Rising Income Inequality and Bipolarisation of Value and Premium Positioning in the US

Income inequality in the US accelerated over 2007-2013, fuelling a vocal public debate on the topic. The top 10% of the richest US individuals held almost 75% of national wealth in 2013 and collected 27% of the total income. This article explores the income inequality along the trends of value and premiumisation in consumer goods.

Figure 1: Share of Total Net Wealth by Decile, US, 2013

Source: Euromonitor International (upcoming Income and Wealth Segmentation Tool)

Note:  The distribution is calculated for individuals and may differ from households.

Middle-Class Squeeze

By and large, the recent increase in income inequality is a result of unemployment and under-unemployment. The Great Recession caused many employees to lose their reasonably well-paid, mid-career jobs, whereas the quantitative easing and the resultant recovery in financial markets has mainly been instrumental in driving growth of the highest income brackets. The number of households in the middle range of income brackets, however, dropped, squeezing the middle-class in the US. According to some estimates, the income gap between the richest 1% of Americans and the other 99% in 2012 broke a record previously set in 1927[1].

Figure 2: Income Polarization in the US

Households Annual Income v10.jpg

Source: Euromonitor International (Countries & Consumers) 

Note: Number of Households within specific Annual Disposable Income Bands, US$. ‘000s, Constant Prices, 2007-2013

The US maintains one of the highest levels of income inequality among developed countries. Its Gini index, a standard measure of income inequality which ranges from 0 (indicating perfect equality) to 100 (indicating maximum inequality), was 47.7% in 2013, up from 46.3% in 2007. Notably, the GINI index in the US is higher than in many countries known for the high income disparity between rich and the poor, such as the United Arab Emirates and Kuwait.

Figure 3: Average Annual Household Disposable Income By Deciles

Average Annual Household Disposable Income v2.jpg

Source: Euromonitor International (Countries & Consumers)

Note: 2013, US$, selected countries

Narrowing Middle Class is Bad News for Branded Goods

The debate about the widening gap between rich and poor has, however, been focused largely on the moral dimension of income inequality rather than its consequences on business and the economy. And while it is probably true that a certain level of inequality can serve as motivation to work harder and produce more, persistently high income disparity is likely to negatively affect the economic climate through differences in the marginal propensity to consume across the income scale.

Diminishing middle-class is bad news for branded consumer goods companies.  Branded products benefit from consumer search for variety and quality, whereas a smaller middle class explains the increasing consumer preference for private label and hard discounted products. This explains the boom of warehouse clubs, variety stores (mainly including dollar-stores) and discounters over 2007-2013. The sales growth through the three retail channels have accounted for an astounding one third of the entire US$152 billion store-based retailing growth through the period

Figure 4: Value Oriented Stores Have Vastly Outperformed Store-based Retailing in the US

Value Oriented Stores.jpg

Source: Euromonitor International (Retailing)

On the other end of the polarization curve, there is a buoyant trend of premiumisation that is happening across many consumer industries along with the luxury products market. Both premiumisation and value have been among the top consumer trends in the post-recession consumer market.

Perhaps the most affected, however, are the big-ticket purchases, such as consumer appliances and consumer electronics, as rising inequality squeezes out investment initiative at household level. Smaller middle-class means fewer people are in a position to upgrade, and the many may not have the income to spend despite the aspiration to.