A new and more segmented American marketplace has risen from the ashes of the recession, prompting some marketplace watchers to proclaim the demise of the middle class—or, at the very least, to call for a new definition of that expansive consumer group. Once marketers’ bread and butter, middle-class consumers are being pushed to the periphery of many marketers’ targeting strategies as they focus, instead, on a more cut-and-dry division of the socioeconomic spectrum: into the “haves” and “have-nots.” Experts predict that this polarized view of the marketplace could prompt many marketers to shift everything from their product portfolios and pricing to their messaging strategies and marketing mixes this year.
More sophisticated segmentation practices have been parceling out the once-generic middle-class consumer group for years, but now, from a socioeconomic standpoint, the definition of a middle-class consumer— and particularly his wallet size—is anything but generic, and many successful marketers are taking a high-low approach to their targeting and segmentation practices. “There’s been a notion in retailing for a long time that you could do better targeting the top end or the bottom end, and you could get lost if you’re in the middle. We’re seeing more companies focusing on that notion now than ever before,” says Jonathan Asher, senior vice president at Perception Research Services International Inc., a consumer research firm based in Fort Lee, N.J.
Given the years of financial unease that many consumers have experienced since the U.S. economy faltered, it comes as no surprise that “trading down” has become a central consumer behavior. Although not quite as bleak as they were at the beginning of the recession in late 2007, economic statistics and consumer attitudes remain grim. The U.S. unemployment rate stood at 8.6% in November 2011, according to the U.S. Bureau of Labor Statistics, and while consumer confidence rose in November entering into the holiday shopping season, the U.S. Consumer Confidence Index, an economic indicator that measures the degree of optimism that consumers feel about the state of the economy, had declined to 39.8 the month before, a level last seen during the 2007-2009 recession. Consumers’ overall optimism about the economy slumped to 23% in October 2011, down from 35% in March 2011 and 41% in September 2009, according to a survey on shopper and consumer insights by global management consulting firm McKinsey & Co. Those results don’t bode well for marketers targeting beleaguered consumers in 2012, experts say.
“Consumers are still spending money, but they’re not feeling good about it. Prices have been increasing and wages are not increasing. The median family income has also fallen three years in a row and a lot of households have lost their net worth. When people don’t have any assets, they pursue less. It’s very evident that the middle market is being squeezed,” says Chris Christopher, senior principal economist at IHS Inc., an Englewood, Colo.-based global research and consulting company. IHS projects that income inequality will increase in the United States in 2012.
Economic conditions in 2012 will foster a recovery for the upper class in terms of consumer spending, but there will be continued malaise in the middle and lower classes, according to Michael Englund, principal director and chief economist at Boulder, Colo.-based Action Economics, a market analysis firm. “At the low end of income distribution, people dependent on wage income are going to find that labor markets are going to get increasingly dysfunctional. We’re not entirely sure the middle class is getting smaller, but what we are finding is people who are depending on wage income can’t simply assume ongoing climbs in wage income going forward … and they just don’t have the income to finance the kind of spending that we’ve seen in [times of economic] expansion.”
Adds Christopher, “We know from economic data that income inequality has increased since the recession hit and that’s being reflected in how retailers are approaching things.”
For a barometer of the changing consumer marketplace, look no further than recent moves by Cincinnati-based Procter & Gamble Co. According to The Wall Street Journal, P&G expanded its research on low-income households over the past two years and this fall, in response to consumers' needs for lower-cost options, P&G launched bargain-priced Gain dish soap, its first dish soap launch in 38 years. In an attempt to secure the other end of the economic spectrum, P&G introduced higher-priced versions of its Olay and Gillette product lines in 2009 and 2010, respectively. P&G declined to comment for this story.
Shrinking package sizes are another consequence of Americans’ shrinking incomes. P&G reduced the size of some Tide laundry detergent packages from 100 oz. to z5 oz., allowing it to sell the smaller package size at under $10 at Wal-Mart compared with $12 for the 100-oz. version, according to Ad Age. In October, H.J. Heinz announced plans to produce smaller-sized versions across its product portfolio to target low-income consumers and Coca-Cola introduced 12.5 oz. bottles that sell for less in convenience stores than its 16- and 20-oz. versions.
Consumers still want name-brand products, but they want them for less, says Marshal Cohen, chief industry analyst at Port Washington, N.Y.-based research firm The NPD Group Inc. who specializes in consumer behavior, retail and fashion. “Today, when you ask the consumer, ‘What is value?’ the No. 1 answer they give is ‘brand names for less.’ That justifies why companies like Coca-Cola and Procter & Gamble [are cutting package sizes]. All of those things are a direct reflection of customers saying, ‘I want the quality of the trusted brand, the reputation of the product, but I want it at a better value price and I’m willing to pay less to get the experience.’ ”
The success of discount retailers such as Family Dollar and Dollar General—both of which posted earnings increases in 2011—is evidence of a more permanent shift in purchase behavior than just a reactionary response to the recession’s pressures, experts say. “The dollar stores have done a very good job of retaining a customer that gravitated towards them during the recession out of necessity to save money and make their paycheck go further,” Cohen says. “The lower-middle and lower-income consumer have engaged with dollar stores and stayed there, and that’s why dollar stores continue to grow, because they’ve offered a more diversified product range, because they’ve offered new sizes of product at advantageous prices.” On the higher-income end of the spectrum, luxury retailers now are faring well. Tiffany’s sales increased 21% over the prior year in the third quarter of 2011 and Neiman Marcus Inc. reported total revenues of $1 billion in the first quarter of the 2012 fiscal year compared with $927.2 million in the prior year. “We’ve been doing a lot of work over the past couple of years on the polarized consumer. Those with incomes of over $100,000 are back in the game. The recession has ended for them. All other income groups are cutting back in terms of spending,” says Todd Hale, senior vice president of consumer and shopper insights at the New York-based Nielsen Co.
Granted, experts say that the luxury consumer of 2012 is more cautious than the pre-recession luxury consumer. “The luxury consumer’s mindset is one of eagerness and anticipation, but there’s also a heavy dose of caution. [Luxury brands] are performing well but not necessarily at pre-recession rates,” says Justin Wartell, executive director of brand strategy at Interbrand Design Forum, the shopper sciences and retail arm of Interbrand, a New York-based global branding consultancy.
Pamela Danziger, founder of Unity Marketing, a Stevens, Pa.-based marketing firm that specializes in luxury goods, says that luxury stores have held their own because they’ve adapted to the changing economy. “Shopping in those stores today is very different than shopping in those stores in 2007. They’ve opened their doors to lower-priced product lines. Saks is doing more with their own private label, which is more valueoriented, more dollar-friendly. Neiman just started taking MasterCard and Visa, whereas before it was only their own credit cards and American Express. The stores are being rewarded for [their] effective response to the economic climate. They’re very smart marketers and as a result, they’re showing positive results,” Danziger says.
While low-end and high-end retailers have hit their stride in targeting more discerning consumers who’ve been trained to mind their credit lines by a painful recession, many middle-range retailers haven’t been as successful. As Marketing News has reported, middle-market retailer Gap Inc. has faltered throughout 2011, with both marketing and earnings troubles. Gap’s third quarter 2011 earnings dropped 36% and it announced the closure of 21% of its U.S.-based Gap stores in October. Other midmarket retailers struggled in late 2011 as well: J.C. Penney’s total company sales in November 2011 decreased 5.9% and Sears’ domestic comparable sales declined 0.7% in the third quarter of 2011.
“We’re watching the consumer try to figure out where they belong. Not all of the mass merchants have done as good of a job as the others at reclaiming that lower-end consumer and not all the luxury retailers have recovered from the loss of that aspirational middle-class customer,” Cohen says.
“As we see the middle class get stretched further and further into having to buy more diversified product with less income power, luxury is going to get back to pure luxury,” he adds. “You’re also seeing the low end being able to raise the bar again to at least engage the consumer in figuring out how to put a little bit of luxury there. We’re seeing the polarization of luxury very strongly exemplified: the luxury market doing better and the low-end market dipping their toe into affordable luxury, which is eroding the middle even more.”
The world of retail is trying to figure out how to reach the two ends of the economic spectrum, Cohen says. And with the disappearance of the aspirational middle-class consumer—or at least with middle-class consumers who are willing and able to spend on aspirational products— some luxury brands are developing products for the middle- or lower-class market, such as fashion retailer Missoni’s line of products for Target. “It sold out within two and a half hours in 89% of stores they put the product in. That’s a phenomenal success story, so successful it crashed Target’s website,” Cohen says.
And as the marketplace bifurcates based on wallet size, price is, of course, paramount. “If you’re going to make price some sort of driver of your message, it has to stand for something, and the middle means nothing. It’s either price because it’s value, or luxury because it’s pricey,” says Scott Lucas, executive director of Interbrand Cincinnati. “We’re seeing our clients make a clear distinction that if it’s going to be a price-based conversation with consumers, it has to be meaningful and that middle tier isn’t as rich of a story because price is tied to just being in the middle. … It has to be value or premium.”
Retailers’ responses to consumers’ new spending behaviors are, of course, emblematic of what’s going on throughout the global marketplace, as restaurants, airlines and tourist destinations, service providers, B-to-B organizations, you name it, rethink their targeting and pricing strategies, unbundle or resize their offerings and adjust their thinking to focus on customers who sit right or left of middle on the financial spectrum. In 2012 and beyond, offering a middle-range, average-priced product or service is no longer an enticing marketing proposition for many customers, experts say. Either you beat your competition by offering the most attractive price, or you beat them by convincing customers that the quality and value of your offering is worth the extra cost.
Asher of Perception Research says that for customers across the marketplace, their purchase behavior has become a cost-conscious, either-or proposition: “It’s either, ‘I’m looking totally for price,’ or ‘I’m going to spend more for quality because it’s going to be worth it in the long run.’ ”