[Viewpoint] Chic, cheap and cheerful

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[Viewpoint] Chic, cheap and cheerful

“Cheapchic,” initially the province of the fashion industry, has spread to all types of retail and service segments, but there is plenty of untapped potential to be mined by more businesses.

The moniker describing a classy style that is not outrageously expensive can now be applied to furniture, electronics, airlines and hotels. For example, the market share of low-cost carriers was only 0.1 percent of Korea’s total passenger flights in 2005. It increased to 34.9 percent in 2010. At the same time, the mid- to low-price cosmetics market has grown 19.3 percent annually on average over the past five years.

As such, cheap and chic products and services are becoming mainstream, a major shift from their longstanding stereotype being a “price-quality trade off.” The offerings are especially welcome at times of inflation. Roland Rust, a marketing professor at the University of Maryland, coined the term “feature fatigue” to describe the beleaguered feeling today’s consumers have about products overloaded with features. Consumers tend to prefer products that just meet their needs, rather than high-end products with many functions.

Successful cheap chic products eliminate non-core features to satisfy consumer desire and hold down operating costs. For example, low-cost air carriers focused on providing budget services. They found that people flying domestically especially wanted lower air ticket prices. In order to offer low fares and meet operating costs, the budget carriers adopt various schemes, such as using the same type of plane to reduce repair bills and cutting frills like movie channels and first-class seating.

Low-priced products can distinguish themselves from others if they maximize core value. Japanese fashion brand Uniqlo is committed to developing its fabrics as much as its clothing design. Its “heat tech” clothes jointly developed with Japan’s leading fiber firm Toray was both cheap and warm, becoming one of the favorite winter clothing items over the last several years. Its success is not only underpinned by moderate prices, but also its focus on making its items better than high-end clothes. There is one common feature shared by companies that have been successful in cheap and chic products. They have built a “network” business structure of retaining core functions - but outsourcing others to achieve cost reduction.

California-based Vizio has only 200 employees but was still able to create $3 billion in sales in 2010. In the third quarter of last year, the company had the leading market share in the North American LCD TV market. It sells TVs and outsources design and manufacturing. It selected large retailers like Wal-Mart and Costco as distribution channels, instead of selling them in branch retail and consumer electronics stores. As a result, its ratio of sales and administrative costs to sales is only 0.7 percent compared to 10-20 percent for other firms.

Even for existing products, companies could satisfy consumers with lower prices if they sell them in new distribution channels. For example, Korea’s online automobile insurance accounted for a fifth of the total domestic auto insurance market in 2009. The online and offline channels had identical products, but the online channel could lower labor costs and offer lower prices.

Many cheap chic products have a short shelf life because they become a victim of their success; their business model elicits imitations by leading companies and newcomers. Competition starts in earnest. This is the case with low-cost carriers and online auto insurance, which are facing rising competition from existing auto insurers with the same business model.

The intense competition can jeopardize the longevity of the original product, unless its owner can adjust its strategy. This was experienced by Michaa, a Korean low-cost cosmetics brand that had led the low-cost cosmetics boom in Korea with products costing less than $3. Missha’s sales plunged from 2005 to 2007 when it came under increased pressure from low-cost rivals Face Shop and Amore Pacific, Korea’s top cosmetics firm. Worse yet, Missha fell short in its overseas endeavors.

However, Missha regained its footing by rolling out new premium functional products and enlisted a top Korean actress to be its advertising model. As a result, Missha’s sales have risen by more than 40 percent in recent years. Vizio faced falling market share due to Sony’s price cuts. But after reinforcing its product lineup, including PC monitors, home theater and LED TVs, it has recovered. All this means is that even a low-priced product can survive intensifying competition if it cements an image of quality, function and branding that matches or surpasses rivals. The key factor for the success of cheap and chic products is to break away from the stereotype that a quality-price trade-off must exist.

This calls for companies to identify their core capability in the cheap chic segment and apply it in business. For that, they need to observe changes in the market and supply and distribution conditions.

*The writer is a research fellow at Samsung Economic Research Institute. Visit www.seriworld.org for more SERI reports.

By Ha Song
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