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HA Song

More Businesses Need to Go "Cheap Chic"

HA Song

Mar. 14, 2011

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"Cheap chic," 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 detonating a classy style that is not outrageously expensive can now be applied to furniture, electronic products, airlines, hotels and financial sectors. For example, the market share of low-cost carriers that was only 0.1% in Korea's total passenger flights in 2005 went up to 34.9% in 2010. At the same time, mid -to low-price cosmetics market has grown 19.3% on annual average over the past five years.

As such, cheap and chic products and services are becoming the mainstream, a major shift from their longstanding stereotype being a "price-quality trade off." The offerings are especially welcome at these times when wallets are feeling the pinch from galloping 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 consumers' desire and hold down operating costs. For example, low-cost air carriers focused on providing budget-minded services. They found that people using domestic flights especially wanted lower air ticket prices. In order to offer low fares and meet operating costs, the budget carriers adopt various scheme 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 clothes items over the last several years. Is 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 function but outsourcing others. To this end they could achieve cost reduction.

California-based Vizio has only 200 employees but was still able to create a huge US$3 billion in sales in 2010. In the third quarter of 2010, the company recorded No.1 ranking market share in the North American LCD TV market. It sells TVs and outsources design, manufacturing and some of product designs. It selected large retailers like Wal-Mart and Costco as distribution channels instead of branch retail stores and consumer electronics stores. As a result, its ratio of sales and administrative costs to sales is only 0.7% compared to 10-20% of 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 topped 20% of 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 and 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 aggressively making inroads into this market 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 low-cost cosmetics boom in Korea with products less than $3. Missha's sales plunged from 2005 to 2007 when it came under increased pressure from low-cost rival Face Shop and Amore Pacific, Korea's top cosmetics firm, which ramped up its product lineup. Worse yet, Missha fell short in its overseas endeavors. However, Missha regained its footing by rolling out new premium functional products such as BB cream and enlisted a top Korean actress to be its advertising model. To this end, Missha reaped a more than 40 percent increase in annual sales in recent years up to 2010.

Vizio also had to face falling market share due to Sony's price cuts. But after reinforcing product lineup, including PC monitors home theater and LED TVs, it recovered its lost market share. All this mean that even a low-priced product can survive ever-intensifying competition if it cements an image of quality, function and branding that matches or surpasses those of rivals.

The key factor for success of cheap and chic products is the break-off from the stereotype of quality-price trade-off. This calls for companies to identify their core capability in the cheap chic segment and apply them in business. For that, they need to observe changes in the market and supply and distribution conditions and examine the possibility of launching cheap and chic products. They can also, based on their assets and capabilities, promote new low-price business, or maintain current position and create a new brand. The most important thing, however, is constant effort for quality and function and unique competitive edge. Companies that have succeeded, meanwhile, should try to develop follow-up cheap chic products.

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