American Business Builds Lower Income Expectations into Their Products

Consumer Products Companies Recognize Permanent Reductions in Middle Class Incomes

Business does not change its strategy quickly.  The focus of a company with respect to its market does not change on a daily, weekly or even monthly basis.  To change strategy a business needs confirmation that its markets have changed.  Once this confirmation is accepted, a business, particularly a consumer business will react accordingly.

This is why it is particularly disturbing that the large consumer products company, Proctor and Gamble is implementing marketing strategies that recognize that the U. S. economy is becoming one of “hourglass incomes”  Hourglass incomes refers to the trend that is producing a large number of consumers at the top of the income distribution, a much larger number at the bottom and a shrinking number in the middle.



That Falling to the Bottom
That's the Middle Class



Citigroup calls the phenomenon the "Consumer Hourglass Theory" and since 2009 has urged investors to focus on companies best positioned to cater to the highest-income and lowest-income consumers. It created an index of 25 companies, including Estée Lauder Cos. and Saks at the top of the hourglass and Family Dollar Stores Inc. and Kellogg Co. at the bottom. The index posted a 56.5% return for investors from its inception on Dec. 10, 2009, through Sept. 1, 2011. Over the same period, the Dow Jones Industrial Average returned 11%

So business strategy reacts accordingly, once they believe a short term trend is a long term fixture.

P&G executives say many of its former middle-market shoppers are trading down to lower-priced goods—widening the pools of have and have-not consumers at the expense of the middle.

That's forced P&G, which estimates it has at least one product in 98% of American households, to fundamentally change the way it develops and sells its goods. For the first time in 38 years, for example, the company launched a new dish soap in the U.S. at a bargain price.

What exactly is P&G reacting to?

In the wake of the worst recession in 50 years, there's little doubt that the American middle class—the 40% of households with annual incomes between $50,000 and $140,000 a year—is in distress. Even before the recession, incomes of American middle-class families weren't keeping up with inflation, especially with the rising costs of what are considered the essential ingredients of middle-class life—college education, health care and housing.

The implications for the U. S. economy are huge.  Business has decided that the current trend towards reduced middle class incomes is permanent and growing.  Money can be made at the high end, money can be made at the low end, but money cannot be made by selling to a smaller and smaller middle.  But the U.S. economy cannot grow without a larger and larger middle.

You do the math.