In a period where income inequality is likely worsening, companies that target the middle class need to better manage their assortments so they don’t lose market share to discounters or private-label brands.
That’s according to a new report from global consulting firm AlixPartners called “Income inequality: The existential crisis in the consumer goods industry.” The report said income inequality threatens the existence of consumer-focused companies by “undermining the buying power of their core middle-class consumer base, forcing these companies to reorganize their business models around consumers in an increasingly fragmented market.” The study also said the problem is long-term, and will grow in the coming years.
Focusing on wealthy consumers isn’t the answer because affluent shoppers can’t make up for the decline in spending by the middle class. That’s because wealthier consumers tend to save more of their income, so a smaller portion of their income gains translate into retail sales. Further, they spend more on travel and dining, so only a small part of their discretionary income is on products made by most consumer businesses. “The middle demographic, then, is the heart of the global consumer industry, and continues to be the key to its future,” the report concluded.
Sudden economic shocks such as the downtown in 2008 allow new value chains and discounters — Dollar Stores and Aldi are two examples — to expand their marketplace reach, mostly because the squeezed middle class, who see income rising slower than the goods and services they consume, are more likely to be forced to make value-based choices.
In a look at different private-label product categories across retail assortments in different countries, the AlixPartner team found that none of the stores aggressively tailored their assortments around local economic conditions. That means for many retailers, the same assortment mix was used for high-income and low-income neighborhoods. An example of a better strategy would have been to up the private-label offerings in the low-income neighborhoods, the report said.
Tailoring offerings, or microtargeting, for different markets means paying closer attention to where consumers live, what challenges they face and where the retailer’s stores are, as well as the locations of their competitors’ doors.
The report cited the city of Boston as an example where retailers offered either a barely tailored assortment or one composed of a mix that seemed counterintuitive for a given neighborhood. It noted that the city has 37 zip codes, with incomes from under $25,000 to more than $200,000.
“Given the challenges ahead, consumer businesses cannot simply tweak their product offerings. They must rethink their entire business models,” the report concluded, adding that both retailers and manufacturers need to reach consumers in a more targeted way.
David Garfield, managing director and global co-head of consumer products at AlixPartners, at a presentation hosted by the Consumer Goods Forum in Berlin on Wednesday, pinpointed some of the challenges faced by manufacturers: Contradictory pressures for sku rationalization and proliferation, losing share and shelf space to value or private-label products and building organization capabilities to understand and manage the issues. On the retail side, challenges include: Confusing consumer behavior and fragmentation of customer profiles; losing share and customers to discount channels; managing assortment rationalization, while maintaining the value balance between branded suppliers and private label products and building organization capabilities to manage the issues.