Apparel Trails New Luxe Hit Parade

NEW YORK — There’s a boom in spending on new luxuries, but fashion is far from number one on the list of luxe hits with consumers.

Apparel accounted for $30 billion, or 6 percent, of spending last year on new luxuries, or premium items that cost up to three times the average price for a type of product. The total amount expended on new luxuries in 2004 was an estimated $525 billion across eight categories, said Michael Silverstein, a senior vice president at The Boston Consulting Group and co-author of “Trading Up: Why Consumers Want New Luxury Goods — And How Companies Create Them” (Portfolio, $26.95). It is the second edition in the Trading Up series about mass affluence and was published this month.

Spending last year on new luxuries by the 47 million U.S. households with annual income of between $50,000 and $150,000 was led by travel, which tallied about $130 billion. That amount accounted for about one-quarter of the total amount of new luxe spending detailed by Silverstein, a figure expected to surge 90 percent to $1 trillion in 2010. The roughly $525 billion expended in 2004 marked a 19 percent spurt over the $440 billion in 2003 and was higher than the average growth in spending on new luxuries of 15 percent over the past several years.

Travel was followed by homes and home renovations, with new luxury purchases totaling $100 billion; automotive, $80 billion; dining out, $60 billion, and home goods, $50 billion, Silverstein recounted at the National Retail Federation’s 94th annual convention held here last week. Those categories were followed by food and beverages, which drew $50 billion from the wallets of new luxury consumers; fashion, with its $30 billion, and personal services such as spas, cosmetic surgery and cosmetic dentistry, $25 billion, said the BCG consumer specialist who led a forum entitled “Succeeding in the Lap of Luxury: An In-Depth Look at the Future of the Luxury Marketplace.”

While acknowledging that $30 billion in fashion sales is significant, Silverstein nonetheless observed, “Apparel is not hot. The trade down is winning over the trade up.” The comment was a reference to the trade-off people make by purchasing less expensive goods in some categories so they can afford premium products in others. “This has been a problem [for apparel] for the past two or three years,” Silverstein continued in an interview following his presentation. “People get excited about a new car, a new oven, a new piece of jewelry, but they’re blasé about a new suit.”

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The scales of trading up and down for apparel appeared to balance out in November, however, based on research conducted by Harris Interactive for Boston Consulting Group. BCG’s third annual survey of more than 2,100 adults with annual household income of at least $50,000 found roughly 35 percent were trading up for personal clothing; 34 percent were trading down; 30 percent were spending no more or no less, and 1 percent weren’t buying any clothing for themselves.

Over the past few years, 10 to 15 percent of American women have “loved” apparel and consistently traded up for it, Silverstein said in the interview.

What will it take to get a bigger chunk of the country’s mass affluent population to spend more liberally on premium apparel?

Silverstein’s prescription is a sharper focus on technical innovations in materials and fit, plus the “wow” factor. Two-thirds of the adults responding to BCG’s November survey claimed they knew all the details of the products they favored. Premium apparel companies would benefit from increasing their spending on research and development, which pales compared with such investments by other industries, Silverstein advised. “Research is less than 1 percent of net sales,” he said of the apparel business. “Procter & Gamble spends nearly 5 percent of net sales. This results in major differences in innovation.

“One of the things out there to be discovered is comfort clothing,” Silverstein said, identifying what he sees as an unrealized opportunity for the apparel business. “Comfort is one of the characteristics consumers use to describe their dream world. They want breathable fabric, moderation of cold and heat, items that make them feel cared for and that are easily accessible.

“There is no one I know really pursuing this now,” Silverstein added. “And it is not velour!”     

Further, BCG’s November research found people’s purchases of new luxuries are increasingly motivated by a desire for a sense of well-being or respite, rather than by style or status, a consideration that may be weighing against purchases of premium apparel. “I believe people are buying new luxuries they want or need for themselves, versus buying things based on what people [might] say or think about them,” Silverstein said when asked of the impact of those values.

One apparel brand that has capitalized on people’s growing desire to buy things that help them take better care of themselves, satisfy a quest for adventure and still reflect a sense of individual style is Under Armour, Silverstein points out in the new edition of “Trading Up,” co-authored by Neil Fiske, chief executive officer of Bath & Body Works. Trading on its proposition of combining the technical innovation of moisture-wicking, snug-fitting, supportive fabric with fashion panache, the privately held, eight-year-old brand of compression underwear and looser-fitting activewear is expected to reach sales of approximately $200 million this year, or nearly double the roughly $110 million it produced in 2003, Silverstein wrote. The standard long-sleeved compression shirt sells for about $50; a women’s looser-fitting workout pant and hoodie pullover for $70 a piece.

By positioning itself as a brand for serious athletes, Silverstein writes, Under Armour commands an estimated 80 percent share of the compression market, with Nike’s mid-single-digit share placing it a distant second. Also propelling Under Armour’s growth is the brand’s ownership of around 15 percent of the loose-fitting activewear sector and an expansion of the brand’s offer of activewear for women.

Women, in fact, drive 85 percent of new luxury spending, a key reason for the robust growth of premium products in recent years.

By 2000, 62 percent of married couples included a wife in the paid labor force, and median dual income in such families was about $70,000. That compares with 50.2 percent of married couples with a wife in the paid labor force in 1980 and median dual income in such households of approximately $52,000. Just 23 percent of married women earned working wages in 1950, when median dual incomes in their households were around $24,000.

Coach, a new luxury brand that saw its sales balloon to $1.3 billion in the fiscal year ended July 3, 2004, from sales of $538 million in the fiscal year ended July 1, 2000, derives a full 90 percent of its dollar volume from women, Coach chairman Lew Frankfort noted during his remarks on the NRF luxury panel.

One shortcoming of the rapidly growing new luxury brand was revealed recently in consumer research, however: a dearth of Coach bags that are fun to experience. There was a gap of 25 percentage points between the share of women who think Coach bags need to be made fun to be with, a group representing 67 percent of respondents, and those who think Coach bags already offer that emotional benefit, or 42 percent of survey participants. In response, Coach will be expanding the range of relaxed bags — including totes, backpacks, and pocket fly bags — in its Hamptons collection this spring, Frankfort said.

Bloomingdale’s has built its new luxuries business over the past two years by skewing its merchandise more heavily to premium products to address the store’s customers, who indicated a preference for luxury goods over mainstream merchandise. As a result, luxury goods produced 67 percent of Bloomingdale’s business in 2004, up from 43 percent two-and-a-half years ago, said Bloomingdale’s chairman Michael Gould, a panelist at the NRF luxury forum.

“Price is irrelevant — it’s an emotional connection that sells luxury goods today,” emphasized Gould, who pointed out the average price of denim jeans at Bloomingdale’s is $150 today, compared with $40 15 years ago. Too, Bloomingdale’s has slashed its number of promotional days by 15 to 20 percent each of the past two years and aims to do the same in 2005.  

Coach and Bloomingdale’s are two of several brands cited by Silverstein as noteworthy purveyors of new luxury fashion and beauty products in the U.S., a roster that also includes Prada, Gucci, Origins, Victoria’s Secret and Bath & Body Works.

Asked how the tastes of America’s new luxury customers stack up against their counterparts in Japan and Europe, Silverstein said: “The American new luxury consumer is much more eclectic and democratic. You don’t need a 30-year pedigree to get into the American club. Europeans have a habit of liking the local producer, plus the big European [labels] in France and Italy,” he continued. “The Japanese new luxury consumer favors the old luxury producer and is in love with everything French and Italian.”

One salient difference between consumption of new luxury fashion in Japan and the U.S. is that a group of young Japanese working women living with their parents spend up to 10 percent of their annual salary on fashion items — a reflection of their low living expenses and high discretionary income, Silverstein points out in the new edition of “Trading Up.” Those young women constitute the largest spending segment of Japanese society.

The biggest difference between consumption of new luxuries in the U.S. today and 18 months ago, when the first edition of “Trading Up” was published, Silverstein said, is “Americans have returned to the new luxury marketplace with confidence and conviction. It is evident that mass affluence is here to stay.” Driving the upswing, he added, are higher real incomes; a more robust stock market; women’s increased purchasing power; cash flow freed up by a larger share of purchases made at low-price chains; rising home values, and a growing desire to assuage the emotional pressures of modern life with luxurious products and experiences. Five of the top 10 categories in which people are trading up are home-related, while only one — household cleaners — is among the top 10 trade downs, based on BCG’s November research.

Author-consultant Silverstein found his own favorite new luxury not long ago on the golf course, where, after driving golf balls with his instructor for 40 minutes, he had a Burroughs-Mac custom-made driver created, one of the brand’s 5,000 custom golf club variations, specified according to shaft, head size, weighting and loft. “My fairways hit are up by 35 percent and my distance is up by 25 yards — all for $399,” Silverstein beamed.