THE VANISHING MID-MARKET
â€œMore of the good stuff For less.â€? So proclaims the new advertising campaign for Whole Foods Market, a hugely successful retailer of organic produce that, until now, has shown no interest whatsoever in being seen as a value-for-money proposition. Indeed, the firm has been nicknamed â€œWhole Paycheck Marketâ€?. But the new ads, launched in New York, carefully draw attention to a private-label range of produce with the frugal-sounding brand name â€œ365 Everyday Valueâ€?.
Last month Mars, a big food company that owns the premium Whiskas and Pedigree pet-food brands, agreed to buy Doane Pet Care Enterprises, the largest supplier of private-label pet food to giant Wal-Mart. Days earlier Martha Stewart Living Omnimedia announced a deal to sell a new â€œMartha Stewart Collectionâ€? of home furnishings in Macyâ€™s department stores. The firm, resurgent since its eponymous founderâ€™s release from jail last year, already sells a â€œMartha Stewart Everydayâ€? range exclusively in the down market K-Mart retail chain.
Each of these companies is trying to profit from what are arguably now the two most noteworthy trends among middle-class consumers around the world-trends that appear to be, at first glance, at odds with each other. These are the tendencies to be more cost-conscious; but simultaneously more willing to splurge money on luxury items.
Until the 1990s, broadly speaking, shopping choices tended to reflect spending power. The rich bought expensive things, and accounted for most luxury goods sales. The poor tended to buy cheap, low-quality stuff. And the middle classes stuck to the mid-market.
Today, however, middle-class shoppers around the world are not content to be marooned in mediocrity. Consumers earn between $50,000-150,000 are â€œtrading up and trading downâ€? both at the same time.
This change is described in great detail in Treasure Hunt: Inside the Mind of the New Consumer, a new book by Michael Silverstein and John Butman. In an earlier book, Trading Up, Silverstein had explored one half of the change, the phenomenon of the middle-class occasionally treating themselves to luxuries.
Treasure Hunt reports on the other side of that coin, the popularity of trading down hunting for basic goods at bargain prices, not least to generate the savings that can be lavished on the occasional luxury.
Sales both at the top and bottom of the consumer market are rapidly growing while sales are being squeezed hard in the middle, though it is still the largest market segment in rich countries. Trading-up salesâ€”those in which a middle-class consumer pays a premium of 50-200%. Mid-priced alternatives were around $300 billion in America in 2002,and are now around $500 billion (out of total consumer spending of $3.7 trillion). This is similar to Europe, where trading up is also in vogue. The trading down market, in which middle-class shoppers pay less than the mid-market price, is far bigger, at around $1 trillion in America, Silverstein calculates, up from $700billion three years ago. This trend is also strong in Japan and Europe.
But trading down is, in fact, a misleading term. One reason why this change has taken place is that discount retailers have raised the quality of their products. A second development is the rapid increases in transparency in consumer markets, thanks not least to the internet points out an expert. When price comparisons on Froogle are only a click away, it has become a sign of sophistication to get the best price. There is status in getting a deal.
Not everyone thinks this is a good thing, however. Americans, in particular, â€œhave become addicted to the deal, which is leading them to do irrational things. One consequence is that people buy lots of stuff they do not need a pack of 600 cookies, a gallon of pickles because it seems to be a bargain.
For companies that have made their money supplying mid-market products, times are getting harsher. At least some of the woes of General Motors, an archetypal mid-market firm, stem from the fact that in 1994-2004 the trading-up segment of the car market grew by 8% , the trading-down grew by 4%, and the middle shrunk by 12%.
In this bifurcated market, firms in the middle need to move either up or down market. Such firms instead typically opt for cost-cutting rather than taking the risk of developing new products for the consumer trading up. Often the cost-cutting is ineffective, as it reduces quality. Kraft, owner of various cheese brands, and Maxwell House coffee, is a good example of a firm stuck in the middle. A few years ago, believing that the market for coffee was in long-term decline, it missed the trading-up opportunity later taken by Starbucks one of the outstanding practitioners of the art of getting self-pampering consumers to part with their money.
Some firms are trying to tap both the trading-up and trading-down markets at once. This is what lies behind Martha Stewartâ€™s move up-market into Macyâ€™s and Whole Foods Marketâ€™s scheme to tout its cheaper range. But neither approach is straight forward. Opinions differ over the value of creating an â€œaffordable luxuryâ€? Martha Stewart brand in a department store. As for Whole Foods, its new focus on value may be a defensive response to Wal-Martâ€™s decision to start selling organic produce at prices only 10% above its non-organic alternatives. Companies that get suck in the mid-market may be doomed. But as businesses trading up clash with those trading down, some of them may end up as losers, too.