As the economy continues to struggle, the American middle class finds itself financially pinched. Previously high-income, high-expenditure households of the middle class are now shopping for middle of the range goods, while middle class shoppers are being forced toward lower-end products due to tightening budgets. Consumer product giant Procter & Gamble Co. (P&G) has targeted the average middle class shopper for years, producing household staples like Tide laundry detergent, Olay skin care products, and Gillette razors. Now, the company is shifting strategy to meet demand from a stable, upper-middle class market as well as a growing lower-middle class market. P&G’s recent introduction of Gain dish soap, a lower-quality, cheaper product exemplifies this new strategy. In that sense, P&G is betting that this rise in economic inequality is more permanent than we think.
Economic polarization of the market has been coined by Citigroup as the Consumer Hourglass Theory. As the economy struggles, the upper and lower classes bulge while the middle class is squeezed. The middle class feels an increased pinch even more so because stock prices and the housing market are declining while prices for education, health care, and other major expenses are increasing. The large proportion of houses underwater and the unstable job market across sectors force middle class households to consume products on the lower end of the spectrum. Wealthier families that don’t feel the pinch in their day to day lives are able to maintain their standard of living, keeping their average expenditure on consumer goods relatively stable. To describe this quantitatively, economists use the Gini index to measure income inequality in a nation. The index ranges from zero, where everyone’s earning is the same, to one, where one person earns all of the income. America’s most recent Gini index in 2009 was 0.468, indicating a 20% increase in income inequality over the past 40 years. To put that in perspective, America’s Gini index is now similar to that of Uganda and Iran. In that sense, it is clear that companies that once targeted the mid-range consumer are finding that they need to diversify to meet the demands of two increasingly polarized audiences.
In addition, P&G isn’t the only company altering its strategy to meet the demands of a polarized middle class. In retail, Saks Inc. has shifted focus to expensive clothing and accessories because affluent customers are proving to be a much more stable market than middle class shoppers. Recently, wealthier consumers have been driving the company’s growth given that sales of entry-level products are falling. The same effects are reported by high end names like Coach Inc., Neiman Marcus Group Inc., and Tiffany & Co. This readjustment in consumer purchasing is particularly well illustrated by the loss in sales of Target Corp. and Wal-Mart Stores Inc., which are losing consumers to lower-end corporations like Dollar General Corp.
Citigroup uses the hourglass theory to guide stock purchasing decisions for the coming year. They predict that companies targeting the low-range consumer will do better than those that target the mid-range consumer. Examples of companies that are expected to do well in the recession include Dollar General, Hanesbrands, and Kraft Foods. But beyond stock predictions and consumer choices, there are a few truly tangible possibilities for corporations as the middle class continues to be squeezed.
First, new, cheaper brands will take a prominent place in stores. P&G and other industry leaders would fare better by introducing new, less-costly options rather than devaluing brands they’ve marketed as high quality. Second, products that present a difficult purchasing process, like property or cars, might try to restructure their methods to make purchasing an easier and more positive experience. Finally, companies will try to provide more information about their products to make consumers feel as though they are making the best possible purchasing decisions.
Until consumers regain their purchasing power, companies will have to take extra measures to build strong relationships with their audience. While the wait for a rebound in the economy continues, however, the middle class is simultaneously shrinking.