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By: Jessica Dudley (group leader), Heather Cunningham (co-leader), Natalia Espejo, Jennifer Lacenera and Dudley Williams
Posted: June 4, 2014
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As these global trends shape the economic and demographic realities of the United States, they will force the U.S. consumer to adapt to a new environment.
The Evolution of America
U.S. Economy: With average household income rising just 2.1% in the U.S. between 2000 and 2009, the U.S. middle class is struggling to maintain its standard of living (De La Cruz, 2012). According to a report issued by the U.S. Census Bureau, the median household income in the U.S. remained flat at $51,017 in 2012 with 15% of the population living in poverty3, an increase from 11.3% in 2000 (Hargreaves, 2013). Meanwhile, the Bureau of Labor & Statistics has reported an average U.S. inflation rate of 2.4% over the past 10 years. This economic stagnation has left consumers wary of the future. Researchers from LIS (a group that maintains the Luxembourg Income Study Database) and The Upshot (a New York Times website that covers policy and politics) reported that polls show just 30% of Americans believe the country is heading in the right direction (Leonhardt & Quealy, 2014).
If current trends continue, the projected average household income in 2030 will be just $85,000. These are meager gains when taking into account an 8% increase in the cost of healthcare and the cost of college education doubling that of today (De La Cruz, 2012; JP, 2012). Many Americans will face decreases to disposable income over the next 15 years; wasteful spending will not be an option for these consumers. Those who do retain significant disposable income will become postrecession survivors, changing their habits to protect themselves against financial instability. Americans are already changing their behaviors in order to survive in the post-recession U.S. economy. The Federal Reserve Bank of New York reported a decline of $24 billion in credit card balances in the first quarter of 2014. This contrasts greatly with the increase in student loan debt, which rose by $31 billion in the same time period, quadrupling in value since 2003. Housing loans also increased by $116 billion, primarily due to lower rates of foreclosure (Kedmey, 2014). These are indications that U.S. consumers are changing their priorities. As the cost of education, healthcare, and other necessities continue to increase, consumers will adapt their spending patterns.
The Progressive Rationalist: Global connectivity, migration, and new economic realities will cause the behaviors of previously separate consumer groups to collide, forming one new group—the Progressive Rationalists. By 2030, purchase behavior will no longer be defined by traditional demographics such as income level, age, or race. For example, regardless of the reason—be it necessity or the elimination of wasteful spending—both low income and affluent consumers will expect high quality and design at a competitive price. Through the laws of supply and demand, the decline in disposable income for all consumers will elevate the value of each dollar spent and each purchase will be subject to higher scrutiny than ever before.
The Progressive Consumption Equation: The Progressive Consumption Equation identifies the path to purchase that the Progressive Rationalist will follow. This equation is based on the historical habits of the U.S. consumer. In the Nineties many companies relied on brand cache to succeed, particularly in fashion and beauty, where logos and advertisements were almost more important than the products themselves. Brands such as Tommy Hilfiger, Calvin Klein, and Nike gained popularity for their underground culture and shocking advertisements. However, as technology advanced and consumers gained more access to product information through bloggers, product reviews, and online editorial, they no longer used brand recognition as their only purchase influencer. Retail venues such as Sephora, as well as the proliferation of social media, have significantly changed the way consumers shop for beauty. There is now a focus on in-store trial and play as well as the availability of instant recommendations from friends and beauty experts. In response to this shift, the beauty industry introduced hero products such as Benefit’s “They’re Real” Mascara and Urban Decay’s Naked Palettes, building product loyalty as the first step towards brand loyalty. This model has been successful, with skin care and color cosmetics brands focusing on creating high quality, specialized products that meet a specific functional need. These products are used to attract consumers to a brand with the hope that they will build a gateway to further sales opportunities. Today’s purchase equation—which focuses on building hero products—can be described as the following equation: functional need (FN) plus product efficacy (PE) equals purchase (Pu) (FN+PE =Pu).
In order to speak to the Progressive Rationalist of 2030, brands will need to build upon today’s equation. Functional need and efficacy will be mandatory requirements on the path to purchase, but The Progressive Consumption Equation takes into account the new value of disposable income by adding in higher order needs (HON). As a result, the equation will evolve to: higher order need (HON) plus functional need (FN) plus product efficacy (PE) equals purchase (Pu) (HON+FN+PE = Pu).
Higher order needs are outside influencers that create enough additional value to allow the consumer to justify spending their disposable income on one product over another. These needs include convenience, clarity around sustainability, price point, or even brand name. Each individual will have their own set of higher order needs and use them to guide their path to purchase. A consumer who values sustainability will purchase more expensive products if they are recycled or organic while a consumer who places a premium on brand name will buy Kraft Macaroni and Cheese instead of the local market private label. Successful brands of the future will identify the needs of their consumers in order to bring value through these needs.
Through comprehensive research, three key needs were identified as the most common and valuable needs of the Progressive Rationalist: convenience, clarity, and cash. To successfully execute the Progressive Consumption Equation in beauty, products should meet a specific functional need, such as a wrinkle reducing eye cream, be a top rated performer in the category and be ethically sourced, available for same day delivery, and competitively priced. By focusing on these three key needs, beauty brands can position themselves to succeed in 2030.
The 2013 Capstone group that presented Digital Marketing predicted that in the near future, mobile and on-the-go purchase would be ubiquitous, and purchase points would exist everywhere the consumer was (Videira, A., Boyce, A., & Cifrese, A., 2013). By 2020, there will be 2.5 billion smart phones in the world, representing nearly half of the global adult population (Van Belleghem, 2013), each providing a unique point of purchase. In this new world, where every desire is in the palm of the consumer’s hand, convenience will take on a new meaning.
One example of a brand model that has identified a way to bring true convenience to the consumer is Subway. Subway has progressed beyond that of a typical fast food chain. It is an established brand that has continuously redefined itself through innovation. The Subway brand was established in 1974 and expanded to 2,000 locations by 1988 using a traditional franchise model. In 1993, a local businessman from small town Iowa brought forth an idea that changed the Subway model, introducing non-traditional franchise locations with his proposal of a shop in his local gas station convenience store. Don Fertman, Subway’s chief development officer initially dismissed the idea as he felt the combination of fresh food and gasoline would not be successful. Despite the dismissal, the local entrepreneur opened his own sandwich shop and returned to Subway one year later proving that the venture was profitable. In light of this success, Fertman reconsidered his original opinion and the first non-traditional Subway location was opened. Today, non-traditional locations include over 10,000 gas station convenience stores, a Detroit high school, and a riverboat in Germany (Hollier, 2011). During the first quarter of 2012, the Subway chain hit two important milestones—25,000 restaurants across the U.S., and operations in 100 countries. The current restaurant count is more than 41,000 locations (Subway.com, 2014). In 2013, Subway was ranked the #2 fast food chain in the U.S. and Fertman attributes much of Subway’s success to their focus on local markets. They handle each market separately through a system of local developers who work with franchisees to understand their local market far better than the corporate office. With each location specifically created to meet the demand of the local consumer, they achieve convenience without saturation. Subway has found that franchisee operated stores are better maintained and provide superior service because there is someone in each store who truly cares about that specific location (Hollier, 2011).
It is recommended that the beauty industry build upon Subway’s unique franchisee model through Hyper-Accessibility. With Hyper-Accessibility, companies will utilize micro-franchisees who buy into brands and set up highly localized points of distribution. This model will provide brands with a low risk strategy that will expand their sales team beyond beauty advisors and account specialists. These micro-franchisees can identify optimal and unique distribution opportunities for their market, such as local boutiques or hosted parties that would otherwise be too small for the corporate office to manage. In addition, micro-franchisees will be empowered to execute localized sales techniques and offer a customized product assortment. Through Hyper-Accessibility, brands will be able to collect local consumer insights across the country, identifying key trends before they emerge nationally. For minimal capital, brands will gain a footprint in communities that were previously only accessible via the Internet.
According to the Charting Our Water Future report, published by McKinsey & Company in partnership with the 2030 Water Resources Group, by 2030, there will be a 40% gap between the global supply of water and the world’s collective demand (Charting Our Water Future, 2009). The International Water Management Institute backs up this claim, citing that by 2025, two-thirds of the world’s population, or six billion people will live under water-stressed conditions (Evans, 2011; U.S. Census, 2014). Advancements in technology and the accessibility of information through global connectivity will continue to highlight the impact of everyday purchases on the environment, creating highly scrutinized consumption behavior. A recent GoodPurpose global study revealed that 44% of global consumers feel they have more power and influence today versus five years ago (Edelman, 2012). The informal networks of 2030 will provide individuals with even more power and influence and the Progressive Rationalists will use their collective power to make a difference in the world.
This voice will not be limited to the consumer. Social entrepreneurship is currently on the rise, and not expected to slow down. New business models such as Benefit Corporations (commonly referred to as B-Corps) unite businesses around the world to use their collective power to solve social and environmental challenges. Method, a cleaning supply brand, is a B-Corp that illustrates how a brand can deliver beyond functional needs and performance. They have created an entire line of non-toxic homecare products that claim to be more powerful than a bottle of sodium hypochlorite while using 100% post-consumer recycled plastic for their packaging.