Capitalize on Affordable Luxuries

Last Updated Aug 2, 2010 2:21 PM EDT


The scenario: Over-leveraged consumers have less
disposable income now than they have in past recessions.

The tactic: Offer affordable and inconspicuous
products that will give consumers a lift without making them feel guilty.

During recessions, consumers tend to give up big indulgences
and turn to smaller ones for a boost. A well-worn bit of business history shows
that sales of little luxuries tend to go up as the Dow goes down. During the
Depression, the founders of Revlon staked their new company’s
fortunes on nail polish — and href="http://www.revlon.com/Corporate/History.aspx">cleared $1 million in sales in six years. Just
before the downturn of 1991–92, href="http://www.scribd.com/doc/7439356/Innovating-Through-Recession-by-Andrew-Razeghi-of-Kellog-School-of-Management">Gillette came out with the high-end
Sensor line of razors, and wound up href="http://www.businessweek.com/archives/1992/b328547.arc.htm">capturing 17 percent of the U.S. men’s
shaving market in three years. After September 11, when Estee Lauder saw lipstick sales grow broadly across all its brands, chairman Leonard Lauder
posited the “ href="http://www.nytimes.com/2008/05/01/fashion/01SKIN.html">lipstick theory,”
which says increased lipstick sales can act as an indicator of economic
downturn.

But in the current recession, says Suzanne Shu, a professor
at UCLA’s Anderson School of Management, even those who have spending
money aren’t keen to flaunt it. Shu blames this new modesty in part for
recent financial disappointments at Starbucks, which just posted a 97 percent
drop in fourth-quarter profits. “Brands like that may suffer a little
more because they become a conspicuous luxury. If I’m walking around
with that cup, everyone knows I spent 3 or 4 dollars at Starbucks this morning,”
she says. Brands with less lofty associations, however, may be ascendant. In
the third quarter of 2008, beer giant Anheuser-Busch’s sales rose 6.6
percent, to $4.92 billion, while most other companies saw a decline in sales.

So what sorts of affordable luxuries should businesses be
looking at most closely? The winners will likely fall into three basic
categories:

1. Trade-downs. What economists call an inferior good,
consumers call a bargain. Can’t afford Cold Stone for dessert? Perhaps
McDonald’s soft serve, at half the price, will do. “We make
these little exchanges in our mind — I’m going to have
hamburger instead of steak,” says Kit Yarrow, a professor of business
psychology at San Francisco's Golden Gate University. Yarrow says that once
consumers have traded down, they’re usually satisfied with the
cheaper purchase; hence, marketers shouldn’t be afraid to emphasize
bargains. Thrift-store sales are booming: The rest of the economy should take
note.

2. Morale boosters. According to Yarrow, consumers will
always favor an experiential pleasure over the simple thrill of ownership, if
the price is right. Alcohol sales, for instance, are up because sipping
cocktails at a bar carries a social dimension that consumers don’t
want to lose. The same goes for movies. Audiences still flock to the cinema
when money is tight; 1939’s Gone With the Wind remains href="http://www.boxofficemojo.com/alltime/adjusted.htm">history’s
biggest blockbuster. “You’re spending a
certain amount of money to be in an environment that transports you,”
Yarrow says. “You’re in a special place, and you’re
with someone else. That’s bang for your buck.”

Shu suggests that people will be most interested in buying
inconspicuous pleasures, rather than pricey status symbols. “Cocooning
is about to come back into fashion,” she says. “People want
to stay home and do their consumption of luxuries in private.” And
bigger luxuries will still be relevant for special occasions — a
couple will still buy that $25 bottle of wine for their wedding anniversary, if
not for every day, says Shu.

3. Gender plays. In general, men and women tend to buy indulgences
differently — an array of small items for her, something big for him.
The pattern still holds during a downturn. Today’s woman browses the
same sale rack but sets her sights on smaller, cheaper purchases; men still
want that Nintendo Wii but work harder to justify the $250 price tag, rationalizing
the game system as a replacement for gym memberships and movie tickets, as
Yarrow explains. Shu cautions, however, that scrimping is still foremost on
everyone’s mind, male and female alike. “[People] are
looking around and feeling the social pressure to cut back,” she
says.