Where will U.S. retailers find middle class growth?

Discussion
May 06, 2014

"The American Middle Class is No Longer the World’s Richest." This recent New York Times front-page headline played to both sides of the political spectrum as each blames the policy of the other for our nation’s economic ills. Unfortunately, the issue is even more significant than the politicos and pundits would have us believe.

A straight-line projection of the growth in income of the middle class around the world would suggest that the United States will soon be in fourth or fifth place, rather than first. By the way, we are not talking about developing countries. We are talking about being overtaken by advanced countries, such as Canada, Sweden, Norway, Finland, the Netherlands and Britain.

Politics aside, why is this important? "Middle class" often has a nebulous definition but is generally defined as the second, third and fourth quintiles in income or wealth. It is this group that buys housing, furniture, cars, computers, mobile phones, clothing, and more, driving the economy forward. The spending of the bottom quintile is limited by access to income. The spending of the top quintile is incomplete in that this population tends to save and invest a higher portion of its income rather than put money back into the economy.

It is not just a vast majority of economists that testify to the value of the middle class, history shows us the way. The greatest economic boom in the history of world was experienced by the U.S. from 1950 to 1970. During that time, the share of total income of the top docile of the population dropped from 45 percent to about 33 percent. That provided a huge gain for those in the middle and the impetus for staggering growth. (U.S. tax rates during this period, by the way, were the highest in the history of the country. The top marginal tax rate was 90 percent.)

Today, the top docile represents close to 50 percent share of total income, the highest level since at least 1900. The result, especially in the last 10 years, has been a lack of growth in real income for those who drive the economy.

The statistics are shocking. While the per capita median income in the U.S. has not changed since 2000, the advanced countries mentioned above grew 14 percent to 20 percent. Even in France, the bottom 99 percent are doing better than in the U.S.

And we haven’t even addressed the rest of the world. The top one percent in the U.S. is still the richest and will continue to be for a long period of time. And the "poor" in the U.S. are no longer the richest "poor" in the world. McKinsey forecasts that the middle class world-wide will grow by one billion people by 2020. That’s three times the population of the U.S. They follow with a forecast of two billion by 2030.

While this news isn’t a sea change in trend, it is a sea change in mindset. Some huge multi-nationals aside, American companies have largely failed to recognize this and adjust appropriately. They are now faced with a new reality — a waning U.S. middle class with no sign of a turn-around coupled with unprecedented opportunities overseas as middle class populations blossom.

How should retailers and marketers adjust to the waning middle class in the U.S.? What opportunities exist for American companies to take advantage of the booming middle class outside the U.S. borders and what changes must they make to participate in this opportunity?

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11 Comments on "Where will U.S. retailers find middle class growth?"

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David Biernbaum
Guest
3 years 7 months ago
Unfortunately, every issue in our country these days is partisan, extreme, and full of blame. The truth is, neither the Democrats nor the Republicans are completely at fault for what has happened to the middle class. The truth is, long before Obama, Bush, Clinton, Bush, or Reagan, and for a number of very complex reasons, our country has slowly lost its manufacturing jobs, and that’s why the middle class is shrinking. And yes, of course this is a concern for retailers. This is partially why middle class retail-stores such as Sears, J.C. Penney, and others have lost so much of… Read more »
Max Goldberg
Guest
3 years 7 months ago
The waning middle class means that consumers will have less to spend and will continue to look for value in almost every expenditure. Retailers will choose between competing on price or luxury. Those choosing to compete on price will have margins squeezed and many will struggle to survive. Being caught in the middle, like Target, will become particularly difficult. As American retailers, particularly Walmart, have learned, it’s not easy to compete overseas. They need to adapt to local mores and customs, like Starbucks. American manufacturers will need to develop the infrastructure to sell their products and compete in multiple countries.… Read more »
Fariba Mitchell
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Fariba Mitchell
3 years 7 months ago
Retailers can influence manufacturers to make the adjustment to quality and value versus price. There is a deep desire building in what is left of the middle class to “buy American,” yet this desire is going largely unmet. Retailers are the key influence which can make manufacturers switch to domestic manufacturing at least for a part of their total production capacity. People expect to pay more for higher quality goods made in America and they respond well when presented with such goods at least as an alternative to cheaper, internationally produced goods. This is the only way of adjusting that… Read more »
Ralph Jacobson
Guest
3 years 7 months ago
Without getting into political discussions here, I will say that much of these trends are driven by the proliferation of “new” wealth in both emerging regions and mature markets. This “wealth” is also not necessarily what we in the U.S. would call “wealthy,” but simply a class of the population that has access to a level of goods they hadn’t had access to in the past. CPG and retail brands can take advantage of this shift and they should do it on a global scale. There are already some innovative brands that offer “growth” markets around the world; “new” items… Read more »
Robert Heiblim
Guest
Robert Heiblim
3 years 7 months ago
This is a very important question for both retailers and the vendors selling through them. Among the observations looking at the “thinning” middle class is that the usual polarity in sales with strength along price lines versus quality or luxury goods is even more pronounced. Recent surveys for things like CE goods show consumers acting “less” affluent in the face of slow wage growth so even when middle class, it appears families are being conservative in spending. This means retailers and vendors need to consider how to service these two different modes. In most cases it may mean choosing which… Read more »
Tony Orlando
Guest
3 years 7 months ago
The middle class, as I knew it growing up, is shrinking. Yes we have way more stuff than before, but the stress level today of families is off the charts. Finding a way to fund college is really hurting the middle class, as they don’t want to leave children with a huge debt, but have a hard time affording basic staples, let alone helping their kids out. As far as growing the middle class, and actually make them thrive again, is the 64K question. There is a way to bring jobs back to this country, as I have discussed this… Read more »
Craig Sundstrom
Guest
3 years 7 months ago
So does it really matter that Canada’s – or Norway’s! – middle class is (by some arguable measure) “richer”? For a company that hopes to augment a flagging domestic market by bolstering sales abroad, it might. But of course one has to look at the total market size, and even in the case of Canada, that’s going to be a small increment; by contrast, China, India, and even parts of Africa may offer greater opportunity (small by averages, but large in the aggregate). For those, unwilling – or unable – to move abroad , the choices are the same as… Read more »
George-Marie Glover
Guest
George-Marie Glover
3 years 7 months ago
The deep loss of manufacturing jobs in the U.S. is more than an economic one. There is a pride that goes along with being able to say, “We made that.” Service jobs don’t offer the wages or satisfaction of creating something tangible. Things that make economic sense like the Keystone Pipeline are put on hold indefinitely. This has led to a deep-rooted skepticism growing in the middle-class. They don’t seem to be experiencing any of the touted, recent economic gains. Their aspirations and dwindling along with their buying power. It’s a depressing thought that retailers even need to adjust to… Read more »
Cathy Hotka
Guest
3 years 7 months ago

There are a lot of ways to attack this topic. One is to focus on the offshoring of jobs.

You have to wonder if any American company, flush with cash, will decide to hire Americans to make their products. Look at Apple — they’re awash in available capital, but choose to locate their factories in China, with no apparent backlash here. Americans without the computer skills to compete in the knowledge economy would jump at the chance to take on new factory jobs. It’s a shame.

Tom Redd
Guest
3 years 7 months ago
Not getting near the political hot potato (red skinned potato) let’s talk about two things – assortment and global reach. First, when markets or environments shift then so must the retail assortment. This might mean new items, refined mix by price, or even downsizing assortments in some areas. Tied to this are promotion tools that help better target the buyers for the specific, tuned assortments. The recent shift of J.Crew’s assortment with the addition of the Merchantile line is a good example. Second, the global reach message has been preached for years and if a larger retailer is not global… Read more »
Gene Detroyer
Guest
3 years 7 months ago
Interesting comments. Here are some finally thoughts… With regard to manufacturing jobs, they aren’t coming back. Every tool that is developed here to make manufacturing more efficient and competitive will be transferred to other lower-cost countries. With regard to regulation, other industrialized countries face even more regulation in their manufacturing sector than the U.S. With regard to American quality, other countries make products that meet or beat U.S. quality (read automobiles, mobile phones, TVs and more.) With regard to building international markets, other than the multi-nationals, U.S. SMEs almost refuse to do what is necessary to develop global relationships. One… Read more »
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