I think that there is a good chance that the new market inefficiency is income inequality.
There is no question that the distribution of wealth, as well as income in this country has grown more uneven over the last couple of decades. Whether or not you care about this or find it “bad” is irrelevant to this discussion and a topic I am not going to touch, but the fact that the gap is widening is not a debate, it’s a matter of public record (the government is good at keeping track of other people’s money). All I care about here is what the effect is on brands and advertisers.
Here is a table of income distribution in the US over the last 30 years:
Top 1% | Next 19% | Bottom 80% | |
1982 | 12.80% | 39.10% | 48.10% |
1988 | 16.60% | 38.90% | 44.50% |
1991 | 15.70% | 40.70% | 43.70% |
1994 | 14.40% | 40.80% | 44.90% |
1997 | 16.60% | 39.60% | 43.80% |
2000 | 20.00% | 38.70% | 41.40% |
2003 | 17.00% | 40.80% | 42.20% |
2006 | 21.30% | 40.10% | 38.60% |
What we are seeing is that the bottom 80% of the country has seen their share of income decrease by 20% over a period when the US as a whole saw strong economic growth as well as a population increase. The amount of purchasing power lost when over 200 million people see their relative income decline is staggering.
Before you say that it is misleading because it is relative to the total growth in wealth, the answer is that it’s not. Professor G. William Domhoff of UC Santa Cruz pointed out that from 1983 – 2004:
“Of all the new financial wealth created by the American economy in that 21-year-period, fully 42% of it went to the top 1%. A whopping 94% went to the top 20%, which of course means that the bottom 80% received only 6% of all the new financial wealth generated in the United States during the '80s, '90s, and early 2000s (Wolff, 2007).”
How does this all tie back to brands? I mean, there is more money in the country, so does it matter who is spending it? Well, that depends on your brand.
BMW is going to be just fine. The number of people who had the buying power to get a luxury car remains the same as before, even in a down economy. If you are a brand that relies on a broad consumer base from the upper-middle class and down however, there is a good chance that this is a paradigm shift, rather than just a short-term cycle.
Brand managers are not economists, so it is understandable that a lot of them would look at poor sales data over the last few years and think, “Well, the economy is down, so everyone hurts, but we will come back with the recovery.” There are several problems with this though, and the biggest being that despite what the man on the street might think, there has been positive, though slow, growth for the last several quarters. Like our hypothetical brand manager though, this assumes that the growth is evenly distributed, but the reality is that it is focused on several sectors.
The recent market troubles provided a volatility that muddied the economic waters to a degree, obscuring long-term trends by drawing focus to the post-2008 environment, focused on housing and finance. The problem is that overall GDP growth and wealth creation is no longer increasing the buying power of the widest part of the consumer base in this country, and brands need to recognize this.
Think about it this way: You make Tide, or Gain, or some other name brand laundry detergent. Total amount of money in the system is increasing, but primarily flowing towards a small number of people who already hold a disproportionate amount. The vast majority of your consumers have actually seen their real buying power (based on income levels pegged to an inflation index) decrease, so they move to cheaper store brands, or buy your product only when there is a coupon/discount offer.
For your brand to just break even, the top 20% of earners in America would have to suddenly start consuming more of the same product, without adding any new consumers. So the well-to-do family, which has gone through 1 bottle of Tide per week forever, suddenly has to start using 3 of them per week. Rich babies will need to start dirtying their diapers at a much higher rate inexplicably. This isn’t going to happen.
We have seen an explosion in interest in savings, discounts, and couponing. There are huge blogs dealing with the subject, and even multiple television shows. Cable subscriber rates fall along with telephone landlines, lagging by ten years. The important thing is realizing that this behavior is not symptomatic of short-term economic slowdown, but long-term trends that started well before the banking crisis.
Growth will slowly increase over the next 6-12 quarters, and unemployment will slowly drop, but probably not to pre-2008 levels any time soon. Meanwhile, population continues to increase, almost entirely in the bottom 80% of the income scale, which still possesses the lion’s share of purchasing power in this country. For a lot of brands, krazycouponlady.com is more relevant to their consumers than BMW, and they need to embrace that. When the economy comes back, they can’t be surprised that their sales never fully returned, and that their profit margins actually shrank.
The flipside of this is that there is a huge opportunity for brands that recognize the shift and respond to it first. If General Mills stubbornly tries to stay the same, and cover their cereal boxes with QR codes that drive to an altered-reality experience (which is not cheap), while Kellogg suddenly cuts overhead and production costs, accepts a slimmer margin but positions themselves as the middle ground between store brands and premium brands, they will reap the benefits.
The majority of buying power as a market group has shifted down a step, roughly 20%, compared to the post-WWII era which saw the growth of the middle class and a large industrial/manufacturing sector when many marketing practices and brand identities were established. We have entered a new reality, and the brands that accept this first will have a vital head-start in dominating the “new middle-class.” Advantage is gained by exploiting market inefficiency, and failure to differentiate between overall economic market conditions versus buying power demographic shifts is that inefficiency.
