How to win without the Middle Class

Posted by Steve Kleber on Sep 16, 2011

Citigroup calls it the “Consumer Hourglass Theory.” Others cite a “trading up, trading down” trend. No matter the label, America’s swiftly evolving consumer markets have created a fairly distinguishable divide.  And to win in this economy, you’re going to need to do it without the middle class.

Luxury jeweler Tiffany & Co. saw a 33% rise in earnings during its second fiscal quarter and as reported by the Wall Street Journal, “lower-priced silver baubles, once a favorite of middle-class shoppers… are now its weakest sellers in the U.S.” What’s more, Porsche sales management claimed “the highest order intake in the company’s history” and predicts that the numbers will climb higher still. Similarly, BMW and Mercedes-Benz executives reported positive sales, with no indication that demand may slow. And luxury retailer Saks promoted that sales for the first half of this year were up 11% and announced a return to profitability with great resiliency on the part of the affluent consumer.

So is the secret to success as simple as chasing the high-end target market? Not so fast.

Consider Dollar General and web discounters who attract value conscious consumers, capitalizing on the gap between the “haves” and “have nots” Even power player WalMart is mired in the middle. Have you seen the new Walgreens drugstore on Wall Street that sells sushi and offers nail salon services or visited a Costco that serves as a one-stop shop for both bulk pack toilet paper and a bottle of first-growth Bordeaux? Proctor & Gamble, for example, saw how shoppers’ habits were changing, and fundamentally changed how it develops and sells product. The company’s strategy now is to please both high-end and lower-end markets by offering home goods such as soap, toothpaste, razors and paper towels through distinctly price-differentiated brands.

The popularity of Target’s new Missoni collection introduction crashed its servers last week. Photo credit: Paul Nelson

At K&A, we’re seeing a considerable and distinct balance between opposite ends of the buyers’ market. There’s a bifurcation taking place in the U.S. whereas the clout of the middle class is seriously diminishing. Just this past week at the Casual Market show in Chicago, we witnessed higher end products and low price alternatives co-existing within the same experiential event… appealing not to the middle-of-the-road consumer, but instead to shoppers at one end of the spectrum and the other. Take EcoSmart and Eco-Fue, two brands represented at Casual Market. Both introduced new Bioethanol fireplaces. EcoSmart’s high price-point fireplace carries a suggested retail of around $1000 while Eco-Fue markets to a more price-conscious consumer with burners starting at $75. Both brands keenly recognize and are taking advantage of the split market phenomena, manufacturing profitable products to meet increasing demand at both ends of the economy.

While median household earnings fell for the third consecutive year according to the Census Bureau and more than 15% of Americans are living in poverty, consider that…

  • Luxury clothing and accessories purchases are demonstrating significant strength this year compared to a similar time period last year, according to  American Express Business Insights
  • Custom residential markets seem to be recovering faster than other types of housing with Southern California rising for the first time in some 14 months.
  • Luxury markets are experiencing greater stability and are demonstrating stronger numbers than other entry-level segments
  • Home sizes may be growing slightly, as 60% of residential architects say upper-end home sizes are increasing or staying the same
This entry was posted by Steve Kleber on Friday, September 16th, 2011 at 3:27 pm and is filed under Brand Management, Marketing, Research. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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  1. kate says:

    On a business perspective which is what this column is based on, this is good information for considering marketing direction.

    But as someone with a social conscience, I cannot help but feel conflicted about the figures touted above. On one hand, it may make a marketer consider that there exist more opportunities to chase the higher end, on the other hand, these figures portend a bleak future for most of the American population.

    While the majority of citizens in this country cling precariously to a dwindling middle class existence, many see themselves slide into a lower income status and then finally into poverty. While at the same time, those who have always had money, thanks to the past thirty years of tax breaks and tax readjustments, have seen their personal wealth increase.

    In addition, most contractors and home goods sellers rely on the middle class market to survive. 1 to 15% of the total population is not enough to employ the rest of the population; unless of course they all are willing to work as serfs.