As the Middle Class Shrinks, Some Retailers Feel the Squeeze

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Need proof that the middle class is shrinking? Look no further than the retail industry, where dollar stores and high-end luxury brands are thriving while retailers in the middle struggle to survive.

Retail: The Haves and the Have-Nots

Catering to lower-income consumers has been a recipe for success for discounters and dollar stores.
The biggest retail winners this earnings season have been discounters like TJ Maxx (TJX), which passes through savings to the consumer by buying up unsold inventory from department stores.

Another bright spot has been the dollar stores like Dollar General (DG) and Dollar Tree (DLTR), who are up 17.8% and 16.8%, respectively, year-over-year.

"Dollar Tree continues to be part of the solution for millions of consumers as they work hard to balance their household budgets, and we serve a very loyal and growing customer base," Dollar Tree CEO Bob Sasser said on the earnings conference call. 

Interestingly, the other big winners of the retail earnings seasons are those serving the other extreme end of the income spectrum. 

“In addition to the discounters outperforming retail, super-high end luxury brands like Hermes are growing,” said Alexis Clarbour, Executive Director of PORTERO a web-based curated marketplace for authentic pre-owned luxury goods, including pristine offerings from brands like Hermes, Rolex, Cartier and Chanel. “Our business is up 20% on the year as the top 1% continues to spend on accessories in demand.”

While discounters and high-end luxury have thrived, department stores serving a more middle-class customer base have struggled. Macy’s (M), Kohl’s (KSS) and Nordstrom (JWN) and single-brand retailers like The Gap (GPS) had terrible quarters and struggled with declining foot traffic and inventory issues.

And even lower-end luxury brands like Michael Kors (KORS), Coach (COH) and Tiffany (TIF) are having a rough go of it.

“Michael Kors and Coach essentially cannibalized their brand due to oversaturation in department stores and outlets that have their own set of issues,” Clarbour said. “They completely threw off the supply/demand ratio and were forced to become over-promotional, which killed the demand for them in the secondary market.”

For some context, Hermes bags typically start at $10,000 and go up to the six-figure mark, while the price points are in the hundreds for Kors and Coach.

Income Inequality Having an Impact

It’s hard not to see the invisible hand of income inequality reflected in the fortunes of the retail sector. As the gulf between the rich and poor grows, and the middle class shrinks, retailers serving the former are seeing big growth, while those aiming with a middle-class clientele are struggling to bounce back.

The numbers don’t lie: wealth distribution is more uneven than ever. And the middle class is getting smaller with each passing year: According to a study by Pew Research, “From 2000 to 2014 the share of adults living in middle-income households fell in 203 of the 229 U.S. metropolitan areas” examined in the study.

And that bodes poorly for the economy as a whole, as the report suggests that “a struggling middle class could be holding back the potential for future economic growth.”

And in the meantime, investors looking for growth opportunities in the retail sectors should consider how that grim economic reality is impacting consumer-facing businesses.