T-shirt for $7 or $70? How the wealth gap is altering retail
The growing wealth gap between the richest and poorest Americans is creating a shopping chasm between those who are trading up and those trading down, experts say. What's missing is the middle.
"There is a two Americas kind of thing going on," said Chris Christopher, director of U.S. and global consumer markets for IHS Global Insight.
The result is a retail marketplace in which even basic goods like socks and razors are becoming either incredibly cheap or extremely expensive, experts say.
Say you're a guy who needs a new T-shirt. A shopper who feels like he has fallen down the economic ladder might opt for the $6.98 Kmart item. But a tech industry hotshot for whom things are looking up might be tempted by the $70 version available at Barneys.
Is there a new baby in the family? Cash-strapped shoppers might head to Wal-Mart for a $6.96 hoodie to bundle up that bundle of joy. The high-end shopper, on the other hand, could be eyeing the $135 cashmere number offered at J. Crew.
Looking to get back to the gym before the holidays? The 1 percent may go for Lululemon's $98 yoga pants (despite the recent troubles) but the 99 percent probably is more prone to scoop up the $14.99 product at Target.
On the high-end side, experts say retailers are seeing an opportunity to snag consumers who have fared well in the weak economic recovery and now want the best—even in a toothbrush, hair dryer or coffeemaker.
"A lot of even basic items have gone premium," said Milton Pedraza, CEO of the Luxury Institute, a consulting firm focused on affluent consumers. He said one company even contacted him recently about the possibility of developing a luxury detergent.
On the lower end of the economic spectrum, retailers see the opportunity—or necessity—of appealing to the wide swath of the country who lost ground during a deep recession and weak recovery.
Brian Sozzi, chief equities strategist at Belus Capital Advisors, points to the success of stores such as Dollar Tree, which sell everyday items at deep discounts. But he also said that, as competition increases to offer basic goods at the lowest price, consumers risk getting a raw deal because the goods are, well, cheap.
"A lot of retailers say they're investing in price," Sozzi said. "What they're basically doing is taking quality out of the product and then offering the product at a cheaper price."
The split also threatens the department stores, mall shops and other retailers that once appealed to America's broad middle and are getting squeezed out.
"It's the middle tiers that are struggling for definition," said Christopher at IHS.
The shift comes as some economists see more evidence that the wealth gap has widened in the four years since the nation officially came out of recession.
An analysis of income gains between 2009 and 2012, released last month by economists at University of California, Berkeley, found that the top 1 percent of incomes grew by 31.4 percent during that three-year period of economic recovery, while the remainder saw income gains of just 0.4 percent.
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Robert Shiller, the Yale professor who won the Nobel prize for economics earlier this year, told The Associated Press last month that rising inequality is "the most important problem that we are facing today."
One big concern is that many Americans who consider themselves middle class are worse off financially than they were five or six years ago and therefore have less money to spend. The U.S. median household income is still below its level in 2007—the year the nation went into recession—after adjusting for inflation.
Experts say that high- and low-end consumers have one thing in common: They're all becoming smarter shoppers.
David Rabkin, senior vice president of consumer lending for American Express, said its data has shown that shoppers of all income levels have become more careful about what they purchase. In addition, they are more mindful of a sale or good deal, and less likely to take on debt.
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Those savvy habits probably permanent, according to Rabkin.
"We don't really expect people to go back to prerecession behavior any time in the predictable future," he said.