• by Karlene Lukovitz , June 4, 2007

Whopping gas hikes didn't discourage Americans from treating themselves to upgrades in just about every category of discretionary spending last year, according to the latest tracking data from The Boston Consulting Group (BCG).

In fact, in a switch from recent years' trends, trading-up spending grew slightly faster (up 7% to $720 billion) than trading-down spending (up 6%, to $1.165 trillion).

In terms of share of discretionary dollars, trading up accounted for 21% (up three percentage points since 2004), while trading down accounted for 33% (up two percentage points since 2004).

Meanwhile, spending on traditional "middle market" products and services continued its inexorable decline. At $1.61 trillion, this sector still represents 46% of all discretionary spending, but that's down from 48% in 2005 and 51% in 2004.

The underlying dynamic is familiar by now. Americans "know how to identify the premium products that will meet their emotional needs and offset the challenges of life," sums up consumer economy expert and BCG Senior Partner Michael J. Silverstein, and in order to afford the products that mean most to them, "they bargain-hunt relentlessly in other categories to find low-cost, quality items and services."

However, the continuing declines in real estate prices in most of the country are clearly forcing some to delay movin' on up to that McMansion--or even to scale down. Trading-up spending on homes and home renovations actually declined by 4% last year to $125 billion, while trading-down spending rose 8% to $260 billion.

Instead, some consumers are turning to food for solace. Trading up on dining-out experiences (both quick- and full-service) leaped by 21% to $85 billion, and trading up on food and beverages (including liquor) jumped 14% to $80 billion.

Little wonder, then, that three of BCG's top 10 trading-up retailers--those showing greatest growth in market capitalization between 1996 and 2006--are Whole Foods Market Inc., Cheesecake Factory and Brinker International (Chili's Grill & Bar, Romano's Macaroni Grill, On The Border Mexican Grill & Cantina, and Maggiano's Little Italy).

Better clothing and footwear are also hot: up by 13% to $45 billion. Coach, Nordstrom, Neiman Marcus and Limited Brands, Inc. made the top 10 trading-up list in this category.

In terms of total dollars spent, however, splurging on travel takes precedence even over homes. Americans spent $160 billion on travel trade-ups last year (up 7%).

Consumers also increased trading-up spending on personal products and services (defined to include everything from shampoo to spas, cosmetic surgery and private schooling), up 9% to $60 billion; home goods (furniture, appliances, home electronics), up 8% to $70 billion; and transportation (new/pre-owned cars, light trucks and SUVs), up 6% to $95 billion.

On the other hand, dining-out cuisine apparently isn't the top priority for many: On the trading-down front, dining out spending jumped 9% to $175 billion. Still, trading down on at-home food and beverages increased by just 3% to $150 billion.

Other categories showing growth in price-chopping popularity included home goods (up 8% to $70 billion), clothing/footwear (up 7% to $75 billion), and travel (up 7% to $160 billion).

Brands on the top 10 trading-down list include Wal-Mart, Home Depot, Target, Lowe's, Costco, Kohl's, Staples, TXJ Companies, Dollar General and Family Dollar.

According to Silverstein, brands in the trading-up game must "create a cycle of innovation" to compete effectively. For example, Bath & Body Works has revitalized itself with new store brands and products developed with outside partners, he points out.

Trading-down brands, not surprisingly, need to focus on driving out costs. Aldi, the hard-discount leader in Europe, offers lower prices than Wal-Mart and earns higher margins.

A few companies, like LG Electronics, manage to span the poles and reap the best of both worlds.

But what's a marketer-in-the-middle to do? Bail out. "The middle has become a death zone for virtually every category," observes Silverstein. "Margins are thin and companies stuck there can go into an inescapable downward spiral."