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May 13, 2006

The bifurcating consumer market and its implications

Knowledge@Wharton has a great interview with Michael J. Silverstein, author of the book, Treasure Hunt: Inside the Mind of the New Consumer.

Here is what the book is focused on: In the U.S. and around the world, the consumer markets are bifurcating into two fast-growing pools of spending. At the high end, consumers are trading up, paying a premium for high-quality, emotionally rich, high-margin products and services. At the low end, consumers are relentlessly trading down, spending as little as possible to buy basic, low-cost goods and services. Between both piles lies a vast range of mediocre, medium-range products that Silverstein claims is doomed to decline. What implications does this have for companies and their brands?

From the interview:

We came to the conclusion that trading up and trading down were big opportunities for companies and for consumers. The amount of spending on trading down was approximately twice the amount of trading up. Both ends of the market offered huge opportunities. Markets were bifurcating, which meant that the top and bottom were growing and the middle was in horrible decline -- and that is creating quite a few casualties. In every category we looked at -- and we studied 30 of them in detail -- there was this war. The war was for this consumer to either trade up or down or to evacuate. In the car business for example, the middle market has shrunk by 12 market-share points.

...In the car category, BMW has less than a 2% global share, but its market value is higher than General Motors, Ford and Chrysler combined.

...We have done shop-alongs with consumers in Costco. During the shop-along, the consumer knows what she wants to spend -- $200. She has a list of items she wants to buy: meat, canned goods, frozen items, paper products, and some drinks. Then it sort of clicks in her head that she has spent $180 and that was at least 10% less than if she had bought these products at a supermarket. So she pats herself on the back and says, "I can go to the wine section and buy that $20 bottle of Kendall- Jackson that I've never given myself."

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.