October 22, 2008
Study: Income Disparity Widens in U.S.
The gap between the haves and have-nots in the U.S. widened between 2000 and 2005, according to a study conducted by the Paris-based Organization for Economic Cooperation and Development (OECD).
According to the report, the U.S. had the third highest level of inequality between rich and poor of the 30 member countries within the OECD. Mexico and Turkey had the highest disparities between rich and poor of the 30 member countries tracked by the organization.
The richest 10 percent of Americans in the OECD study earned an average of $93,000 a year. The poorest 10 percent earned an average of $5,800 annually.
Angel Gurria, secretary general of the OECD, called on governments to develop policies that help working families boost incomes rather than having to rely on social services to get by.
“Greater income inequality stifles upward mobility between generations, making it harder for talented and hard-working people to get the rewards they deserve,” Mr. Gurria said in a statement.
Although the study was conducted through 2005, the OECD said its findings were still relevant to the situation facing the U.S. and other developed countries today.
Discussion Questions: What has the disparity of incomes in the U.S. meant for the business of retailing? Is there room for middle of the road merchants in a country where the economic middle appears to be shrinking?
BrainTrust
Recent Discussions
Discussion Questions
Poll
Ayn Rand is alive well and going by the name David Livingston.
If I may be so bold as to suggest a title for a new book, how about “Walmart Shrugged”?
Increasing income disparity will gradually keep driving polarization of retailing at both ends of the spectrum leaving middle income people to settle for low priced, low quality merchandise in some cases and high priced merchandise in other cases. Smart middle income shoppers will heavily rely on “sales” at higher-end stores. In the long run, income disparity is bad news for the society.
This is one of my favorite topics because it doesn’t get the airtime is deserves. The US is at the highest level of income disparity since its inception. According to Kevin Phillips’ book, Wealth and Democracy, the ratio of the largest fortune (Bill Gates) to the median household wealth was 1.4 million to one, in 2000. For contrast, during the robber baron era, the ratio was 210,000 to one, with Cornelius Vanderbilt as the richest man in 1875. I verified these findings against The Statistical History of the United States, volumes one and two.
Further, the US is now closer to Mexico than Northern European countries in its GINI index, the measure of wealth distribution.
What does it mean for retailers? Several things. I see an alignment of retailing by economic class (Trader Joe’s vs. Aldi’s discount, for example), which may mean a portfolio approach of doors for retailers. We are already seeing this to some extent, but it may become de rigeur for P&Ls.
Private shopping is popular in Japan and we may see more of that kind of thing taking hold here in the US. On the lower end, buying groups among consumers may become more prevalent as well.
Access is important too. In airports, luxury fliers get access to private lounges, while others do not. Could this be the future for other kinds of retail?
Even though there is significant income disparity, middle-class market is still sizable and attractive for retailers like JCPenney and Kohl’s to service. In addition, higher income consumers engage in cross-shopping–buying a blouse at Target to go with a skirt from Neiman-Marcus.
The lower economy segment of consumers offers an attractive market and unexploited opportunity for retailers. While some retailers like Save-A-Lot and Family Dollar target these lower income consumers, they typically just offer lower prices rather than services appealing to lower income consumers. In Brazil, there are several very successful retailers targeting lower income consumers that provide extensive credit and other service for this target market.
We live in a country where income is more of a personal lifestyle decision. If you choose to be rich, you will be rich. A lot of the rich people I know live like poor people. And a lot of the poor people I know are credit card millionaires. I don’t believe any of these studies since all my life I have heard the same story about how the rich get richer and poor get poorer. Therefore I see no need for a business model change.
I’m no economist, but one only has to look at the relative sales performance of numerous retail chains over the past few years. Not withstanding this current economic hiccup we’re all tolerating, the best performing retailers have been at polar opposite ends of the price scale. High end/low end were the winners. Those positioned in the middle for the most part were uninspiring to the consumer based on sales results.
Was this the direct result of the increasing spread between high and low income earners? Maybe not, but it certainly does reflect the new shopping patterns.
First, let’s not forget that while the middle-market is often no-man’s land, it is still a large number (people, households, spending) in the U.S.
Second, it is imperative that retailers focus on understanding who their customers are, how they behave and how they deliver a unique value proposition. This is equally applicable to the high end as well as the discounters.
Third, depending on the health of the macro economy (as well as how an individual is doing/feeling) there is always trading up. And trading down. There are plenty of very wealthy people feeling at least an emotional recession and thus curtailing consumption. At the same time, it’s well documented that there were plenty of bankers in line at the Hermes sample sale in New York a few weeks ago. And there are always Range Rovers in the parking lot at Walmart and Target.
Last, and perhaps most relevant given the current financial problems, there appears to be more of a movement towards companies in general (and retailers in particular) being more oriented around cause marketing. This is one shift that will hopefully be long-lasting and beneficial for all.
Income disparity is an almost meaningless concept with reference to retailing. Consumers have many resources beyond wages/salary. Why are the highest-priced sneakers found in low-income neighborhoods? What about all the middle-class (and above) families shopping value retailers from dollar stores to warehouse clubs?
Income disparity is a political concept, perhaps a sociological construct, but has little meaning for retailers who have years and years of experience and received knowledge in targeting specific consumer groups with specific demo- and psycho-graphics. As far as I know, no retailer makes you bring in a tax return or a bankbook to show them before you can shop the store.
What has the disparity of incomes in the U.S. meant for the business of retailing? Well, of course, it has meant a proliferation of high-end retailers on one end, and a proliferation of discount retailers on the other.
But is there room for middle of the road merchants in a country where the economic middle appears to be shrinking? Of course there is. Most consumers still consider themselves to be middle class, and still shop, buy and otherwise behave as middle-class.
But growing income inequality is real and likely to grow, driven by several unstoppable trends: the education premium, the technological skills premium, winner-take-all labor markets, assortive marital patterns, and immigration.
How can retailers respond:
— Cater to the luxury market (yes, plenty of people still have money, even after losing lots of it), and are still spending it
— Cater to those still striving to become middle class (lower income households comprise a huge cumulative market)
— Cater to ethnic markets that are growing (Hispanics, Asians)
— Target current customer retention instead of new customer acquisition
— Broaden (or narrow) offerings
— Variable pricing
— INTEGRATE IN-STORE AND ONLINE OPERATIONS (This may be the most important strategy, as it positions those who are prepared for the future competitive landscape).
I might have to rethink this. Seems the rich are getting poorer as they watch their stock portfolios and home values fall. The poor are getting richer as gas prices fall and their mortgage lenders are writing off a big percent of their mortgage balances and letting them live in their homes. But in the long run, one’s income is a result of personal choice and motivation.
Over the past few years I’ve seen subdivisions of McMansions being built indicating to me we have more people choosing to be successful. It’s often a blurry line between rich and poor. All my millionaire friends drive old cars, clip coupons, shop at Aldi, and complain about being poor. All my poor friends drive huge pick-up trucks, have cable TV, buy coffee at Starbucks, and complain about being poor.
I must disagree with my colleague on the panel, David Livingston. The saying “The Rich Get Richer and The Poor Get Poorer” has not been true in this country from the end of World War II until 2000. Many studies have indicated that the gap narrowed during those 50 or more years. Not coincidentally, the economy experienced the greatest growth in its history.
However, since 2000, the gap is again widening, which does not bid well for the retail business. Yes, the wealthy spend, but they do not spend as high a portion of their disposable income as those less wealthy. If fewer dollars go to down market demographics, less dollars end up being recycled in the economy.
Perhaps, counter intuitively, I also believe that high end retailers will suffer. Several weeks ago I described some comments made by a friend who is a personal shopper at one of the highest-end department stores in the country. Relating back to this summer, she said she saw no difference in the buying patterns of her clients. (Note: Her clients spend between $60,000 and $250,000 annually at her store alone.) The only difference she noted was that they would ask for the price before they bought it.
Just yesterday, we revisited what is happening with her clients. Her story was a bit surprising to me. She said, in the last several weeks, not only are sales down, but they are experiencing the highest level of returns that she can remember. She added, and to make purchases, her clients are going through two and three credit cards to find one that won’t be rejected.
Will these folks go to Macy’s or not buy at all? I don’t know. I find her story difficult to conceptualize.
One hopes there is room for the middle of the road retailers. If the economy is going to have a concrete recovery, it must come from the recovery of the middle class. If the current trends continue, retailers of all sorts will be seeing very trying times.
Income disparity is completely irrelevant. There are three factors that matter:
(1) the absolute level of income, as defined by the goods and services one can buy with that money. This has risen over the long term, even at the low end. In the long term, it will continue to rise. The poorest people in America today are much better off the the rich 300 years ago.
(2) the availability of credit to allow shoppers to stretch the high end of their spend–whether that is low income stretching to buy Nikes or middle-income stretching to buy Tiffany
(3) the spend-vs-save and value-orientation profile of higher income shoppers (i.e., the Lexus SUVs in the Costco parking lot)
What worries me isn’t some weird notion of income inequality (where absolute levels don’t matter)… it’s what happens as the availability of cheap credit (#2 above) blows up in our faces.
There’s a lot to be said for retailers who go into the middle with a strategy of being the “best of the middle,” like Kohl’s and Safeway. Wise move. It’s an easier, seemingly more clear path to pick the poles and drive the distinctive execution of either being “best” or “best price.” However, competitively, it’s a much tougher go.
Think about it, would you rather compete with JCPenney or Walmart? JCPenney or Ralph Lauren? You can see what Kohl’s thought right there: dominate a sleepy competitor in a dormant retail sector. The middle, purely by definition, is still a vast, mostly ignored, segment. There’s plenty of room for success there, regardless of the salary polarization.
I think extreme income disparities hurt the whole economy–and retail is a microcosm of the whole.
Oddly enough, this is something Henry Ford understood a hundred years ago: if working people don’t make enough to afford to buy the products we’re selling, there’s not much point in being in business.
Over the last 30 years, we’ve steadily drifted away from that principle, and as long as everyone had endlessly expanding credit, we could keep the merry-go-round running. But now we see, finally, that we can’t run an economy that expects the customers to spend $150,000 a year if they’re only clearing $40,000–if that.
Trickle-down has always been something of a fraud: the theory behind tax cuts for the rich has been that they would invest in new technology and new plants, and create new jobs. But have you ever known anyone to decide to build a new factory just because they had extra cash lying around?
What people do with extra cash is invest it where they think they’ll get the highest return. That’s exactly the position corporations did find themselves in several years ago–and they didn’t find that expanding operations was the best use for that cash. The highest returns, they saw, were in the equity markets, real estate and–wait for it–collateralized debt obligations. Especially CDOs, which they couldn’t get enough of, because they carried these incredible return rates.
Until they didn’t.
And here we are.
Some folks are “rich in spirit.” They ship aspirationally. Tiffany has a silver money clip for $115 and a silver tennis ball can for $1,500. For an aspirational splurge, one is affordable and the other isn’t.
Even though the middle class is declining, the real issue is competition for those shoppers. If the competition declines faster than the population, the surviving retailers will be fine. The erasure of local and regional middle class department stores helped Kohl’s and J.C. Penney. The recent lack of new major mall development also helps.
More Discussions
As Boomers ‘Age Out of Peak Purchasing,’ How Can National Brands Retain Interest With Gen Z?
According to a recent First Insight study titled “Is Gen Z Still Choosing Your Brand,” while…Is Supply Chain Volatility Here To Stay?
Can we expect an ongoing volatility to remain in terms of retail supply chain?Has Same-Day Delivery Become an Expectation Across Retail?
Are expectations around retail delivery speed in flux?
Ayn Rand is alive well and going by the name David Livingston.
If I may be so bold as to suggest a title for a new book, how about “Walmart Shrugged”?
Increasing income disparity will gradually keep driving polarization of retailing at both ends of the spectrum leaving middle income people to settle for low priced, low quality merchandise in some cases and high priced merchandise in other cases. Smart middle income shoppers will heavily rely on “sales” at higher-end stores. In the long run, income disparity is bad news for the society.
This is one of my favorite topics because it doesn’t get the airtime is deserves. The US is at the highest level of income disparity since its inception. According to Kevin Phillips’ book, Wealth and Democracy, the ratio of the largest fortune (Bill Gates) to the median household wealth was 1.4 million to one, in 2000. For contrast, during the robber baron era, the ratio was 210,000 to one, with Cornelius Vanderbilt as the richest man in 1875. I verified these findings against The Statistical History of the United States, volumes one and two.
Further, the US is now closer to Mexico than Northern European countries in its GINI index, the measure of wealth distribution.
What does it mean for retailers? Several things. I see an alignment of retailing by economic class (Trader Joe’s vs. Aldi’s discount, for example), which may mean a portfolio approach of doors for retailers. We are already seeing this to some extent, but it may become de rigeur for P&Ls.
Private shopping is popular in Japan and we may see more of that kind of thing taking hold here in the US. On the lower end, buying groups among consumers may become more prevalent as well.
Access is important too. In airports, luxury fliers get access to private lounges, while others do not. Could this be the future for other kinds of retail?
Even though there is significant income disparity, middle-class market is still sizable and attractive for retailers like JCPenney and Kohl’s to service. In addition, higher income consumers engage in cross-shopping–buying a blouse at Target to go with a skirt from Neiman-Marcus.
The lower economy segment of consumers offers an attractive market and unexploited opportunity for retailers. While some retailers like Save-A-Lot and Family Dollar target these lower income consumers, they typically just offer lower prices rather than services appealing to lower income consumers. In Brazil, there are several very successful retailers targeting lower income consumers that provide extensive credit and other service for this target market.
We live in a country where income is more of a personal lifestyle decision. If you choose to be rich, you will be rich. A lot of the rich people I know live like poor people. And a lot of the poor people I know are credit card millionaires. I don’t believe any of these studies since all my life I have heard the same story about how the rich get richer and poor get poorer. Therefore I see no need for a business model change.
I’m no economist, but one only has to look at the relative sales performance of numerous retail chains over the past few years. Not withstanding this current economic hiccup we’re all tolerating, the best performing retailers have been at polar opposite ends of the price scale. High end/low end were the winners. Those positioned in the middle for the most part were uninspiring to the consumer based on sales results.
Was this the direct result of the increasing spread between high and low income earners? Maybe not, but it certainly does reflect the new shopping patterns.
First, let’s not forget that while the middle-market is often no-man’s land, it is still a large number (people, households, spending) in the U.S.
Second, it is imperative that retailers focus on understanding who their customers are, how they behave and how they deliver a unique value proposition. This is equally applicable to the high end as well as the discounters.
Third, depending on the health of the macro economy (as well as how an individual is doing/feeling) there is always trading up. And trading down. There are plenty of very wealthy people feeling at least an emotional recession and thus curtailing consumption. At the same time, it’s well documented that there were plenty of bankers in line at the Hermes sample sale in New York a few weeks ago. And there are always Range Rovers in the parking lot at Walmart and Target.
Last, and perhaps most relevant given the current financial problems, there appears to be more of a movement towards companies in general (and retailers in particular) being more oriented around cause marketing. This is one shift that will hopefully be long-lasting and beneficial for all.
Income disparity is an almost meaningless concept with reference to retailing. Consumers have many resources beyond wages/salary. Why are the highest-priced sneakers found in low-income neighborhoods? What about all the middle-class (and above) families shopping value retailers from dollar stores to warehouse clubs?
Income disparity is a political concept, perhaps a sociological construct, but has little meaning for retailers who have years and years of experience and received knowledge in targeting specific consumer groups with specific demo- and psycho-graphics. As far as I know, no retailer makes you bring in a tax return or a bankbook to show them before you can shop the store.
What has the disparity of incomes in the U.S. meant for the business of retailing? Well, of course, it has meant a proliferation of high-end retailers on one end, and a proliferation of discount retailers on the other.
But is there room for middle of the road merchants in a country where the economic middle appears to be shrinking? Of course there is. Most consumers still consider themselves to be middle class, and still shop, buy and otherwise behave as middle-class.
But growing income inequality is real and likely to grow, driven by several unstoppable trends: the education premium, the technological skills premium, winner-take-all labor markets, assortive marital patterns, and immigration.
How can retailers respond:
— Cater to the luxury market (yes, plenty of people still have money, even after losing lots of it), and are still spending it
— Cater to those still striving to become middle class (lower income households comprise a huge cumulative market)
— Cater to ethnic markets that are growing (Hispanics, Asians)
— Target current customer retention instead of new customer acquisition
— Broaden (or narrow) offerings
— Variable pricing
— INTEGRATE IN-STORE AND ONLINE OPERATIONS (This may be the most important strategy, as it positions those who are prepared for the future competitive landscape).
I might have to rethink this. Seems the rich are getting poorer as they watch their stock portfolios and home values fall. The poor are getting richer as gas prices fall and their mortgage lenders are writing off a big percent of their mortgage balances and letting them live in their homes. But in the long run, one’s income is a result of personal choice and motivation.
Over the past few years I’ve seen subdivisions of McMansions being built indicating to me we have more people choosing to be successful. It’s often a blurry line between rich and poor. All my millionaire friends drive old cars, clip coupons, shop at Aldi, and complain about being poor. All my poor friends drive huge pick-up trucks, have cable TV, buy coffee at Starbucks, and complain about being poor.
I must disagree with my colleague on the panel, David Livingston. The saying “The Rich Get Richer and The Poor Get Poorer” has not been true in this country from the end of World War II until 2000. Many studies have indicated that the gap narrowed during those 50 or more years. Not coincidentally, the economy experienced the greatest growth in its history.
However, since 2000, the gap is again widening, which does not bid well for the retail business. Yes, the wealthy spend, but they do not spend as high a portion of their disposable income as those less wealthy. If fewer dollars go to down market demographics, less dollars end up being recycled in the economy.
Perhaps, counter intuitively, I also believe that high end retailers will suffer. Several weeks ago I described some comments made by a friend who is a personal shopper at one of the highest-end department stores in the country. Relating back to this summer, she said she saw no difference in the buying patterns of her clients. (Note: Her clients spend between $60,000 and $250,000 annually at her store alone.) The only difference she noted was that they would ask for the price before they bought it.
Just yesterday, we revisited what is happening with her clients. Her story was a bit surprising to me. She said, in the last several weeks, not only are sales down, but they are experiencing the highest level of returns that she can remember. She added, and to make purchases, her clients are going through two and three credit cards to find one that won’t be rejected.
Will these folks go to Macy’s or not buy at all? I don’t know. I find her story difficult to conceptualize.
One hopes there is room for the middle of the road retailers. If the economy is going to have a concrete recovery, it must come from the recovery of the middle class. If the current trends continue, retailers of all sorts will be seeing very trying times.
Income disparity is completely irrelevant. There are three factors that matter:
(1) the absolute level of income, as defined by the goods and services one can buy with that money. This has risen over the long term, even at the low end. In the long term, it will continue to rise. The poorest people in America today are much better off the the rich 300 years ago.
(2) the availability of credit to allow shoppers to stretch the high end of their spend–whether that is low income stretching to buy Nikes or middle-income stretching to buy Tiffany
(3) the spend-vs-save and value-orientation profile of higher income shoppers (i.e., the Lexus SUVs in the Costco parking lot)
What worries me isn’t some weird notion of income inequality (where absolute levels don’t matter)… it’s what happens as the availability of cheap credit (#2 above) blows up in our faces.
There’s a lot to be said for retailers who go into the middle with a strategy of being the “best of the middle,” like Kohl’s and Safeway. Wise move. It’s an easier, seemingly more clear path to pick the poles and drive the distinctive execution of either being “best” or “best price.” However, competitively, it’s a much tougher go.
Think about it, would you rather compete with JCPenney or Walmart? JCPenney or Ralph Lauren? You can see what Kohl’s thought right there: dominate a sleepy competitor in a dormant retail sector. The middle, purely by definition, is still a vast, mostly ignored, segment. There’s plenty of room for success there, regardless of the salary polarization.
I think extreme income disparities hurt the whole economy–and retail is a microcosm of the whole.
Oddly enough, this is something Henry Ford understood a hundred years ago: if working people don’t make enough to afford to buy the products we’re selling, there’s not much point in being in business.
Over the last 30 years, we’ve steadily drifted away from that principle, and as long as everyone had endlessly expanding credit, we could keep the merry-go-round running. But now we see, finally, that we can’t run an economy that expects the customers to spend $150,000 a year if they’re only clearing $40,000–if that.
Trickle-down has always been something of a fraud: the theory behind tax cuts for the rich has been that they would invest in new technology and new plants, and create new jobs. But have you ever known anyone to decide to build a new factory just because they had extra cash lying around?
What people do with extra cash is invest it where they think they’ll get the highest return. That’s exactly the position corporations did find themselves in several years ago–and they didn’t find that expanding operations was the best use for that cash. The highest returns, they saw, were in the equity markets, real estate and–wait for it–collateralized debt obligations. Especially CDOs, which they couldn’t get enough of, because they carried these incredible return rates.
Until they didn’t.
And here we are.
Some folks are “rich in spirit.” They ship aspirationally. Tiffany has a silver money clip for $115 and a silver tennis ball can for $1,500. For an aspirational splurge, one is affordable and the other isn’t.
Even though the middle class is declining, the real issue is competition for those shoppers. If the competition declines faster than the population, the surviving retailers will be fine. The erasure of local and regional middle class department stores helped Kohl’s and J.C. Penney. The recent lack of new major mall development also helps.