Big companies are tricking their customers into buying fancier, and often more expensive, versions of their products, from Krispy Kreme donuts to cans of WD-40.
As proof, a new fashionable expression in the business world: the premiumization.
Companies hope to continue to benefit from favorable economic conditions after several years in which they took advantage of strong consumer spending and rapid inflation to raise prices and increase profit margins. Many companies make offers that appeal to high-income customers – people who are willing to pay more for products and services.
A sign of this trend: the notion of premiumization has been discussed in nearly 60 earnings conference calls and investor meetings over the past three weeks.
This is an indication of the changing economic context. Inflation and consumer spending are expected to slow this year, which could make it harder for businesses to sustain large price increases without justification.
The tendency to premiumization also reflects a fracture in the US economy. The top 40% earners are sitting on over US$1 trillion in extra savings accumulated during the first part of the pandemic. Low-income households, on the other hand, have depleted their savings, in part because they have to deal with the rising costs of food, rent and other basic necessities which account for a larger share of their expenses.
“The pool of people willing to spend on high-end products remains strong,” said David Mayer, senior branding partner at consultancy Lippincott.
As products become more expensive and more exclusive, large swaths of the economy are at risk of gentrification, with the possibility that poorer consumers will be increasingly underserved.
Companies have long segmented their customers, trying to push the wealthier into more expensive and profitable purchases: think first-class seats on an airplane versus economy-class seats. But the trend has accelerated during the pandemic, and the movement towards luxury is now spreading to a wider range of products and services.
The leaders of some companies focus on the wealthy. At American Express, which saw record cardholder spending last quarter, “we are constantly tightening the number of cardholders we acquire,” CEO Stephen Squeri told analysts in a recent briefing. conference call, describing how the company consistently focused on the highest earning candidates. “This high-end clientele, even if it is not immune to a slowing economy, is spending briskly at the moment. »
Other companies emphasize so-called “premium” offers as an alternative to discounts. Krispy Kreme has spent the last year enticing customers with discounts, including a ” Beat the Pump which matched the price of a dozen glazed donuts to the national average price of a gallon of gas. But the company plans to do fewer discounts this year, an executive said in a phone call, looking instead to generate “excitement around [ses] high-end specialty donuts”, which are more refined and more expensive.
The promotion of high-end products has appeared in some unexpected sectors. WD-40 found that customers are willing to pay more for products with enhancements, such as a can with a “smart straw” that sprays lube in two ways – either a precise squirt or a mist. . ” There premiumization creates opportunities for revenue growth, margin expansion, and most importantly, it delights our target users,” CEO Steve Brass said in a conference call.
The question now is what this move towards higher-end products means for the economy in general. It could be a sign that companies are desperately trying to justify higher prices and cling to big profits as the economic outlook darkens.
To fight inflation, the US Federal Reserve (Fed) has been rapidly raising interest rates, which is believed to slow economic growth and dampen consumer demand. This could make it more difficult for companies to keep charging more, which would slow inflation and potentially reduce profits in the process.
“Most companies had pricing power last year,” said Citigroup strategist Scott Chronert, explaining that his forecast suggests “that’s going to change.”
And attempts to maintain profit margins by making products look premium aren’t guaranteed to pay off.
Six Flags, an operator of theme parks including La Ronde in Montreal, recently moved to a more upscale model by raising prices and limiting promotions, which CEO Selim Bassoul described as “bold changes in [son] business model to enhance the visitor experience”. The results are mixed so far. In the nine months to September, attendance at its parks was down 25% from a year earlier, spending per customer was up 22%, and ultimately profits were down nearly 10%.
In January, Walt Disney admitted that it may have raised prices too much at its theme parks, angering its loyal customers. The company has revised its policies for ticketing, hotel parking, attraction photos and annual passes.
But the move towards premium products could mark the start of a more lasting shift, with companies settling into a routine of selling lower volumes at higher prices in a divided economy – a strategy that could leave the poorest consumers most deprived.
This article was originally published in The New York Times.