Just Ask the Business World
By Nelson D. Scwhartz
In
Manhattan, the upscale clothing retailer Barneys will replace the
bankrupt discounter Loehmann’s, whose Chelsea store closes in a few
weeks. Across the country, Olive Garden and Red Lobster restaurants are
struggling, while fine-dining chains like Capital Grille are thriving.
And at General Electric, the increase in demand for high-end dishwashers
and refrigerators dwarfs sales growth of mass-market models.
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.
If there is any doubt, the speed at which companies are adapting to
the new consumer landscape serves as very convincing evidence. Within
top consulting firms and among Wall Street analysts, the shift is being
described with a frankness more often associated with left-wing
academics than business experts.
“Those consumers who have capital like real estate and stocks and are
in the top 20 percent are feeling pretty good,” said John G. Maxwell,
head of the global retail and consumer practice at
PricewaterhouseCoopers.
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.
“As a retailer or restaurant chain, if you’re not at the really high
level or the low level, that’s a tough place to be,” Mr. Maxwell said.
“You don’t want to be stuck in the middle.”
Although data on consumption is less readily available than figures
that show a comparable split in income gains, new research by the
economists Steven Fazzari, of Washington University in St. Louis, and
Barry Cynamon, of the Federal Reserve Bank of St. Louis, backs up what
is already apparent in the marketplace.
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.
Even more striking, the current recovery has been driven almost
entirely by the upper crust, according to Mr. Fazzari and Mr. Cynamon.
Since 2009, the year the recession ended, inflation-adjusted spending by
this top echelon has risen 17 percent, compared with just 1 percent
among the bottom 95 percent.
More broadly, about 90 percent of the overall increase in
inflation-adjusted consumption between 2009 and 2012 was generated by
the top 20 percent of households in terms of income, according to the
study, which was sponsored by the Institute for New Economic Thinking, a
research group in New York.
The effects of this phenomenon are now rippling through one sector
after another in the American economy, from retailers and restaurants to
hotels, casinos and even appliance makers.
For example, luxury gambling properties like Wynn and the Venetian in
Las Vegas are booming, drawing in more high rollers than regional
casinos in Atlantic City, upstate New York and Connecticut, which
attract a less affluent clientele who are not betting as much, said
Steven Kent, an analyst at Goldman Sachs.
Among hotels, revenue per room in the high-end category, which
includes brands like the Four Seasons and St. Regis, grew 7.5 percent in
2013, compared with a 4.1 percent gain for midscale properties like
Best Western, according to Smith Travel Research.
While spending among the most affluent consumers has managed to
propel the economy forward, the sharpening divide is worrying, Mr.
Fazzari said.
“It’s going to be hard to maintain strong economic growth with such a
large proportion of the population falling behind,” he said. “We might
be able to muddle along — but can we really recover?”
Mr. Fazzari also said that depending on a relatively small but
affluent slice of the population to drive demand makes the economy more
volatile, because this group does more discretionary spending that can
rise and fall with the stock market, or track seesawing housing prices.
The run-up on Wall Street in recent years has only heightened these
trends, said Guy Berger, an economist at RBS, who estimates that 50
percent of Americans have no effective participation in the surging
stock market, even counting retirement accounts.
Regardless, affluent shoppers like Mitchell Goldberg, an independent
investment manager in Dix Hills, N.Y., say the rising stock market has
encouraged people to open their wallets and purses more.
“Opulence isn’t back, but we’re spending a little more comfortably,”
Mr. Goldberg said. He recently replaced his old Nike golf clubs with
Callaway drivers and Adams irons, bought a Samsung tablet for work and
traded in his minivan for a sport utility vehicle.
And while the superrich garner much of the attention, most companies
are building their business strategies around a broader slice of
affluent consumers.
At G.E. Appliances, for example, the fastest-growing brand is the
Café line, which is aimed at the top quarter of the market, with
refrigerators typically retailing for $1,700 to $3,000.
“This is a person who is willing to pay for features, like a
double-oven range or a refrigerator with hot water,” said Brian
McWaters, a general manager in G.E.’s Appliance division.
At street level, the divide is even more stark.
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.
Loehmann’s, where generations of middle-class shoppers hunted for
marked-down designer labels in the famed Back Room, is now being
liquidated after three trips to bankruptcy court since 1999.
The Loehmann’s store in Chelsea, like all 39 Loehmann’s outlets
nationwide, will go dark as soon as the last items sell. Barneys New
York, which started in the same location in 1923 before moving to a more
luxurious spot on Madison Avenue two decades ago, plans to reopen a
store on the site in 2017.
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.
Competition from online giants like Amazon has only added to the
problems faced by old-line retailers, of course. But changes in the
restaurant business show that the effects of rising inequality are
widespread.
A shift at Darden, which calls itself the world’s largest
full-service restaurant owner, encapsulates the trend. Foot traffic at
midtier, casual dining properties like Red Lobster and Olive Garden has
dropped in every quarter but one since 2005, according to John Glass, a
restaurant industry analyst at Morgan Stanley.
With diners paying an average tab of $16.50 a person at Olive Garden,
Mr. Glass said, “The customers are middle class. They’re not rich.
They’re not poor.” With income growth stagnant and prices for
necessities like health care and education on the rise, he said, “They
are cutting back.” On the other hand, at the Capital Grille, an upscale
Darden chain where the average check per person is about $71, spending
is up by an average of 5 percent annually over the last three years.
LongHorn Steakhouse, another Darden chain, has been reworked to
target a slightly more affluent crowd than Olive Garden, with décor
intended to evoke a cattleman’s ranch instead of an Old West theme.
Now, hedge fund investors are pressuring Darden’s management to break
up the company and spin out the more upscale properties into a separate
entity.
“A separation could make sense from a strategic perspective,” Mr.
Glass said. “Generally, the specialty restaurant group is more
attractive demographically.”
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