American Tastes Move Upscale, Forcing Manufacturers to Adjust

By GREGORY L. WHITE and SHIRLEY LEUNG
Staff Reporters of THE WALL STREET JOURNAL

Who would pay $2,200 for a washer-dryer set with stainless-steel drums, 12 different wash cycles, rounded styling, baby-blue trim and room for 22 bath towels? Whirlpool Corp. thought it knew the answer when it introduced its Duet line last year: a niche of affluent laundry-doers willing to pay about three times the price of the company's midrange machines. Whirlpool expected the Duet would make up only 5% of its North American washer and dryer sales.

Instead, in its first six months on the market, the Duet line is on track to double Whirlpool's projections, while sales of the company's midrange models are flat. Despite the weak economy, it isn't just the rich who are buying Duets, but many of the middle-class shoppers who might once have bought Whirlpool's standard offerings.

The same surprising pattern is popping up in cars, retailing, electronics and other industries, upending much of the conventional wisdom of consumer marketing. Millions of Americans who once made up the vast middle of the nation's $7 trillion consumer market are migrating upscale toward premium and luxury goods.

The Shape of Things

In the past, high-end goods typically sold in small volumes to the relatively few customers willing to pay top dollar. They formed the tip of a pyramid-shaped market that got broader toward the bottom, as prices declined. Because of its breadth, the mass market was king, dictating the fortunes of auto makers and other consumer-goods manufacturers.

But no longer. Today's auto market is increasingly "shaped like an hourglass," says Helmut Panke, who is scheduled to take over this spring as head of German auto maker Bayerische Motoren Werke AG. At the bottom, the only differentiator is price, and advantage shifts constantly between rivals that can deliver the best value. At the top are luxury names, which rely on the cachet of their well-known brands and which are aggressively coaxing middle-class consumers to climb up the ladder.

What's brought about this change? First, there's globalization. Thanks to free trade, the low end of the electronics market, for example, offers plenty of $79 DVD players to tempt the most price-sensitive buyers. That leaves three choices for the middle-market consumers who once would have spent a little more for a familiar brand: buy a low-end DVD player, pay more for a brand-name product with much the same features as the $79 version, or step up to a premium brand that claims to offer higher style, quality or technology.

Americans' big increase in wealth during the 1990s boom also has put pressure on the middle market. Much of that wealth has survived the stock market's downturn and the current economic slowdown. According to census data, median household income, adjusted for inflation, held steady at a record $42,151 in 2000, the latest year for which data are available. And Federal Reserve data show that household net worth, while down from its 1999 peak, is still above mid-1990s levels. Meanwhile, the personal savings rate for the past two years has remained at its lowest since the Great Depression.

'Affluent Attitudes'

Baby boomers, whose tastes have driven consumer markets for years, are a major force behind the current urge to splurge, especially as their kids graduate from college and head into their own peak consuming years. The great migration upscale also reflects a shift in consumers' aspirations. For decades, many Americans were proud just to belong to the middle class. Now, a growing number of them regard the middle class as a starting point, not a goal.

"Right now, there's no aspiration to be middle class. Everyone wants to be at the top," says J. Walker Smith, president of the market consulting firm Yankelovich Partners, which is based in Chapel Hill, N.C. It dubs the phenomenon "the mainstreaming of affluent attitudes."

Companies of all stripes are hard at work finding ways to exploit the trend. At Whirlpool, the Duet's surprise popularity prompted the appliance maker to overhaul its marketing plans. The average Duet buyer, says Dave Hurwitt, brand manager for the company's $2 billion-a-year North American washer and dryer business, turned out to have average household income of about $50,000, far less than the $75,000 the company had expected.

Seeking to broaden its target audience, Whirlpool pulled its original TV ads, as well as its ads in specialty magazines, such as House Beautiful, which targeted the energy-conscious high-income consumer. Now, Whirlpool is emphasizing in-store promotions. Its new TV spots feature a customer testimonial to stress the product's practical appeal.

At Abt Electronics, a big retailer outside Chicago, Jim and Diana Boyd say they bought Whirlpool's new Duet washer and dryer to replace their old ones, which cost about a third as much. Mrs. Boyd, a substitute teacher at a public high school, says she and her husband, a field manager for a construction company, have become less price-sensitive and more quality-conscious.

The Boyds, who live in suburban Chicago, say their income has risen some over the years, but so have their expenses, as their four children have entered their teen years. Even so, says Mrs. Boyd, "we find in the long run it's more cost-effective to have high-quality products," because they perform better and last longer.

Ways to Adapt

Abt manager Phil Hannon says his store now carries more high-end appliances and electronics than it did a decade ago, because discounters and even grocery stores have grabbed the low-end of the market for such products as VCRs and stereos. "There's a shift," Mr. Hannon says. "You have to find ways to adapt."

The shift has roiled even the discount sector, where Wal-Mart Stores Inc. has emerged as the low-price leader and Target Corp. as its upscale rival. Target has thrived by offering consumers more stylish products, such as its curvaceous phones and toasters designed by Michael Graves. Kmart Corp., meanwhile, took the middle road. Unable to compete with Wal-Mart on price or with Target on style, it recently entered bankruptcy proceedings.

Some former middle-market players have followed consumers up the market as their traditional clientele has evaporated. The Seghesio Family Vineyards, founded in 1895, used to cater to consumers of moderately priced wines, selling bottles of cabernet, merlot and zinfandel, for about $6 each. By the 1990s, however, the company was struggling to survive in the shrinking middle market between cheap jug wines and quality vintages. Sales of premium wines were surging as more Americans set their sights higher.

In 1995, a younger generation of the family took control and decided to revamp the company. "My dad didn't want any of our wines to be above $10 a bottle," says Peter Seghesio, chief executive of the Healdsburg, Calif., winery. "We saw that the only way we can survive was to make really great wines."

The winery ditched all its grapes, except for its zinfandels, and slashed production to 35,000 cases from 120,000 cases. Because making premium wines required more labor, it raised its average price to about $20 a bottle. Seghesio, whose biggest distribution channel had been Safeway supermarkets, started pitching its products to independent wine shops.

The strategy worked. Not only is the winery no longer struggling, but it has managed to boost its production to 70,000 cases, two years ahead of schedule.

Reaching Down

In other markets, high-end brands are hoping to prevail by making their exclusive products more attainable. Luxury-car makers, such as BMW and DaimlerChrysler AG's Mercedes, which have set sales records in recent years, are spending billions on new, lower-priced models to coax consumers up from the middle market. BMW's latest offering is the Mini, an updated version of the tiny 1960s British classic. Starting at $17,000, the Mini will offer amenities typical of cars costing thousands more. Its safety features include six air bags, and its options include a computerized navigation system. Mercedes already sells a model called the C-Class Coupe that starts at just over $25,000.

About 18 months ago, when Terry Kominsky started shopping for a replacement for his 1993 Nissan Altima sedan, he wanted something a little more fun to drive. Friends suggested he try a Volkswagen Jetta. Mr. Kominsky, who lives in Shartlesville, Pa., says he liked the model's sportier European feel, so he decided to try some other German models. He initially set his price limit at $25,000, "then each time I drove another car, I pushed it up a few thousand," says the 38-year-old engineer, whose wife stays home to care for their two children. He wound up buying a $37,000 BMW 330Ci coupe, which he says won him over with its performance and handling.

"I'm a steak-and-potatoes guy," he says. "But when I buy something for myself -- a motorcycle, a stereo -- or for the kids, I do a lot of research, and then I buy the best that I can afford."

That kind of attitude has Ford Motor Co. scrambling to exploit its stable of luxury brands -- Jaguar, Volvo, Land Rover and Aston Martin -- most of which it picked up in a $9 billion acquisition spree in the late 1990s. Ford, whose results from its core Ford brand have been slipping for several years, expects its luxury brands, which now account for about a quarter of its corporate profits, to generate about a third of the total by 2005.

Through the 1990s, Ford chased its middle-market customers up the ladder by offering them pickup trucks and sport-utility vehicles that often cost as much as luxury cars. Meanwhile, demand for its traditional mass-market models, such as the Ford Taurus -- once America's best-selling car -- ebbed as consumers abandoned it for more upscale models or switched to cheaper alternatives, such as the Korean-made Hyundai.

The shift has pulled the rug out from under some legendary American auto brands, such as DaimlerChrysler's Plymouth and General Motors Corp.'s Oldsmobile, which once populated the broad middle but didn't have the cachet to compete with the luxury nameplates. Sales of others, such as Mercury and Buick, traditionally pitched as step-up vehicles for 40-somethings who had established themselves in careers, have declined steadily as their loyal buyers have aged. Meanwhile, today's 40-somethings are increasingly looking to stylish imports.

"The Buick Regal looks like a 240-horsepower version of my living room sofa," says Mark Klicker, a Massachusetts defense-electronics worker, referring to the Buick's overstuffed seats. Mr. Klicker, 48, traded in a 1994 Taurus for an Audi A6 sedan last year. He recalls how growing up in the Midwest in the 1960s, "if you drove a Mercury Park Lane or an Oldsmobile, that was the big time, that was a big step up." But now, he says, American brands can't compete with luxury imports.

Detroit auto makers insist they're still capturing many of the buyers moving upscale, thanks to SUVs, which continue to post record sales growth even after a decade of explosive popularity. "One of my favorite quizzes is who sells more vehicles for more than $35,000," says GM CEO Rick Wagoner. "The answer is Chevrolet," he says -- thanks to SUVs such as the Suburban, which can cost well over $40,000.

Nonetheless, GM's biggest challenge remains "our inability to conquest or retain customers in the higher income groups," says GM market analyst Paul Ballew.

GM is taking aim at the problem in part by investing nearly $5 billion to overhaul and expand its Cadillac and Saab luxury brands. Officials say the company still is trying to figure out exactly where Buick fits in.

The big luxury car makers like BMW and Mercedes face a big risk: They could undermine the cachet of their $70,000 top-of-the-line cars with their new sub-$30,000 offerings. And those less expensive cars may not measure up to consumers' expectations. In the early 1990s, BMW, known for high performance, offered a low-priced hatchback with a four-cylinder engine. Sales of the car, which was widely panned by critics, were disappointing, and BMW pulled it off the market. BMW takes pains to point out its updated Mini will sell under the little car's own brand name, and not BMW's.

Undaunted, BMW's Mr. Panke says he expects sales of premium vehicles to grow at twice the rate of the mass market over the next few years. That's because consumers are increasingly willing to pay more for what they perceive as a better value.

The 'Reasonable Thing'

Take William Hall, 43, who lives in Alexandria, Va. Mr. Hall had been a loyal Toyota customer for two decades until a year and a half ago, when he went shopping for a new car. After he discovered that a Toyota Camry sedan with the options he wanted would cost more than $25,000, he decided to look at Mercedes, a brand he'd long admired but always thought was out of reach. At $34,000, the C-class sedan he test drove was about $7,000 more than the top-of-the-line Camry he was looking at, and it offered more safety features than the Toyota.

Mr. Hall and his wife had to "overcome the initial thought of having a Mercedes, that it's like trying to move up to a different socioeconomic class," he says. "Once we understood that" the price difference "was not outrageous at all, it was just the reasonable thing to do."

Some luxury names haven't had to lower their standards at all to tap into the growing consumer taste for the better things in life. Tiffany & Co. has discovered a simple method of luring less-well-to-do customers into its tony jewelry stores: putting prices in its ads. Its first such ads disclosed that while Tiffany's diamond engagement rings ran as high as $850,000, they started at $850.

"We found very few men came in looking for an $850 diamond -- they spend in a neighborhood of $7,000 to $8,000," says Mark Aaron, vice president of investor relations for the New York-based jeweler. But seeing that its prices start at less than $1,000, says Mr. Aaron, reassures them that " 'I can go into Tiffany, and I don't have to be embarrassed.' "

Tiffany's fastest-growing line last year was silver jewelry, which starts at about $50 for a pair of earrings. That's because of shoppers such as Lisa Mason, a 30-year-old high-school teacher, who walked out of Tiffany's on Chicago's Michigan Avenue last month carrying its famous robin's-egg blue shopping bag. Her purchase: a $200 sterling-silver chain necklace.

Why shop at Tiffany? "I want to move up in the world," Ms. Mason says.