing of most of the older theatres. Today, several theatre chains, including Muvico and Rave, have ratcheted up the quality with true New Luxury cinema complexes, and the public is trading up to them.
We see the New Luxury phenomenon impacting the LBE industry. With consumers' time considered even more valuable than in the past, people are trading up for quality entertainment experiences. The bowling industry is seeing the rapid emergence of new state-of-art bowling complexes and bowling lounges. These facilities are attracting business, often at premium prices, while the traditional bowling alleys are dying off and closing. Dave & Buster's is another example, with its sales exceeding $200 per square foot, as much as four times the sales of many indoor family entertainment centers. Compared to many bars, gamerooms and billiard centers, Dave & Buster's offers a New Luxury experience. Our company has seen the New Luxury phenomenon starting to impact the family entertainment center industry, with new higher quality family entertainment facilities achieving higher prices and margins with more than double the sales of the typical centers.
One of the important features of creating a New Luxury LBE experience is the quality of the environment and its décor, ambiance, lighting, acoustics, furniture -- what we call quality-of-place. Research has shown that quality-of-place has a major impact on the price consumers are willing to pay. A recent study by New York-based WSL Strategic Retail found that over half of survey respondents with incomes between $50,000 and $100,000 said they are willing to pay more for grocery and household items when shopping in a more pleasant environment. If the environment can affect the price of toothpaste and cereal, it will impact even more so the perceived quality and value of an entertainment offering.
LBEs actually have the opportunity to gain a greater competitive advantage than most stores with the New Luxury consumer. Most marketing analysts consider the luxury market to be households with an annual income of $75,000 or more. These households make up a large part of the New Luxury market and probably account for the majority of New Luxury expenditures. According to marketing firm Unity Marketing of Stevens, Pennsylvania, 63% of luxury consumers rate "enjoyment and pleasure" as very important for luxury purchases. Coming in second in importance was "enhances quality of life" with 42% of consumers.
According to Unity Marketing founder Pamela Danziger and author of Let Them Eat Cake, Marketing Luxury to the Masses - As Well as the Classes, luxury marketing consumers are more likely to be motivated to buy by the promise of a stimulating shopping experience, rather than the need from the product. Danziger says the luxury consumer is driven experientially. She says, "It's not about the money. They aren't interested in buying more 'things' just to have them. Retailers have to sell the experience that goes along with the purchase."
Danziger believes we are in the age of luxury -- and the age of experiences is on the horizon. As Danziger explains, "With Americans' [and many other countries'] standard of living so high, consumers today are hankering to satisfy higher emotional needs as described by psychologist Abraham Maslow in the hierarchy of needs. The Maslow hierarchy explains how first people seek to satisfy their physiological needs, then safety needs, followed by love and affection, then esteem. After all those needs are satisfied, people strive for self-actualization, which is 'the desire to become more and more what is, to become everything that one is capable of becoming.' For more Americans with an excess of material goods, self-actualization becomes the ultimate goal. Our culture as a whole is moving beyond the pursuit of material things. In search for more meaning, people discover that experiences are the source for their greatest satisfaction."
LBEs have always been in the business of offering experiences. Americans, Europeans and consumers in many other cultures are increasingly turning to experiences rather than material goods. To take advantage of this shift, LBEs need to shift their paradigm of offering just rides, amusements and games to offering New Luxury quality social, dining and leisure experiences in environments in tune with the new experiential consumer. Experiential expenditures are on the increase, but so is the competition, with even retailers creating shopping experiences. Shopping center developers are now creating new, inviting experiential shopping environments such as 'lifestyle centers.'
One area that LBEs can tap to appeal to this new consumer is education and learning. As Silverstein and Fiske point out, "The impact of a college education is not only on consumers' ability to earn money; it also tends to increase their appreciation of learning in general and throughout the course of their lives." In their research, the authors found that 70% of New Luxury consumers said that "knowledge is the greatest luxury." In a sense, the luxury these consumers are questing is self-actualization, for themselves and for their children. That is where edutainment becomes the perfect fit. Properly executed in the right environment, edutainment offers the opportunity for an away-from-home leisure experience that is social, relaxing, fun and enriching, simultaneously meeting many consumer needs. Thus, it also appeals to the time-pressed consumers' desires to pack in as much as possible and make their expendable leisure time as valuable as possible.
As Joseph Pine II and James Gilmore point out in their book The
Experience Economy, "Experiences are not the final economic
offering [referring to the progression of economic value] ... When you
customize an experience to make it just right for an individual -
providing exactly what he or she needs right now - you cannot help
changing [their emphasis] that individual. When you customize an
experience, you automatically turn it into a transformation."
One of the greatest ways you can transform an individual towards self-actualization
is with knowledge and the acquisition of new skills and abilities. Transformation
experiences are the ultimate luxury that many consumers are more than
willing to trade up to.
The growth opportunities for LBEs have never been better. Those LBEs that understand this important societal paradigm shift to New Luxury experiences and consumers' desires for self-actualization are already winning. Those LBEs that are prisoners of the past will slowly become extinct.