Recent economic data confirms a long-term U.S. trend: the rich really are getting richer and the poor are getting poorer.1 Reinicke, Carmen. US income inequality continues to grow. CNBC. July 19, 2018. And now more retail companies have to adapt to the shrinking middle class.
In 1971, the middle class accounted for 61% of adults; by 2016 that figure had fallen to 52%, as the number of higher- and lower-income households grew.2 Kochhar, Rakesh. The American middle class is stable in size, but losing ground financially to upper-income families. Pew Research Center. September 6, 2018. Widening income disparity means more retailers and brands will need to consider how to serve consumers at opposite ends of the socioeconomic spectrum.
Consumers’ purchasing power has shifted. Deloitte found that between 2007 and 2016 the disposable income of high-income consumers rose 4% while low-income consumers’ disposable income fell 16%. Middle-income consumers’ disposable income remained flat. During the same period, higher-end stores experienced revenue growth of 81%, while revenues for discount stores grew 37%. Revenues at midrange stores grew only 2%.3 Garcia, Krista. Retailers Feel the Effects of Growing Income Disparity. eMarketer. March 15, 2018.
These economic changes create new retail opportunities for both value and premium tier products.
Widening income disparities mean dollar stores feed more
Americans than grocers like Whole Foods.4
Koch, Lucy. Why Dollar Stores Are Thriving. eMarketer. January 4, 2019.
Value is in vogue (across generations and income levels)
Since 2008, consumers have adopted bargain-shopping behaviors that persist even in today’s strong economy.
Of note, consumer demand for value products spans demographics. Among Millennials, significant levels of student debt and fewer full-time jobs mean their purchasing power hasn’t grown along with their income.5 Danziger, Pamela N. Four Demographic Trends That Many Retailers Missed, But Not Walmart. Forbes. May 5, 2019.
In addition, the 2008 recession “erased decades of improvements in material well-being for the most vulnerable groups,” including the elderly.6 Probasco, Jim. 10 Years Later: How the Financial Crisis Affected Seniors. Investopedia. September 14, 2018. As a result, Millennials are dramatically financially worse off than previous cohorts with a 34% decrease in their net worth since 1996. 7 The great retail bifurcation. Deloitte. 2018.
Deloitte even found alarming evidence that basic necessities now take up more than 100% of a low-income family’s budget.8 The great retail bifurcation. Deloitte. 2018. 9The great retail bifurcation. Deloitte. 2018. That’s why more consumers now feel the pressure to stretch every dollar. The bottom 40% of earners had less discretionary income in 2017 than they did 10 years ago, and the next 40% saw only a minor increase, which places increased pressure on consumers’ wallets. The rising costs of education, food and healthcare help to explain why consumers feel squeezed. 10 Lobaugh, Kasey M., Jeff Simpson and Bobby Stephens. The consumer is changing, but perhaps not how you think. Deloitte Insights. May 29, 2019.
Key themes in the value segment include:
- Dollar stores’ dominance: Dollar stores’ dominance: Even though thousands of retail stores have closed in recent years, dollar stores continue to flourish. Today, the U.S. has nearly 30,000 dollar stores, up 50% from 2011. This year, Dollar Tree is renovating at least 1,000 Family Dollar stores and will open an additional 550 locations. Rival Dollar General plans to open roughly 975 new locations in 2019, especially in lower-income cities and rural towns.11 Koch, Lucy. Why Dollar Stores Are Thriving. eMarketer. January 4, 2019.12 The great retail bifurcation. Deloitte. 2018.
- Value-seekers span income levels: Nearly one-third of dollar store spending comes from households with annual incomes of $100,000 or higher. Dollar stores’ broad assortments and value prices also appeal to households with annual incomes of $25,000-$49,999. The average spend per buyer at dollar stores has risen 7% year-over-year from $165 to $171. In addition, last year more than 40% of holiday shoppers planned to shop at a dollar store during the festive season.13 Howland, Daphne. More than 40% of holiday shoppers heading to dollar stores. Retail Dive. December 21, 2018.
- Grocery needs to remain accessible: Regardless of income, groceries are a necessity, so more retailers are ensuring their products remain accessible to lower-income consumers, as well as value-seeking shoppers of all income levels. As research firm IRI found, one-third of consumers say they struggle to afford groceries, reflecting a greater need for affordable value brands than currently exists.14 Wells, Jeff. Private label sales soar, but grocers are off pace. Grocery Dive. November 14, 2018
Fortunately for value shoppers, a new study found the quality of fruits and vegetables at dollar stores is just as good as regular grocery store produce. Researchers found that 84% of produce studied was less expensive at dollar stores than traditional food outlets.15 Sweeney, Jennifer. Study: Dollar stores’ produce quality matches supermarkets. Grocery Dive. February 28, 2019.
In addition, the growing popularity and aggressive expansion of efficient discount grocery chains Aldi and Lidl reflect the fact that value offerings in the grocery space are in demand.16 Meyersohn, Nathaniel. How a cheap, brutally efficient grocery chain is upending America’s supermarkets. CNN Business. May 17, 2019. 17 Meyersohn, Nathaniel. Lidl will open 25 new US grocery stores over the next year. CNN Business. May 20, 2019.
Low-income consumer groups are among the fast-growing populations in terms of online purchasing, with a compound annual growth rate of 14%, showing that e-commerce represents a growth area for retailers and brands targeting value shoppers. 18 Lobaugh, Kasey M., Jeff Simpson and Bobby Stephens. The consumer is changing, but perhaps not how you think. Deloitte Insights. May 29, 2019.
Notably, Amazon is deliberately targeting lower-income shoppers with a discounted Prime program for customers on government programs and Medicaid recipients. Its e-commerce website includes a new bargain section to grow its reach among value shoppers and remain competitive against rivals like Walmart.19 Bhattacharyya, Suman. A ‘cutthroat market’: Amazon wants to reach lower-income customers. Digiday UK. March 18, 2019.
Last year Amazon launched a “$10 & Under” section on its e-commerce website to satisfy consumers seeking everyday low-cost items and small gift items. Amazon offers free shipping – even if bargain seekers don’t have a Prime membership – to remain accessible to consumers of all socioeconomic levels. 20 Hu, Krystal. Amazon is going after dollar stores. Yahoo Finance. February 2, 2018.
As American economic trends shift, retailers and consumer goods suppliers now need to consider whether they need to include value tier products in their assortment. Value shoppers range in age and income levels; however, lower-income shoppers are the most consistently in need of necessities at low prices. Stay tuned for an upcoming post on growing demand for premium tier products.