April 4, 2012
PL Buyer: Avoid the Middle
Through a special arrangement, what follows is an excerpt from a current article from Private Label Buyer, presented here for discussion.
Retailers need to choose whether they want to target high end or low end consumers if they’re going to survive because the middle ground of consumers is going away, said Doug Stephens, president of Retail Prophet Consulting.
With 35 percent of all sales accounted for by the top five percent of consumers, and the bottom 80 percent totaling just 39 percent of sales, the audience in between is losing its purchasing power, Mr. Stephens shared with the crowd at the Private Label Manufacturers Association (PLMA) annual meeting March 23 in Florida. "This is not about frugality. This is about coping and trying to get by," he said. "You used to want to be in the middle … because that’s where everybody bought. But you don’t want to be there anymore because that group is declining."
That means companies need to decide whether they want to provide the concierge level of services, or whether they want to offer as much affordable convenience as possible.
"The market is polarizing between convenience and fidelity. Everything else in the middle is just average. That chasm where average exists is getting wider and wider every time. There’s no middle ground. Well, there’s middle ground, you just don’t want to be there."
BrainTrust
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Discussion Questions
Discussion Questions: Is there still room for mid-tier position retailers in today’s market? Which retail channels (apparel, electronics, food, home, etc.) are most experiencing a shift to high-end/low-end positioning?
Poll
Actually, I tend to agree that the marketplace seems to be strengthening on two opposite sides; very low pricing on one side vs. high end and convenience on the other. I also agree that the middle ground seems to be shrinking with a lack of identity. However, I do not believe that it has to be this way. In my opinion the middle ground retailers, and the middle ground brands, need to re-invent a few of their core marketing and merchandising habits, not only to survive but also to serve what I still believe should be the biggest sector of the marketplace; the middle!
It may be where the analysis of where we’ve been the past few years supports Mr. Stephens, but I don’t believe it is where we are going. So it will either be Cadillac or Kia, Whole Foods or Walmart, Charmin or burlap….
I don’t buy it. The middle ground, while it may be have had trouble, is still where most people think of themselves. They may have had to buy cheaper but they don’t like it. They might like to think they could shop at a high-end boutique but look for similar looks in the middle.
To say it’s either a concierge level of service or self service seems draconian. Goldilocks found there was always an in-between choice which suited her best and the history of brands has found the same. If I’m wrong then Kmart should be an up and coming stock….
When it comes to private label — the high end can promise exclusivity, as per usual, and the low end can offer ‘no frills’, as per usual. The middle is a vexing question.
The reason to shop at a mid-tier shop would need to be an emotional or social motivation, which lives outside the realm of price. This might include offerings of quirkiness/exoticism (Trader Joe’s), or cool youth (Gap)… but in general, I believe the market will see greater and greater discrepancy in the retail offerings and the retailer formats themselves.
Let me see if I understand this: The “top” five percent of consumers (what’s “top”?) account for 35 percent of sales (Dollars? Units? Sales of what — are automobiles included? Real Estate? Travel?). Then, the “bottom” 80 percent account for 39 percent of sales.
If my math is correct, the remaining or “middle” 15 percent of consumers account for the remaining 26 percent of sales. So, a quarter of all sales are in the “middle ground,” which Doug Stephens is advising retailers to abandon. It doesn’t sound like such a bad target market to me.
Stephens also states that “the middle ground of consumers is going away.” I saw no validation of this in his remarks. What’s the research model, what are its metrics, and what definitions are used? Short of answers to these questions, I have doubts about Stephens’s thesis.
The challenge with remaining in the “middle” is that your business is not differentiated and there are no compelling reasons to shop your store, whether you are selling food, apparel or whatever. I’ve been talking about this “Bell curve — Well curve” phenomenon for several years. The migration to one extreme or the other will continue while those in the middle will tend to stay flat or have depressed growth. The graphic on page 5 of this pitch from 2004 shows pictorially what is happening.
It is indeed a sad state of affairs that our economy can boast the strong rate of growth in membership of the poor. I do agree that membership to the poverty class has largely come from the middle class of this society, but only as a numbers contributor. The membership depletion of the wealthy class on a percentage scale is shocking and has much to say about the state of the economy.
As for the answer to today’s question, catering to the wealthy class is by far more profitable if successfully established. But what really makes this opportunity attractive is the ever shrinking margins yielded from selling to the poor that can not keep up with the rising costs of goods sold. Energy costs are forcing the poor in this society to switch from doing with less to doing without. Retailers are buying and stocking goods that do not sell. The obvious reaction is to look at opportunities that can be viable. Upscaling is far less a risk than the wait for the economy to regain a forward momentum. What is interesting to see is how this market will evolve with 5 year free maintenance for jets, yachts and luxury million dollar + automobiles. And I can’t wait to learn what kind of response to expect from a well-known celebrity, hand-written and personally mailed coupon. This could get interesting!
I agree with Dr. Banks on this one. The math above would leave about 25% in the middle, not a market I would abandon. Also hard to say how we are defining ‘sales’ and what’s included.
Bottom line is, I would decrease my serviceable market by 25% out of the gate by doing this.
As soon as we can get past the class warfare being promoted from the top, and get back to serious economic, as opposed to government, development, the middle class will be just fine. Planning for the future based on transient problems in the present will leave you in the dust.
Success in Private Label today will not be a matter of being at the top, bottom or middle. The key will be to match the PL strategy to that of the retailer. As demographics change and brands lose their exclusive position in the consumer’s minds, unique opportunities open for the retailer. The retailer should approach PL not as an alternative offering, but as a direct competitor to branded products.
Therefore, the decision on high, low or middle should match the retailer’s positioning of high, low or middle. Which retailer is going to offer me a better Oreo?
This is also too simplistic for me to digest. Most stores in the USA deal with the middle every day, and are quite successful at it. Yes, I agree that we need to keep in our heads that there are extreme ends of the shopping arena that continue to grow, but not to the extreme as it stated here. I handle both in my store, and the high-end business is a small niche, but I also promote the the value priced deals everyday, which keeps people coming back.
Learn to sell to all the folks, and create the signature foods, which will help your bottom line.
I think the issue is that as the economy rebounds, the growth that is occurring is skewed toward upper incomes, while growth remains stagnant with middle or lower incomes. This obviously has implications for retailers depending on who their target customer is.
For major national retailers selling consumer commodities (which is most of the major national retailers), overall growth is limited, price will remain king, and the emphasis will continue to be on cost reductions to drive more competitive prices and earn greater market share. I don’t think there’s any secrets there.
For specialists, however, and this includes many independent retailers, money for consumer discretionaries, across a wide range of product categories, appears to be skewing toward the upper end of the income spectrum. Customer counts are still inconsistent, but those customers who are buying are spending more. I’m suggesting to my clients who sell discretionaries that they will probably find their increases coming from better merchandise sold to higher income customers.
In response to M. Jericho Banks, here are a few stats for consideration.
From 1979 to 2005 the average family went from apportioning 50% of their income to fixed living costs to 75% (adjusted for inflation). The middle 3 quintiles of income earners had almost no discernible income growth over the last 30 years. In fact, many experts note that middle-incomes declined during that time in real dollars.
Also since about 1980, the mid-tier of the retail market (for all goods) has been shrinking — by some estimates as much as 6% per annum.
In 1979, the top quintile of income earners made 8 times what the lower quintile did. By the 2005 that number was 14 times.
The vast majority of jobs that have been eliminated over the last 30 years have been middle-income jobs and the Bureau of Labor Statistics now projects that the two fastest growing work categories over the coming years will be “professionals” and “service workers.”
And the condition isn’t limited to the United States. In Toronto (as only one example) the number of “middle-class” income neighborhoods went from 69% in 1979 to 29% in 2006.
Perhaps Mr. Banks can offer a few statistics to support his assertion that the middle is growing?
There is still a middle, it’s just smaller. And that’s the problem; it used to be bigger — just ask JCPenney, Kohl’s, Kroger, GAP, Sears, Macy’s — all center brands that thrived years ago when we had a massive middle class and before Walmart and Amazon. Now, it’s a fight to the death for the same shrinking market.
The most interesting battle in retail will be fought over that territory over the next 5 – 10 years. It’s hard to call who’ll be victorious, but one thing’s for sure; it’ll be the brand that innovates the most from where they are now. I like the road Penney’s is on at the moment, but it’s long from over. Good times!
I think that as long as there is a middle class with aspiration to move up, you will need mid-tier retailers. In order for mid-tier to succeed they have to be very crisp on their value proposition in terms of customer experience and merchandising. People don’t jump from Walmart to Bloomingdales in one leap, especially in fashion. I can see mid-tier retailers selling non-differentiated products having problems with e-commerce pure play, but especially in fashion, there are always mid-tier brands and retailers.
It would be considered simplistic targeting to only use income. Since the largest retailers are targeting the middle income segment, to say it has gone away does not prove out. Maybe the author thinks that Walmart owns the middle income leaving only high and low for everyone else. Walmart’s many quarters of declining comp sales could be verification of a shrinking middle income, but it is still there today and is the largest segment.
Thanks to Ralph Jacobson for providing a 2004 reference that graphically illustrates Doug Stephens’s speculation. It’s very interesting and fine for a theory, but without reliable research that includes a timeline, I remain skeptical. Broad generalizations often get headlines, but the contributors to RetailWire are known for their hunger for specifics.
In hopes of brokering a peace deal between the warring camps of “the middle class is disappearing” vs. “no it isn’t,” and to avoid the arbitrary quantitative measures, should “middle class” be defined as the middle quintile? The middle three quintiles? The middle eight deciles? Etc. Might I suggest what is disappearing, or to many of us SEEMS to be disappearing, is the qualitative sense of middle class: wanting a sensible product at a good price, not junk at the cheapest price possible, or (overpriced) junk at the highest price imaginable; in short, the whole infrastructure of department stores, toy stores, and fill-in-the-blank stores that offered branded merchandise with some measure of service to go along with it. And I DO think that is eroding.
Thanks to Doug Stephens for his response. Thanks to him, too, for requesting statistics to support my nonexistent assertion that the middle is growing. Careful reading is important here, and that would apply to my specific requests for definitions of “top,” “sales,” and “bottom;” and requests for the research model, metrics, and definitions that support his thesis. The information provided in his newest comments is very interesting, but neither answers these questions nor draws a straight line to his Private Label Buyer article.
The truth is, the middle has shrunk, particularly because the low end has improved their presentation and ambiance. Though certainly not wonderful, even the dollar stores and Walmart are usually reasonably clean and easy to shop. The middle continues and will continue to exist. But it is smaller, and will be occupied by fewer and larger players, such as Kohl’s, JC Penney and Macy’s.
It is all about execution at the lower and mid levels of retail, just as it is at the top. The customer expectations are the only differing factors.
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Actually, I tend to agree that the marketplace seems to be strengthening on two opposite sides; very low pricing on one side vs. high end and convenience on the other. I also agree that the middle ground seems to be shrinking with a lack of identity. However, I do not believe that it has to be this way. In my opinion the middle ground retailers, and the middle ground brands, need to re-invent a few of their core marketing and merchandising habits, not only to survive but also to serve what I still believe should be the biggest sector of the marketplace; the middle!
It may be where the analysis of where we’ve been the past few years supports Mr. Stephens, but I don’t believe it is where we are going. So it will either be Cadillac or Kia, Whole Foods or Walmart, Charmin or burlap….
I don’t buy it. The middle ground, while it may be have had trouble, is still where most people think of themselves. They may have had to buy cheaper but they don’t like it. They might like to think they could shop at a high-end boutique but look for similar looks in the middle.
To say it’s either a concierge level of service or self service seems draconian. Goldilocks found there was always an in-between choice which suited her best and the history of brands has found the same. If I’m wrong then Kmart should be an up and coming stock….
When it comes to private label — the high end can promise exclusivity, as per usual, and the low end can offer ‘no frills’, as per usual. The middle is a vexing question.
The reason to shop at a mid-tier shop would need to be an emotional or social motivation, which lives outside the realm of price. This might include offerings of quirkiness/exoticism (Trader Joe’s), or cool youth (Gap)… but in general, I believe the market will see greater and greater discrepancy in the retail offerings and the retailer formats themselves.
Let me see if I understand this: The “top” five percent of consumers (what’s “top”?) account for 35 percent of sales (Dollars? Units? Sales of what — are automobiles included? Real Estate? Travel?). Then, the “bottom” 80 percent account for 39 percent of sales.
If my math is correct, the remaining or “middle” 15 percent of consumers account for the remaining 26 percent of sales. So, a quarter of all sales are in the “middle ground,” which Doug Stephens is advising retailers to abandon. It doesn’t sound like such a bad target market to me.
Stephens also states that “the middle ground of consumers is going away.” I saw no validation of this in his remarks. What’s the research model, what are its metrics, and what definitions are used? Short of answers to these questions, I have doubts about Stephens’s thesis.
The challenge with remaining in the “middle” is that your business is not differentiated and there are no compelling reasons to shop your store, whether you are selling food, apparel or whatever. I’ve been talking about this “Bell curve — Well curve” phenomenon for several years. The migration to one extreme or the other will continue while those in the middle will tend to stay flat or have depressed growth. The graphic on page 5 of this pitch from 2004 shows pictorially what is happening.
It is indeed a sad state of affairs that our economy can boast the strong rate of growth in membership of the poor. I do agree that membership to the poverty class has largely come from the middle class of this society, but only as a numbers contributor. The membership depletion of the wealthy class on a percentage scale is shocking and has much to say about the state of the economy.
As for the answer to today’s question, catering to the wealthy class is by far more profitable if successfully established. But what really makes this opportunity attractive is the ever shrinking margins yielded from selling to the poor that can not keep up with the rising costs of goods sold. Energy costs are forcing the poor in this society to switch from doing with less to doing without. Retailers are buying and stocking goods that do not sell. The obvious reaction is to look at opportunities that can be viable. Upscaling is far less a risk than the wait for the economy to regain a forward momentum. What is interesting to see is how this market will evolve with 5 year free maintenance for jets, yachts and luxury million dollar + automobiles. And I can’t wait to learn what kind of response to expect from a well-known celebrity, hand-written and personally mailed coupon. This could get interesting!
I agree with Dr. Banks on this one. The math above would leave about 25% in the middle, not a market I would abandon. Also hard to say how we are defining ‘sales’ and what’s included.
Bottom line is, I would decrease my serviceable market by 25% out of the gate by doing this.
As soon as we can get past the class warfare being promoted from the top, and get back to serious economic, as opposed to government, development, the middle class will be just fine. Planning for the future based on transient problems in the present will leave you in the dust.
Success in Private Label today will not be a matter of being at the top, bottom or middle. The key will be to match the PL strategy to that of the retailer. As demographics change and brands lose their exclusive position in the consumer’s minds, unique opportunities open for the retailer. The retailer should approach PL not as an alternative offering, but as a direct competitor to branded products.
Therefore, the decision on high, low or middle should match the retailer’s positioning of high, low or middle. Which retailer is going to offer me a better Oreo?
This is also too simplistic for me to digest. Most stores in the USA deal with the middle every day, and are quite successful at it. Yes, I agree that we need to keep in our heads that there are extreme ends of the shopping arena that continue to grow, but not to the extreme as it stated here. I handle both in my store, and the high-end business is a small niche, but I also promote the the value priced deals everyday, which keeps people coming back.
Learn to sell to all the folks, and create the signature foods, which will help your bottom line.
I think the issue is that as the economy rebounds, the growth that is occurring is skewed toward upper incomes, while growth remains stagnant with middle or lower incomes. This obviously has implications for retailers depending on who their target customer is.
For major national retailers selling consumer commodities (which is most of the major national retailers), overall growth is limited, price will remain king, and the emphasis will continue to be on cost reductions to drive more competitive prices and earn greater market share. I don’t think there’s any secrets there.
For specialists, however, and this includes many independent retailers, money for consumer discretionaries, across a wide range of product categories, appears to be skewing toward the upper end of the income spectrum. Customer counts are still inconsistent, but those customers who are buying are spending more. I’m suggesting to my clients who sell discretionaries that they will probably find their increases coming from better merchandise sold to higher income customers.
In response to M. Jericho Banks, here are a few stats for consideration.
From 1979 to 2005 the average family went from apportioning 50% of their income to fixed living costs to 75% (adjusted for inflation). The middle 3 quintiles of income earners had almost no discernible income growth over the last 30 years. In fact, many experts note that middle-incomes declined during that time in real dollars.
Also since about 1980, the mid-tier of the retail market (for all goods) has been shrinking — by some estimates as much as 6% per annum.
In 1979, the top quintile of income earners made 8 times what the lower quintile did. By the 2005 that number was 14 times.
The vast majority of jobs that have been eliminated over the last 30 years have been middle-income jobs and the Bureau of Labor Statistics now projects that the two fastest growing work categories over the coming years will be “professionals” and “service workers.”
And the condition isn’t limited to the United States. In Toronto (as only one example) the number of “middle-class” income neighborhoods went from 69% in 1979 to 29% in 2006.
Perhaps Mr. Banks can offer a few statistics to support his assertion that the middle is growing?
There is still a middle, it’s just smaller. And that’s the problem; it used to be bigger — just ask JCPenney, Kohl’s, Kroger, GAP, Sears, Macy’s — all center brands that thrived years ago when we had a massive middle class and before Walmart and Amazon. Now, it’s a fight to the death for the same shrinking market.
The most interesting battle in retail will be fought over that territory over the next 5 – 10 years. It’s hard to call who’ll be victorious, but one thing’s for sure; it’ll be the brand that innovates the most from where they are now. I like the road Penney’s is on at the moment, but it’s long from over. Good times!
I think that as long as there is a middle class with aspiration to move up, you will need mid-tier retailers. In order for mid-tier to succeed they have to be very crisp on their value proposition in terms of customer experience and merchandising. People don’t jump from Walmart to Bloomingdales in one leap, especially in fashion. I can see mid-tier retailers selling non-differentiated products having problems with e-commerce pure play, but especially in fashion, there are always mid-tier brands and retailers.
It would be considered simplistic targeting to only use income. Since the largest retailers are targeting the middle income segment, to say it has gone away does not prove out. Maybe the author thinks that Walmart owns the middle income leaving only high and low for everyone else. Walmart’s many quarters of declining comp sales could be verification of a shrinking middle income, but it is still there today and is the largest segment.
Thanks to Ralph Jacobson for providing a 2004 reference that graphically illustrates Doug Stephens’s speculation. It’s very interesting and fine for a theory, but without reliable research that includes a timeline, I remain skeptical. Broad generalizations often get headlines, but the contributors to RetailWire are known for their hunger for specifics.
In hopes of brokering a peace deal between the warring camps of “the middle class is disappearing” vs. “no it isn’t,” and to avoid the arbitrary quantitative measures, should “middle class” be defined as the middle quintile? The middle three quintiles? The middle eight deciles? Etc. Might I suggest what is disappearing, or to many of us SEEMS to be disappearing, is the qualitative sense of middle class: wanting a sensible product at a good price, not junk at the cheapest price possible, or (overpriced) junk at the highest price imaginable; in short, the whole infrastructure of department stores, toy stores, and fill-in-the-blank stores that offered branded merchandise with some measure of service to go along with it. And I DO think that is eroding.
Thanks to Doug Stephens for his response. Thanks to him, too, for requesting statistics to support my nonexistent assertion that the middle is growing. Careful reading is important here, and that would apply to my specific requests for definitions of “top,” “sales,” and “bottom;” and requests for the research model, metrics, and definitions that support his thesis. The information provided in his newest comments is very interesting, but neither answers these questions nor draws a straight line to his Private Label Buyer article.
The truth is, the middle has shrunk, particularly because the low end has improved their presentation and ambiance. Though certainly not wonderful, even the dollar stores and Walmart are usually reasonably clean and easy to shop. The middle continues and will continue to exist. But it is smaller, and will be occupied by fewer and larger players, such as Kohl’s, JC Penney and Macy’s.
It is all about execution at the lower and mid levels of retail, just as it is at the top. The customer expectations are the only differing factors.