Businesses cater to high-end products, while middle class erodes

I found this interesting story off the New York Times:

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.”

In one sense, I am not surprised.  When 85 of the richest people on Earth have the same amount of wealth as the bottom half of the global population,  why wouldn't businesses start selling luxury items to cater to the wealthy?  General Electric is selling a Cafe line of refrigerators for $1,700 to $3,000--aimed at the top quarter of the market.  “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.  According to the NY Times: 

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.

The question I would ask here is just how many $3,000 refrigerators with hot water, or double-oven ranges, or steak dinners at the Capitol Grill, are these upper 5 percent, or even 20 percent earners are willing to consume?  Yes, they are spending now.  More wealth is flowing upwards.  But there is only so much demand for such luxury products.  The hollowed out middle class, working class and poor?  They don't have the money to spend on such products.  They don't have the money to consume at the stores selling to such market segments--hence the troubles at J.C. Penny and Sears.  Even WalMart, the ultimate big box retailer which sells to low working class and poor, is now reporting that cuts to the government food stamps is hurting their bottom line:

Walmart Friday said bad weather and cuts in food stamp support for the poor weighed on US sales and would hit earnings for its November-January fourth quarter.

Wal-Mart Stores Inc., the world’s largest retailer and the country’s largest single private sector employer, said it now expects sales at its namesake US stores and its Sam’s Club chain to be “slightly negative” for the quarter, which included the crucial holiday shopping period.

Previously the company forecast “relatively flat” sales at Walmarts and 0-2 percent growth at Sam’s Clubs.

Walmart reports fourth-quarter earnings on February 20. The company had previously forecast underlying earnings of $1.60-$1.70 per share.

“Despite a holiday season that delivered positive comps, two factors contributed to lower comp sales performance,” said Walmart chief financial officer Charles Holley — referring to sales at comparable stores.

Holley cited deeper-than-expected cuts to benefits under the US Supplemental Nutrition Assistance Program — food support for the poor — and heavy weather in some areas that had forced some temporary store closings and kept consumers away.

I am starting to wonder when this entire economic house of cards will start crashing down.  Then again, they can always go to Eko Atlantic.

UPDATE:  Charles P. Pierce has a more profound take on this NY Times story in his The Politics Blog:

American "business," a concept that runs from your local pharmacist to Goldman Sachs, which then steals it all and runs away, pronounces itself startled that, having worked diligently at its highest levels to burn the entire house down, it is now difficult to see the TV clearly through all the smoke.

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.

Perhaps because the former have been right all along, and the latter have been in the thrall of thieves and mountebanks, and almost 40 years of retrograde economic policy that have shoved the nation's wealth into a smaller and smaller place at the very toppermost of the poppermost. Suddenly, lo and behold, the blog's First Law Of Economics -- Fk The Deficit. People Got No Jobs. People Got No Money -- kicks in and, unless, you're selling yachts, business goes sour because...wait for it...nobody can afford to buy anything! Hoocodanode?

And he's completely right.  This really is a demand issue.  When wages have remained stagnant, with all the productivity gains going to the ubber-rich and corporations, ordinary people do not have money to purchase the middle-class goods and services that corporations have been trying to sell them.  Now that only the rich have all the money, corporate business has decided to abandon the middle and working class to sell luxury products to the ubber-rich.  But still, the rich are not going to purchase 10 or 20 or 30 G.E. Cafe line of $4,000 refrigerators.  Interestingly enough, in reading a lot of comments on Charles Pierce's post, and on the NY Times story, there are plenty of comments on Henry Ford paying his factory workers higher wages to build his Ford cars, then those same factory workers would be purchasing Ford cars, thus generating more demand for his Ford cars.  Will Corporate America ever learn this lesson?

Probably not.