The impact of premiumization.

Premiumization is becoming commonplace for companies looking to maximize profits amid soaring inflation rates, among other challenges. Will it still have a role when consumer prices and spending stabilize?

As the US navigates high inflation, economic uncertainty, labor shortages, supply chain issues, and lingering challenges brought on by the pandemic, many organizations implemented new strategies to mitigate profit losses.

One of these was “premiumization,” the creation of luxury versions of products that can be sold at elevated price points. This allowed companies to attract and retain higher-income consumers, and generate more revenue while producing fewer goods.

And, as consumers became accustomed to navigating rising costs in nearly every sector, brands were able to more easily introduce these more expensive offerings.

However, price stability may be on the horizon. Between July 2022 and July 2023, consumer prices increased only 3.2 percent across all categories and 4.9 percent for food. (For comparison, the previous year saw increases of 8.5 percent and 10.9 percent, respectively.)

But, that doesn’t mean the end of premiumization.

Coming out of the pandemic, consumers have roughly $1.4 trillion in excess savings–the vast majority of which is held by the top 40 percent of earners–and companies are motivated to continue finding outlets for this spending power.

Consumer segmentation

For any business to succeed, it must identify and cater to its target market. Based on what was being sold, the ideal buyers could span many income levels.

As a result of premiumization, however, companies are increasingly segmenting their customers into just two distinct groups: premium and discount buyers.

As detailed above, the motivations for brands to offer premium products is relatively clear. But, there are also growing opportunities from discount buyers–particularly as brand loyalty wanes among these consumers.

According to a recent report, nearly half of shoppers would leave their favorite brand for a less expensive competitor. In short: in today’s economy, the brand that can sell at the lowest price point may have the greatest opportunity to attract consumers.

And while some producers of consumer goods are well positioned to cater to each or both sides of this dichotomy, it isn’t easy for every industry to adapt to this new structure.

Premiumization and the restaurant industry

The restaurant industry has continued to struggle since the onset of the pandemic. And though diners are returning to restaurants more regularly, price sensitivities remain prevalent across income groups. This issue may be further exacerbated as diners navigate a changing tipping environment. As a result, eating out continues to be an experience that consumers are willing to forgo in pursuit of financial savings.

Taking a page from the premiumization playbook, fine dining establishments are raising their prices to minimize the consequences of this volatility. This, in turn, makes the experience of eating at these restaurants even more exclusive–which may be a draw for high-income individuals.

On the other hand, diners with less disposable income are motivated by deals. But, for those bars and restaurants operating outside of the fast food sector, it can be difficult to provide promotions without devaluing their food, service, and reputation.

And while I do not foresee a future where our restaurant options are reduced to Michelin-starred restaurants or drive-thrus, I fear what may be lost in the widening gap between premium and discount buyers.

This concern reflects a looming question about consumer segmentation due to premiumization: What about middle-class consumers?

As of now, it is too soon to tell. But it is important to remember that economic forces are cyclical. And focusing so heavily on the two ends of the premiumization spectrum will likely impact everyone’s buying power–and preferences–in the future.

Danilo Diazgranados is an independent investor in the global food and wine, financial services, real estate, and the hospitality sectors.