• The shrinking middle class is bolstering deep discount chains like TJ Maxx and Marshalls, which cater to shoppers looking for value and efficiency amid a time of high unemployment.
  • On the other end of the spectrum, those unaffected by the economic downturn have continued to shop at high-end luxury stores, which is keeping this sector stable.
  • The problem exists for the stores in between, mainly department stores like Macy’s or JCPenney, as the middle-class shrinks and people limit spending on non-essential items.
  • Visit Business Insider’s homepage for more stories.

The middle class is shrinking rapidly. And that means a shift in the places people are choosing to spend their money.

Data from the Pew Research Center showed that from 1971 to 2016, the size of the American middle class decreased by 9 percentage points. Results from a 2019 INSIDER and Morning Consult survey of 4,400 Americans reflected trends of a shrinking middle class amid higher living costs.

Read more: Here’s why department stores like Nordstrom and Macy’s are banking on deep discount models as TJ Maxx and Marshalls emerge as winners in the pandemic

Now, with the pandemic sending unemployment levels to record highs, the gap appears to be widening and having a significant impact on retail. Experts say that deep-discount — or off-price — chains like TJ Maxx and Marshalls have been in a good position to reap the benefits from a growing class of consumers at the lower end of the wealth spectrum looking to save money and shop efficiently. At the same time, those at the top who have mostly been unaffected by the economic downturn have continued to shop at high-end luxury stores, which is keeping that segment relatively stable. 

The problem exists for the vast group of stores in the middle, such as department stores like Macy’s or JCPenney, which have failed to distinguish themselves among a shrinking middle class of consumers who are limiting their spending on non-essential items.

Off-price has been growing over the last decade

To be a sure, while a weak online presence may have hurt the off-price sector in the short run during the pandemic, the lack of strong digital capabilities has not stopped these retailers from growing in the last decade.

The off-price sector saw gains during its store reopening process, with TJ Maxx parent company TJX Companies reporting in May that sales were up at stores that had reopened since the pandemic forced shutdowns.

“I think off-price has been growing steadily,” said Brett Rose, the founder and CEO of United National Consumer Suppliers (UNCS), which globally distributes manufacturers’ overstocks and closeouts to discount retailers. “There’s a great disparity now — and it’s becoming bigger — between the ‘haves’ and ‘have nots.'”

Rose, whose company sources merchandise to retailers like Home Goods, Macy’s, and Sam’s Club, said the current high levels of unemployment make off-price stores a leading destination for many shoppers. This renewed focus on spending smartly amid widespread economic uncertainty and unemployment, Rose said, will help off-price stores survive the “dust of the pandemic.”

According to Kathy Gersch, a former Nordstrom executive and founder and executive vice president at strategy and change management firm Kotter, the rapid growth of the deeply discounted Nordstrom Rack in comparison to regularly-priced Nordstrom’s stores is a solid example of the strength of the off-price sector in recent years.

“This is visible both in terms of revenue and, on the flip side, where leadership has chosen to reduce the physical store footprint,” Gersch told Business Insider.

In a recent Cowen online summit, Nordstrom co-president Erik Nordstrom said the company’s off-price arm, Nordstrom Rack, is worth over $1 billion and has seen particularly rapid growth online.

Luxury brands will not be heavily impacted

Meanwhile, as the off-price sector continues to grow, experts also say high-end and luxury brands will likely not be heavily impacted by a shrinking middle class.

“High-end retailers cater to consumers that have likely been less impacted by the economic downturn,” said Natalie Kotlyar, a retail and consumer products practice leader at BDO. In other words, the regular Gucci or Chanel shopper is likely still in a financial position to continue shopping there, even during a financial downturn. Although these brands have lost sales due to COVID, they have more recently confidently raised prices.

Read more: Grocery stores, Target, and Walmart could save shopping malls by filling the void left by dying department stores

While luxury chains are banking on shoppers who have been mostly unaffected by the downturn, off-price chains have an advantage by catering to a much wider base of shoppers.

“There has been a growth in off-price retailers across the board, with shoppers frequenting those stores including both the ‘haves’ and the ‘have nots,'” said Gersch. “The difference is that the ‘haves’ shop at off-price retail stores and at the higher end.”

The fate of department stores

While on opposite ends of the spectrum, both off-price chains and luxury stores will likely remain stable as the middle class continues to shrink. The problem, experts say, lies for the slew of chains in the middle, namely department stores.

In general, the pandemic appears to have intensified an already precarious situation for department stores. Stores like JCPenney, Nordstrom, and Macy’s have been seen low foot traffic during the pandemic, partly due to mass stores closures and changing shopping habits.

Read more: Experts say Macy’s, JCPenney, and Nordstrom can survive mass store closures by reimagining the department store experience

“The shrinking of the middle class isn’t just affecting middle-class retailers, it’s department stores across the board,” said Kotlyar. “Traditional department stores will struggle the most as they face overwhelming real estate costs, have unsophisticated digital offerings and lose relevance without specialized or exclusive products.”

To Kotlyar, these stores in the middle must consider reinventing themselves to stay relevant. She recommended retailers lean into creating unique brands that “take a stance on social issues,” a quality many shoppers seem to be interested in today, especially among Gen Z.

Similarly, Gersch said that the ability for a brand to evolve to meet the needs of a changing consumer, regardless of age or income level, is what will define which of these stores in the middle will succeed.

“The retailers that can shift and continue to appeal to their customer base will survive,” she said. “Those that do not will ultimately die.”

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