Business/Finance

We sell to the rich, to the poor — but not the middle class

My refrigerator is fatigued. Soon, but hopefully not too soon, I’ll need to replace it. Will I be able to buy a modestly priced, well-built but not fancy refrigerator that will last the rest of my life?

I am not rich; I am not poor. I have a middling five-figure annual salary. I am parked firmly in the middle class. But, according to a New York Times story by Nelson D. Schwartz, American business is becoming less interested in selling to me and the rest of us mired in the middle — because the middle class is shrinking. Writes Schwartz:

As politicians and pundits in Washington continue to spar over whether economic inequality is in fact deepening, in corporate America there really is no debate at all. The post-recession reality is that the customer base for businesses that appeal to the middle class is shrinking as the top tier pulls even further away.


GE, which manufactures big-ticket appliances, is not that interested in selling me a refrigerator. As the story notes, its Café line of refrigerators costs between $1,700 and $3,000. Of course, in those models you get options such as a “hot water dispenser for simplified hot food and drink preparation” and TwinChill™ “separate climates” in fresh food and freezer sections. I am insufficiently elite a market for Café class cooling. GE is happy because it makes more money selling higher-priced refrigerators at three grand than it does selling to me at one-sixth the price.

I’m willing to continue boiling water in a tea kettle instead of having the Café fridge disgorge it. I don’t have $3,099 to spend on a 29-cubic-foot French door refrigerator in stainless steel with such inane amenities. So, you tell me, I should head for Sears, like my Mom and Dad did 50 years ago, where I can buy a decent fridge for about $500. But these days, can I? Sayeth The Times:

Sears and J. C. Penney, retailers whose wares are aimed squarely at middle-class Americans, are both in dire straits. Last month, Sears said it would shutter its flagship store on State Street in downtown Chicago, and J. C. Penney announced the closings of 33 stores and 2,000 layoffs.

In some sectors of the economy, “from retailers and restaurants to hotels, casinos and even appliance makers,” notes Schwartz, businesses are abandoning the middle and racing for the top and the bottom.

In response to the upward shift in spending, PricewaterhouseCoopers clients like big stores and restaurants are chasing richer customers with a wider offering of high-end goods and services, or focusing on rock-bottom prices to attract the expanding ranks of penny-pinching consumers.

This has risks, of course, for the companies who abandon a significant customer base and for the economy writ large. So far, the sharp rise in spending by the most affluent Americans is a principal driver of economic recovery. But can that last?

Those who have risen to the Promised Land of Plentiful Disposal Income are buying more, Schwartz writes: “In 2012, the top 5 percent of earners were responsible for 38 percent of domestic consumption, up from 28 percent in 1995, the researchers found.”

The sharp divide worries economist Steven Fazzari of Washington University, who fears the sharp divide in consumer bases may leave the economy overly volatile.

It’s going to be hard to maintain strong economic growth with such a large proportion of the population falling behind. We might be able to muddle along — but can we really recover?

Falling behind? How about being deserted by business and industry favoring the affluent (plenty of dough to spend) and the penny-pinchers (buyers of low-cost, low-quality, off-shored products sold in volume at high markup) to perpetuate the chase for a higher stock price?

Investors have taken notice of the shrinking middle. Shares of Sears and J. C. Penney have fallen more than 50 percent since the end of 2009, even as upper-end stores like Nordstrom and bargain-basement chains like Dollar Tree and Family Dollar Stores have more than doubled in value over the same period.

Well, dandy. But my concerns are not macroeconomic: If business and industry is focusing on the top and bottom ends of the economy, what are they actually delivering for the middle class and how? Are the products and services less or more credible or of high quality? Or is the middle getting what’s fastest and easiest to produce? (You know, “cheap.”) If American business is focusing more attention on the top and bottom, does than mean it is likely they are investing more money and know-how on those market segments? And less on the middle-class offerings?

So how can quality and quantity of goods favored by the masses in the middle be significantly improving? I sense a decline. More recalls? More frustrating calls to “customer service representatives” (and longer wait times)? Products that cannot be repaired (despite the pricey extended warranties) but only replaced? More plastic, less metal?

Remember F. W. Woolworth Company? Wasn’t it five-and-dime stores like Woolworth’s that created the model for the middle-class shopping experience more than a century ago? Its department stores offered American-made goods of quality at reasonable prices. Well, that era is gone. Dead. Finished.

Sears and J.C. Penney may beyond life support. Bricks and mortar have gone the way of Woolworth’s. Now we shop at Amazon and eBay where we can only gaze at images instead of feel the fabric, check the sizes, kick the tires.

It’s the new economy, stupid: There is more money to be made by selling to a small market segment which has oodles of money to spend, and more to be made by selling to a larger market segment, those at or near the poverty line who as a group spend more than the shrinking middle class. Will that leave a diminished diversity of poorly manufactured crap for those of us remaining in the middle to buy?

Ah, such is the American dream. Such is the ethos of American exceptionalism operating amorally in the marketplace.

I just hope I can replace my refrigerator some day and not have to make monthly calls to a CSR in the Philippines.

18 replies »

  1. Interesting. Before the Internet the sway of the pendulum would bring the economy back to catering to the middle class but this time we are hip deep in the Internet economy so it will hit hard but the eventual turn will be back toward middle class IMO. The doom and gloom requires that the low end/bottom never recover from there. It is the struggle to get to the top which creates the middle. In some circumstances, it works the other way… staying at the top is not without pitfalls and so not all at the top now will remain there. Not all at the bottom will remain there. The middle was never the largest section and the top never will be in the economic world we have today. Business caters to where they can get revenue. Your appliance conundrum will happen again but in the lower tier and a middle class will remain. The constant competition for a few dollars more will ensure that the middle class is always there.

    To remove the middle class requires the banking system break fully. The top tier have too much invested in fiat currency to let that happen now. If they did, it would not be a depression but full on collapse. In that scenario there are no winners but those that are self sufficient – the lower class.

  2. Sears and Penny’s have been a dying business model for 40 years as were Woolworth’s and Western Auto before them. If the thesis is that a dissolving middle class is causing the disappearance of mid-range price points in consumer goods, and the example is refrigerators, then I dispute it by simply pointing to Home Depot. 150+ choices of top freezer refrigerators in the $400-700 range. http://www.homedepot.com/b/Appliances-Refrigerators-Top-Freezer-Refrigerators/N-5yc1vZc3ns Lowe’s and Best Buy offer similar variety.

    Business hasn’t abandoned the middle class, they’ve just moved to more energetic venues. The disturbing thing in this post Denny is that an experienced Professor with a PhD is only valued at a middling 5 figure income in our society. Frankly, I find that fucking criminal.While teaching has never been a get rich quick scheme I did not realize wages had fallen so far behind. I assume at the least there is a pension as an offset?

    If we believe education is the most important tool we can give our youth (and I truly do) then educators should be paid closer to doctors than janitors.

  3. Hmmmm. Provocative, but Denny every market is an intersection of supply and demand. If the supply has dried up, that means the demand has dried up. Except in the very short term or in very sticky markets, it’s not possible for supply to be insufficient if the demand is there.

    It’s hard to define the middle class (and I’ve been paid to try.) Something like 95% of the US self-identify themselves as middle class. If you take a more considered view and call it the 70% of the country with incomes between $25K and $125K, then there are plenty of middle class households to sell to. So why are there fewer middle class stores? Because the middle class doesn’t want to shop in middle class stores. Fifty years ago, a middle class person would one-stop shop at Sears for clothes, a gift for Mom for Mother’s Day, and lawnmowers. Now that same person shops at Nordstroms or LL Bean for clothes, Tiffany’s for a gift and Walmart or Home Depot for lawnmowers. There is no longer an access barrier for middle class people to shop at high end outlets–there are Tiffany’s in malls now. Nor is there any longer a stigma when middle class people shop at bargain outlets. When upper middle class people shop at Target, they jokingly call it Tar-jay, lightly mocking themselves.

    I’ll guarantee you that Sears would love to sell you a $500 refridgerator, but that same fridge (albeit with a different badge) is on sale for $497 at Best Buy, so you’re on your way to Best Buy. In the old days, Sears had the best prices, the best selection, and the best products. Now Walmart has the best prices, Amazon the best selection, and specialty stores the best products. The problem isn’t Sears, it’s that consumers have changed the way we shop.

    It’s very, very hard to exist in the middle of any market. Over time, markets tend to sift out into cheap and luxury, leaving the middle empty. As the old marketing saying goes, “Some people like iced tea and some people like hot tea, but nobody likes luke-warm tea.”

  4. At the risk of coming off snarky, I’d observe that you sell to the rich because they have a lot of money. You sell to the poor because there are so many of them (and, thanks to the rich, more every day). The middle class borders on extinction, and hence makes for a risky market.

  5. it’s 70% of the country. how in the hell can you say it borders on extinction? that makes no sense.

    yes, concentration of wealth is a problem. yes, lack of upward mobility in the bottom 20% is a problem. yes, the middle class face greater economic uncertainty in the future. (due partially to economics, e.g., loss of manufacturing jobs, and due partially to their own bad habits, e.g., low savings and excessive buying) however, extinction of the middle class is nonsense.

    look, i don’t mind a little good natured polemical hyperbolic sloganeering and i’m as guilty as the next guy, but saying stuff that is just mathematically bullshit goes too far.

  6. I try to stick with neutral links with you cats because I know momma don’t allow no Forbes/WSJ playing around here. http://en.wikipedia.org/wiki/American_middle_class

    Something between 25-66% of the US population is what Wiki estimates. The real question is what was it 20 years ago and what will it be 20 years hence? I know one thing, I’m paying high school graduates $50k+ and full health/dental/optical and 4 weeks of sick/vacation time to do simple assembly work and I worry that unless the Fed starts clawing back some of the extra money it’s been printing that won’t be enough.

    Then I hear about tenured PhD college professors who aren’t making much more and it really does make me wonder what the frickin’ frack is wrong with this country…

    • I’m curious about how “middle class” is defined. What I suspect, but can’t know without looking closely, is how broadly they cast that net. My suspicion is that some official definitions are going to include people on the low end who are living paycheck to paycheck, and losing ground at that. I actually have one specific person I know well and her family in mind. Any frame that tells me she’s middle class is going to automatically discredit itself.

      All of which is to say that yes, Otherwise is right in accusing me of a measure of hyperbole. Hey, I admitted as much when I made the comment. But I also am going to be staggered to learn that 70% of the population fits the bill in a way that I’m going to be comfortable with. But I may be wrong – this is why I ask.

    • This is why I’m poking. Your 70% includes $25K on the bottom end. Okay, I know that family. Actually, the family I know makes more than that, and they live in an area with a much lower cost of living than a lot of us. And if they’re “middle class,” then the term no longer has any meaning. It becomes a statistical game. Contextually, that term has always described a lifestyle that wasn’t luxurious, but that was comfortable. You could afford what you needed, take a vacation every now and again, send the kids to college, retire without worrying about having to eat cat food to survive, etc.

      I’m sorry, but none of that is happening on $25K. I’m not sure a lot of it is happening on $40K, depending on factors like where you live and the size of your family.

  7. Nothing is wrong with a Phd making 5 figure incomes. Apparently, Phd’s are willing to work for that. We’ve been through this before, but let’s do it again.

    Since regular people can change careers to find higher paying employment and professors rarely do , there are a handful of possibilities.

    1. Phd’s are idiots and don’t know other jobs exist. (information assymetries)
    2. Phd tenured professors aren’t suitable for other employment. (or people are prejudiced against them.)
    3. Phd tenured professors are willing to work in low paying jobs for non-wage related reasons, e.g., tenure brings security of employment, enjoyment of the job, pensions, living in university towns is nice, social status, etc, etc.
    4. There are massive switching costs.

    Note that none of those possibilities is that something is wrong with the country.

    The reality is that tenured professor is an easy gig. It may be hard work, but it’s not as hard as other work, e.g., working on an assembly line. (And for every anecdote about how hard profs work, Sam, I’ll see your anecdote and raise you one. I have many friends who’ve left business and gone to academia, and living in a college town, I have numberous acquaintances who are post docs et al, who cheerfully make statements like, “I want to get tenure so I can take it easy.” (Real quote.))

    Look, we all feel sorry for Phd’s because they’ve invested a huge amount in terms of time and money and most of the time that doesn’t pay off. But the economy isn’t obligated to give you a return. I can take my sixty year old ass out and invest a million bucks in dance lessons and practice ballet all day long, but I have no right to a gig with Joffrey that will allow me to recoup that investment.

    If Denny (For the record, I really like Denny) or any other prof wants to make more money, they should change careers. Journalism professor and low pay come as a package. It’s not a menu. Period.

    Note that another contributor to this site, C-Mac, recently changed careers from a higher paying one in industry in order to become a professor. And another walked away from a high paying gig with GE to work for a not-for-profit org. I’d bet right now there a thousand guys in industry making six figures who’d swap places with Denny in heart beat.

    • Sadly, I agree with every word of this. I knew at age 45, when I headed off to CU to begin “my studies,” what my life would like professionally, personally, and financially at age 67. Sure, I’d like a better salary. Sure, I’d like my work with young people to be more highly valued by a capitalistic society. But I like my job; I can treat it as being retired one-third of the year, and I can be pompous whenever the hell I want to.

      But I made the choices. And I’ll live with them. (But every time I see a freshman driving around in a Jag worth more than my annual salary, I reconsider alcoholism.)

      • and for the record, you are a brilliant photographer and i expect (havent read it yet) fine novelist, so you’ve used that 1/3 wisely.

      • You make me laugh Denny and your photographic art is impeccable. Not sure about your fiction yet but it seems to be growing on me after the first few chapters.

        Fine, I accept the truth because it is true not because I like it or think it is fair. Luckily in my world after 34 years in the saddle I get to call the shots and even while taking a captain’s share, I make sure my crew receives more than their fair share as well.

        It’s not charity, it’s good business. Happy secure employees are much better money making tools than angry underpaid disgruntled ones.

  8. Re: Declining middle class. OK, then, pick another number. $40K. It doesn’t matter. You can pick any endpoints. But Frank is right, the real question is how that has changed over time. And to be accurate, it needs to be based not solely on income but also on wealth and more importantly on purchasing power, e.g., home ownership, etc.

    It’s also a tricky question because of economic cycles. If you’d chosen June 2008 as a measuring point you might have found the middle class was shrinking because people were moving up into the wealthy bracket. If you picked November 2008, the opposite. I dont know the answer.

    Yes, intutitively we all feel like things are getting harder for the middle class, but it’s really hard to prove that. Let’s posit the soft hypothesis is true: The middle class feels under increasing pressure and feels like it’s losing ground.

    One problem is escalating expectations. For example, does a middle class family today feel strapped and resent things like “both parents having to work when in the fifties my mom could stay home?” Well, when you really dig into that, you find that families in the fifties also felt strapped, moms didnt want to stay home but had to, and that if a family today were willing to live to the standard of the fifties (one used car, 1500 square foot house, no cell phone, one TV) then people could live just fine on one income.

    Another is that as the first poster said, the middle class isn’t a static group. It’s also composed of people on the way up from poverty like me (who feel pretty good) and people on the way down from wealth (who feel like crap.) Obviously the people on the way down scream louder than people on the way up.

    Look, there are some real problems. Trying to live on $25K is very difficult. Living on $40K is very difficult. It’s not good. But even developing nations what we would recognize as middle class by US standards. It’s small, but it’s there. Extinction is hyperbole.

  9. Some fun charts on individual wage growth versus corporate profit growth from Reuters here: http://blogs.reuters.com/macroscope/2014/01/24/why-are-us-corporate-profits-so-high-because-wages-are-so-low/

    Perhaps jobs off-shoring and wage and benefit stagnation are simply byproducts of globalization and at some point in a generation or two when the Chinese and Indian middle classes rise, jobs will come back and wages will normalize in this country.

    Or…what if we’re seeing a replay of the gilded age from the late 19th century and a relative handful of monied individuals are manipulating this economy via political corruption for their own gain? Who’s going to be our McKinley and Roosevelt? What new Sherman Anti-trust act can wrest power back by busting up the worst offenders and regulating the rest?

    Quite a thought provoking little piece Dr D, and it’s tendrils reach far beyond professor’s wages and mid-price refrigerators. If as a republican businessman even I can see that this shit stinks, then perhaps it is reasonable to suspect that this shit really does stink….

  10. the truth is that the argument for globalization lies in Ricardian logic, that on average everyone is better off with trade, which is correct.

    people forget that averages are dangerous things, e.g., the old example of a man with his feet in the oven and his head in the freezer who on average is at 70 degrees.

    on average everyone will be better off, but it’s entirely possible for some to be much better off (the oligarchs,) many to be some better off (the middle classes in developing nations) and some to be much, much worse off–the american lower middle class. the pie is still bigger and on average the pieces are bigger, but the american workers slice has become very thin indeed. and will become thinner.

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