Farewell to the Middle Class

Posted on March 14, 2014 · Posted in Business Month

We are all middle class now – aren’t we?  Actually a strong case can be made to argue that while there is a growing middle class in the emerging markets such as China and Brazil, in the UK and the rest of the Western world we are living through the decline and fall of the middle class.  If so, the implications for businesses are profound.

 

Superficially, the argument is in fact easy to make.  While Poundland and Poundworld are thriving, those bastions of middle class life Debenhams and the Marks & Spencer’s clothing business are struggling.  Up and down the high street the picture is consistent: the middle market is being squeezed.  Meanwhile, many luxury goods retailers and top of the market restaurants are doing well.

 

This is hardly surprising.  Quantitative easing – the posh name for the increase in the supply of money – has led to inflated asset prices.  That has helped generate rising share prices and a new boom in central London property prices.  That, in turn, has fed into good times for the super rich.  There are more millionaires and billionaires than ever before, and their number has grown during the recession.

 

This is not mere assertion.  The Wealth-X and UBS Billionaire Census published at the end of last year reported that there is now a record 2,170 billionaires around the world, boasting an average net worth of $3bn.  Despite the rise of the Asian super rich, the United States continues to boast the largest number.

 

Last year’s World Wealth Report similarly reported a jump in the number of millionaires – there are now 12 milion millionaires globally.  According to a just published analysis by Oxfam, the richest 85 people on the planet now own as much as the whole of the poorest half of the population put together.

 

The increase in money supply has not had the same positive effect on the majority of the population.  According to the Resolution Foundation, middle income families in the UK had their incomes fall in real terms by 2.4% in the first two years – 2009-10 and 2010-11 – after the onset of the recession.  But the trend, they say, preceded this, with only the top 10% of the population receiving the full financial benefit of economic growth during the boom years.

 

It seems that Northern Ireland has been much worse hit than the rest of the UK.  Oxfam found that the Government’s austerity programme – accompanied by private and public sector wages not keeping track with inflation – has led to the lowest earners in Northern Ireland losing a staggering 38% of their disposable income during the recession.  It concludes that 22% of our population is now living in what it terms poverty.

 

The Resolution Foundation calculates that in the period 2001 to 2010, the proportion of the incomes of middle income families spent on basic essentials rose from 37% to 42% – clearly leaving these households with less money to spend on luxuries.  For higher income families, the increase was just 2%.

 

This phenomenon is not restricted to the UK.  Research by the New York Times found that in the last 22 years spending by the wealthiest 5% rose from 27% of total US personal consumption to nearly 40%.  Inevitably, consumption spending by the wealthiest rose very substantially over that period.  Meanwhile, consumption spending by poorer households fell significantly.

 

Given this context, it should be no surprise that pound shops are doing well, or that more supermarkets are focusing on ‘value’ ranges.  As with the UK, in New York it is the traditional retailers that serviced middle class customers that are struggling to survive, while the top and bottom of the markets are doing well.

 

Donald McFetridge, retail analyst at the University of Ulster’s Ulster Business School, concurs with the assessment that we have a more divided society in terms of wealth and also that this needs to be taken into account by businesses that service the consumer market.

 

“It is no secret that the growing divide between the richest and the rest continues apace and nowhere is this more perceptible than in the retail industry in both the food and non-food sectors,” says McFetridge.  “While top-end retailers like Ermenegildo Zegna and Prada continue to outperform their main competitors with high-end merchandise in leading cities of the world, mid-market operators are struggling for survival.

 

“At the opposite end of the spectrum, value retailers – particularly in fast fashion and food – continue to grow market share.  One need only look at the rapidity with which chains like Primark and New Look in the fashion sector and Aldi and Lidl in the food sector continue to expand their retail empires with ever-increasing profits and profit statements.

 

“The truth of the matter is that the marketplaces in both fashion and food are becoming increasingly polarised.  That is to say, value operators continue to attract those who ‘don’t have’, while the high-end operators are still able to retain their loyal, well-heeled customers who have been less badly affected by the global economic situation.

 

“Every pound and every single penny matters to consumers on low incomes – much more than a few hundred dollars’ increases matter to customers with healthy bank balances.  The unemployed student will seek out value food and fashion – and generally in that order – while the richest in society are able to flaunt all the rules of thrift and still engage in profligate purchasing activities which many would regard as shameful.

 

“In the meantime, mid-market operators need to radically re-think who their customers really are.  A good example of this is Marks & Spencer – a company which seems to have lost its way in terms of general merchandise – 90% of which is clothing – based on their latest trading statement issued on 9 January.  They need to – with expedience – address the issues which matter most to their once-loyal customers and realise that today’s consumer places much more emphasis on ‘value’ as opposed to ‘price’.  Where once those customers would have taken purchasing decisions based on ‘price’ alone, they are now placing much more emphasis on the ‘value’ of the item of clothing or food in real terms.

 

“Retailers who wish to remain successful must pay much more careful attention to who their customer is and listen to what their customer wants and they must also take cognisance of changing patterns and trends in terms of current, contemporary consumer behaviour.  To ignore those changes would be foolhardy, if not wholly unpardonable – particularly in today’s economically stringent times where the situation is improving but not nearly as fast as either consumers or retailers would like it to.

 

“Prudent retailers will continue to innovate and evolve in line with changing demands and tastes from today’s much more discerning and discriminating consumers.  Their approach to marketing in a lot of instances needs to be radically re-thought if they are to retain their current market position.

The retailer who stands still is signing his/her/their own death warrant.  There is no room – or space – for inertia in today’s extremely challenging and competitive retail marketplace.”

 

Retailers – you have been warned.