The Gini’s out of the bottle: implications of a shrinking middle-class for business

In the U.S. the 40% of households that are considered middle class (incomes between $50,000 and $140,000 per year) has seen their net worth (household assets minus debts) grow by 2.4% per year between 2001 and 2007 and then drop by 26.2% between 2008 and 2009. Income for the median family, the family in the middle of the middle, was lower in 2009, when adjusted for inflation, than in 1998, and was the first such drop in almost 30 years.

The Gini index, a measure of income inequality (a Gini index of 0.000 means everyone has the same income, an index of 1.00 means one person has all the money in the economy) stands at 0.468 in 2009 in the U.S. a 20% rise in income inequality over the past 20 years and the highest ever for America (it was about 0.390 in 1970). Says P&G’s Vice President of Consumer Market Knowledge, North America, Phyllis Jackson, “We now have a Gini index similar to the Philippines (0.458 in 2006) and Mexico (0.479 in 2006) – you’d never have imagined that.” Canada’s Gini index, in 2005 was 0.321, right between Ireland (0.320) and Greece (0.330). By way of reference, Sweden in 2005 was 0.230, the lowest Gini index I could find, while the most unequal economy is Namibia at 0.707 in 2003 and South Africa at 0650 in 2005.

In practical terms, what this means is that, depending on the country, and let’s look at the U.S. for the moment, growing income disparity can lead to major shifts in consumer buying patterns. For example, P&G estimates that it has at least one of its products in 98% of U.S. households. It has seen sales of its cheaper brands outpacing its more expensive lines despite receiving less advertising. P&G’s Luv’s diapers and Gain detergent increased faster than its premium-priced Pampers and Tide brands. In addition, they have seen more of their business go to cheaper options such as private label. Its dominant fabric-softener brand, Bounce, lost 5 percentage points in just 36 months.

Now, P&G executives regularly study the Gini index to better understand global shifts in income and consequently they have shifted their strategy and priorities. In the past, P&G’s mantra was scale. To get scale they could and did aim products at a large mainstream, middle-class group. With many economies now bifurcating into a few very rich and many cash-strapped shoppers, companies must now deal with producing smaller runs of higher end products profitably and/or developing products and services that are very aggressively priced and offer huge real and perceived value. P&G has increased its research and development spending on the growing ranks of low-income American households. “This has been the humbling aspect of our jobs,” says Phyllis Jackson. “The numbers of Middle America have been shrinking because people have been getting hurt so badly economically that they’ve been falling into lower income.”

Canada may think it is doing relatively better than the U.S. economically, but Canadian companies ignore the implications of a shifting consumer psychology at their peril. Businesses may not be able to price their way to profitability, and pure scale may not work quite the way they thought it would.