The bottom of the pyramid

Businesses are learning to serve the growing number of hard-up Americans

In the most recent issue of The Economist magazine, the business columnist Schumpeter describes how American business is adapting to serve what appears to be a permanent class of low income and low- middle income consumers.

Providing goods and service to lower income people is not glamorous, or thought to be a growth industry, certainly not in the U. S., right?

But even in one of the world’s richest countries the hard-up represent a huge and growing market. The average American household saw its real income decline between 2005 and 2009. Millions of middle-class Americans have been forced to “downshift”, as credit dries up and the costs of college and health care soar. Some 44m Americans live below the official poverty line ($21,954 a year for a family of four). Consumer spending per household fell by 2.8% in 2009, the first time it had fallen since the Bureau of Labour Statistics started gathering data in 1984.

What is happening is that business is shifting to provide for the increasing market composed of the recently downscaled consumer.

McDonald’s, for example, is booming. Since 2006 its restaurants have generated an annual increase in sales of 4%, despite rising food prices. . .

Frugal shops have been thriving, too. Walmart and Target are marching into new markets (such as basic medical care) and new places (such as inner cities). Aldi, a German discounter, has been doing surprisingly well in America, too. . .

Even that staple of the urban poor, the pawn shop, is being reinvented. Pawngo is putting pawn on the internet for the convenience of what it describes as “college-educated working professionals with temporary cashflow problems”. Customers can send their college-graduation presents (for example) to Pawngo by FedEx and get a loan in the form of a bank transfer.

Entrepreneurs are also adjusting their business models to deal with the age of austerity. One popular model is paying for things upfront (which appeals to consumers who have poor credit or who want to curb their splurging).

What all of this means is that American business has determined that newly downsized consumers who now have lesser real income are joining those who have always had lesser income to create a permanent market for discount goods, credit facilities like pawn shops and other services that were supposed to be relegated to a small and shrinking population of the poor and near poor. 

Business has recognized a new reality.  The American dream of an increasing standard of living is rapidly disappearing for a growing segment of the population.  For a large number of people, their current deprivation will be with them for the rest of their lives. Instead of a shrinking population of poor and near poor, business is gearing up to serve what it expects is a increasing population of poor and near poor.  While business acumen has been wrong in the past, it is usually ahead of the curve in recognizing trends.  This is not a good long term sign for the economy.

The Republican position in Washington

House Majority Leader Eric Cantor (R-Va.) pressed for as much as $1.7 trillion in cuts. And he wanted an overall cap on spending that would leave the door open to slashing the entire sum from domestic programs -- such as education, food safety, health research and criminal justice – when lawmakers draft spending bills next spring.

 That will not help.