Today’s interview is with Michael J. Silverstein – author, and senior partner and managing director at The Boston Consulting Group. I was thrilled to have the opportunity to interview Michael as he has conducted some groundbreaking research covering some fascinating topics – the rise of luxury globally, the power and psyche of female consumers, and the emerging affluent in China and India.
Michael has a unique insight into luxury, meeting regularly with some of the biggest retail companies in the world, CEOs of luxury conglomerates, and regular consumers. He had some thought provoking insights to offer on a range of topics, a few which gave me considerable pause (you’ll see what I mean when you read about the V-curve of happiness). Enjoy meeting Michael!
In 2003 you wrote Trading Up, which covered the phenomenon of consumers “trading up” and purchasing luxury goods. Can you share how the world has changed since then?
I’ve written four books now. I wrote Trading Up in 2003, I wrote Treasure Hunt in 2006. Treasure Hunt was about trading down. And it forecast that consumers had had enough of wanton spending… that they were tightening budgets at that time, and that they were increasing their savings rate. Consumers in our survey work in 2006 were saying, things are pretty shaky out here. We’re not too happy about our world out here. And they said without a a shadow of a doubt that they were going to trade down. And that’s exactly what happened. This was of course was triggered by the financial industry and its consumers, but it was also triggered by ordinary consumers doing inapproriate things, like buying a bigger house they couldn’t afford. And there was a backlash.
In 2009 I wrote a book called Women Want More, and it said that there was going to be a recovery based on female spending power. Then in October 2012, I wrote a book called The $10 Trillion Prize, which was about an economic recovery based on spending in India and China. Focusing on the consumer – and what the consumer wants – is a really a good way to gauge the future.
How has this landscape changed for luxury goods since you first wrote Trading Up, and since the financial crisis of 2008?
The luxury sector between 2003 and 2012 has increased. And that’s through the worst economic downturn in the history of the world. The mix has shifted, the geography has shifted, the largest luxury market now is China. China has 112 billionaire and a million millionaire households that make enough money to buy luxury goods. When we started looking at luxury there, it was a nascent market.
When you go look at the United States and examine its luxury categories, there have been winners and there have been losers. The companies that stayed ahead of the curve in a category that they had an advantage in, made a huge amount of money and generated a huge amount of value for their shareholders.
What are some luxury companies that have come out winners in this recent time period?
It’s a highly segmented market, and it has shifted geographically. Few companies have been able to stay on top this entire time. The most notable have been LVMH, PPR, and Hermes. Now looking into the next line of “mass-tige” luxury – Victoria’s Secret has had an incredible run from 2003 to now. BMW has done well, but has been outclassed by Audi. We highlighted BMW in Trading Up, we highlighted a company called Viking (which produces cooking ranges) which was just aquired for $400 million, we highlighted Panera Bread, which has done extraordinarily well. Kendell Jackson, a maker of wines, has thrived.
Can you take me through the mindset of an average female consumer who has started purchasing luxury goods? What’s her mindset initially, and what pushes her to buy that first item?
Why don’t I take you through the mindset of two different 26 year old professional women – both single, one in New York and the other in Beijing.
Let’s start with New York. If our single woman is successful, she’s making about $80,000 a year. She’s in an entry level management job, she’s single, she’s living in her smaller apartment, she has scrimped and saved. She has a pretty tight budget. And lets suppose that on average, she’s spending about a $1,000 a month on discretionary purchases. So she has her rent, utilities, transportation expense, travel budget, and that $1,000 translates to $12,000 of additional discretionary funds per year.
Our subject needs to spend about $4,000 – $6,000 on work clothes. So out of a total of $12,000, that gives her $6,00o to splurge with. She goes on vacation. When she’s on vacation, she’ll spend one third on her discretionary funds. She’s going to do a lot of shopping. She’s going to buy fashion sunglasses, a luxury bathing suit, a cover up, a fun dress, a pair of shoes, possibly a prestige entry level necklace or bracelet, and later on in the years she’s going to scrimp and save for the one big piece she wants.
That one big piece might be an Armani suit on sale, it could be a pendant, it could be a new watch. She could say to herself, I really always wanted to have a pair of Jimmy Choos. And she’ll buy them, but she’ll buy them on sale, and that’ll be the way that she lives. And over time as she makes a little more money, she’ll consume more. If she never marries, she has a higher probability of being a major luxury consumer than if she does marry, which is a interesting bifurcation down the road.
The reasoning behind this is, if she takes a husband – well, first of all they are hard to find – and second, a lot of the time it results in her getting pregnant and staying home. On average, getting married will push our woman down a V-Curve of happiness. It will cause anxiety, unhappiness, and a reduction of income for our working woman. When she gets married, she potentially loses $500,000 of lifetime income. Somebody “has” to stay home and right now, it probably is going to be her.
By contrast, all of these single women who started buying luxury when they were 26 and are now 40 and unmarried – they are making an average of $250,000 a year. You can consume quite a few goods at that point, you can buy luxury items, you can have what you want and go travel, and there’s nobody telling you how to spend your money.
If we cut to Beijing, our college graduate will be a successful graduate of one of the C9 League universities. She will make the equivalent of $12-$13,000 a year. Her rent will be free because her parents will have purchased her an apartment. Transportation will be dirt cheap. Most meals will be at work, and a lot of companies provide breakfast and lunch. So the only thing expense she really needs to cover is whatever travel she has, some very modest government taxes, and her purchaes.
Young, with it, 25 and 26 year old women spend a lot on entertainment and on themselves. So they scrimp and they save, and they want to buy a Coach bag. And, they want a entry level price point car. And they want to have a fancy watch. They want a name brand Swiss watch, they don’t want an imitation. They want a nice overcoat, a few beautiful Western suits. They will go to Hong Kong to do their luxury shopping where prices are 35% lower than in Mainland China. Now I hate to use the word smuggle – but she will probably bring the goods back in without paying duty or tariff.
Have you found any correlation between the savings rates in households and the happiness of women?
I’ve never done how happy are you, and how much is your savings rate? I have done, who has a high savings rate and what causes them to have a high savings rate. So I don’t know the answer to your particular question. But I do know that people who have high savings rates have a fear of the future, and the reason that they save is because they feel insecure and at risk. So if you took the China population, which as an savings rate of 16% or so, the reason for that rate is because they feel that in the future, they are not going to have anybody they can count on who can help them.
The people who live paycheck to paycheck, spend a lot of money and have a lot of fun. I can see how you might develop a hypothesis that free spending people are happier than tight savers. But I don’t know. Many people that I speak with say that their savings gives them happiness. The population might be split on that particular decision.
Some “luxury purists” have been critical of a “watering down” of luxury. Their charge is that luxury formerly was something very special, enjoyed by a select few. Now with Gucci keychains and Coach wristlets, luxury is more widely available than ever. Is there a new tier of luxury?
There has always been aristocratic luxury. That’s in the history of the world. If we were to go back to Rome 2000 years ago, you would see that there were luxury goods that were owned by only the richest people, and there are still luxury goods that are only owned by the richest people in the world. Few people can afford an Hermes saddle for their horses, a Rolls Royce, and the $25 million condos being buit in New York and London. So that segment has always existed.
It’s a stratified world, and there’s luxury at many different price points. There’s still a serious amount being consumed in the United States, Western Europe, and now China. In China if you have a $20,000 income, you can now buy luxury goods. Because of the way it works with the one-child policy, a kid can have four grandparents, all doting on them. That child can be wearing a Rolex watch with a $20,000 income. They may not have bought it, but they have it on their wrist.
You speak regularly to leaders of major luxury conglomerates like LVMH and PPR. I would think that they’ve been pretty happy with their company’s performance over the last few decades. Anything keeping them up at night?
Well…the world is a very risky place. If you look at whats hapening in Africa in terms of the Al-Qaeda conflicts, if you look at terrorist activity, if you look at the financial markets, you’ll see it. There is the risk every day that the world could turn to stone. And so the biggest risk to their businesses is calamity, global calamity. Global calamity is pretty bad for the luxury companies .
When you have a 9/11 or even a Katrina, you see a rapid decline in the market. All the luxury executives now have experience with declines and they do understand that consumers come back, that they climb themselvves out of the pit. But look at Spain, and look at Greece – they were pretty good luxury markets on a per capita basis…but now have largely collapsed.
You could see lots of reasons to be concerned in the future. China is a fantastic country right now. The government has figured out a way to deliver 8% consistent GDP growth which as trickled down to 4-5 % per capita income growth. They figured out a way to control population growth so people could consume more. But there’s pollution, water shortages, conflicts with Japan and India and potentially with other powers. North Korea could potentially ignite a global conflict, and that conflict could bring China in behind North Korea.
So there are many reasons to believe that there is a one in 20 or one in 100 chance that catastrophe is right around the corner. We could have another black swan. Black swans keep the executives awake at night. They’ve added a huge amount of capacity to manufacture goods for what were once marginal populations. The United States market is also unstable. We have $16 trillion of debt, and the Obama administration just increased taxes 7% for people with incomes over $1 million. They positioned it as a 4.6% hike, but it’s really 7%.
With all of this expanded capacity – has the quality of luxury goods decreased? Has capacity come at a cost of quality?
My impression is that most of the capacity in the luxury industry has expanded in a successful way. If you look at the Swiss watch makers, the automobile manufacturers, they are delivering goods that are every bit as good as they ever were, and in some cases better – because the increases in capacity has allowed them to purchase better machines.
You recently wrote a book, The $10 Trillion Prize – about the emerging affluent in India and China. If you are a luxury brand wanting to have longevity in these countries – what do you do for the local market? Is there a risk of domestic brands becoming a threat in the luxury space?
I think there are two parts to this question. Are the local companies getting more sophisticated? The answer is usually yes, but it’s a very, very slow road to local companies to getting better. There’s limited venture capital, there’s not a lot of role models for domestic companies that have succeeded, and thus there’s not a lot of companies that say, that’s what I want to be. So, its a hard road for domestic luxury companies.
The answer for survival for existing companies, is innovation. The luxury companies that get stuck in yesterday, are the luxury companies that will be dying. The luxury companies that are always thinking about innovation – materials, technology, design, use by consumers – those are the ones which will succeed. The companies that are planning against particular targets, that are designing products very tightly targeted around the questions, “Who does this item belong to? Who should it be used by? And how do we make sure consumers know about it?” Those are the companies that are going to win.
What are some examples of luxury brands that have been successful in international markets?
I think that LVMH is doing fantastic job. If you look at their leather goods, they are. If you look at Gucci, and how its expanded its range and purpose, you would see it. I think that the Hermes offering is extraordinary. Burberry would also count as a great example. Burberry should be able to sell another $1 billion pounds of raincoats in China alone.
And finally – over the years as part of your research, you’ve studied and interviewed over 20,000 women. What were some of the happiest women doing with their lives?
Their jobs were personally fulfilling. They had a lot of friends, and they defined their own destiny. They were able to travel, they were able to go out, they were able to enjoy life, they had nobody beating them, nobody starving the family, and the like. So it was basically having personal security, quality of life, and being able to do what they wanted – with little to no risk.
I know that many readers share an interest in the luxury sector, and quite a few even work directly in it. Michael has such a fantastic background in both the luxury and consumer retail industry as a whole, and it was wonderful to be able to hear his thoughts on topics that have interested me for years. His last answer in particular has stuck with me, as a working woman who (hopefully!) is seeking a happy life.
Thank you very much to Michael for being here today. If you’d like to read more of Michael’s work (which I strongly encourage), here are links to the four books he mentions, below.
By Michael J. Silverstein: