Income Inequality: A Crisis For the Consumer Goods Industry
Income inequality has been touted as a political issue in the United States and elsewhere. But according to a recent report from Alix Partners, it also represents a crisis for retailers and manufacturers that cater to consumers.
Income inequality measures the discrepancy between the haves and the have-nots. It’s always been around, but the financial crisis of 2007-2008 exacerbated the situation. In the last 20 to 30 years, lower- and middle-class consumers in developed markets have seen little or no increase in household incomes.
To learn how retailers are confronting the challenges of income inequality, Alix Partners visited 40 retailers of different kinds and in different income zones in London, Boston, Frankfurt, and Mumbai. The study found that almost none of them “rigorously tailored their assortments around local economic conditions.”
Focusing on wealthy consumers might seem like a reasonable strategy for consumer goods companies but there are several reasons why that won’t work. Spending by the affluent won’t make up for falling middle-class spending. Wealthier consumers save more of their income and spend more on experiences like travel and dining, so a smaller portion of their income gains go toward retail sales.
What consumer goods companies have to fear is that someone will come along who will tailor offerings to middle income consumers if they don’t. “Surviving and thriving today requires focusing on a few critical elements across the value chain,” the report said. “The path forward is best understood as a four-part framework.”
Targeting precision. Retailers and manufacturers need to focus on understanding their consumers. Manufacturers need to understand specific stores that sell their products so they can get ahead of the market. All this means using big data and finding the right data to understand local conditions.
Mastering complexity. Heightened income inequality will create a proliferation of brand positionings, package formats, and sub-brands. Each region has its own set of microregions. The study found that Boston retailers offered “either a barely tailored or an entirely counterintuitive range and mix of private label cleaning products across these different neighborhoods.”
Capturing operational efficiencies. Retailers must figure out how to monitor inventory levels to avoid creating too much assortment. Manufacturers must also tailoring their product assortment “to broaden their reach across the price-value spectrum.”
Reinventing business models. Retailers must decide whether to trade up or down. Manufacturers need more differentiated product portfolios to hit different price points and will need to determine how to manage global brands and how to manufacture and deliver products in a world of micro-targeting.
“Given the challenges ahead,” the report concluded, “consumer businesses cannot simply tweak their product offerings. They must understand store surroundings and build models that can adapt accordingly.”