Premiumization: a dead parrot? Or merely sleeping?

The American economist Paul Krugman’s comment was one of the best I’ve come across recently: “We've got a problem with terminology because we usually say either the economy is in recession or the economy is recovering. Either you're in hell or you're in heaven. And the trouble is we're actually in purgatory.” My own frustration with the binary, black-or-white way of viewing the world has developed over the last few weeks as I have tried to juggle with a number of very contradictory pieces of news. On one side of the ledger, there’s the “fact” that Germany, France and Japan are no longer in a recession and that Britain and the US are, for their part, on the road to recovery. On the other, there’s the “fact” that French and German unemployment figures are still growing. Most estimates suggest that during the course of 2009, the jobless rate in these two countries alone will have risen by over a million. People are tightening their belts across the globe. Apart from the bankers who will be celebrating a fresh crop of generous bonuses at the end of the year. In 2007, you could have paid £525 for a Just-Drinks report entitled Emerging Markets and Premiumisation to Drive Global Spirits Market. Just two years later, the analysts at Deutsche Bank are questioning whether “The era of premiumisation is over..?” and backing the drinks giant Diageo for its perceived ability to achieve “volume growth to drive earnings”.

The problem is that premiumisation is not only an ugly word; it’s also a term whose meaning depends on the person using it. For some, it applies to super-luxury products like the $10,000 Loewe Calle handbag photographed on Victoria Beckham’s arm in February when the credit crunch was arguably at its worst. Or the Armand de Brignac non-vintage Champagne that relies on its blingy packaging and link with the rapper Jay-Z to justify a price tag of $500 a time. Neither of these, interestingly, complies to the definition of “New Luxury” in from Michael J Silverstein and Neil Fiske’s excellent 2005 book Trading Up”. The focus for these authors is “products and services that possess higher levels of quality, taste and aspiration than other goods in the category but are not so expensive as to be out of reach”.

Of course, buried within this definition are several subjective issues. Who is to say whether one product is of higher quality and taste than another? What one consumer may aspire to might leave another completely cold. And how far can any consumer actually reach? Silverstein and Fiske acknowledge this last point by pointing out that “a consumer’s buying habits do not always confirm to her income level”. There may be a “disharmony of consumption” whereby she will purchase own-label dishwashing liquid but drink premium Samuel Adams beer.

A good illustration of the lack of connection between the amount of money in a consumer’s pocket and the way in which he will spend is offered in the UK by the current performance of two beverages: coffee and wine. It was recently reported that Tesco’s “Finest” wine range had been removed from some 200 of the chain’s 300 stores and its place taken by a “Value” range including Spanish Tetra Paks of wine at £3.15 per litre, a price which would allow for a wine cost of €30c per litre. Tesco's strenuously denies the first part of these reports, but most retailers acknowledge that "premium" wines are proving harder to sell. Meanwhile, however, Whitbread, the UK hotel, pub and coffee bar group which once brewed beer and retailed wine, has just announced first half figures for 2009 which revealed an 18.4% increase in sales at its Costa coffee outlets, where a cappuccino would cost around £2.00.

My own simple take on the relative success of the coffee vendors is that successful premiumisation is all to do with the way the product or service makes the consumer feel - irrespective of price. The ability to spend more than you need to on a cup of coffee, or on a pair of socks - or shoes - may actually be part of the appeal. And I doubt that this is a human emotion that is going to disappear simply because the world is going through a financial crisis.

What may well change for many people, is unconsidered spending. It’s not surprising that Nielsen and Datamonitor data show own-label purchasing as being on the rise in the US and UK. But that trend does not contradict the declaration by the up-market UK supermarket chain Waitrose that many of its consumers are returning to its aisles after an unsatisfactory flirtation with the discounters Aldi and Lidl.

The challenge confronting wine producers and marketers lies in ensuring that their product has that feel-good factor. And no brand exemplifies that better than Oyster Bay. Despite oversupply of New Zealand Sauvignon Blanc and the recession, Delegat’s its makers have just announced a 37% rise in annual revenue and 57% jump in net profits. Interestingly, Oyster Bay seems to be maintaining its premium price in the UK despite Tesco’s sale of an ocean of three-for-£10 Marlborough Sauvignon Blanc. It has also joined the ranks of the ten best-selling over $10 wines in the US, despite the general downward trend of wine prices there. The Costa and Oyster Bay factor is not easily defined - if it were, everyone would be applying it - but my guess is that it lies in maintaining quality that is at least at the higher end of its class, a premium image and a price that’s just high enough to make the buyer aware that he is treating himself without actually feeling any pain.