The economy and middle-class

(the picture is from internet)

On today’s WSJ, there is an article about P&G’s strategy adjustment: as the middle class shrinks, P&G aims high and low. This is a pretty long article, and the opinions and facts from this article are eye-opening to me, so I would like to note down what I learned from this article.

Who belongs to middle-class?

In this article, the middle-class definition roughly goes like this: households with annual incomes between $50,000 and $140,000 a year, who consist of 40% of America’s population.  The essential ingredients of middle-class life include college education, health care and housing.

Consumer Hourglass Theory

Middle-class was hit hard in the recession. The slumping stock market, the collapse in housing prices, and the inflation, etc., all caused the consumer market to bifurcate into high and low ends and erode in the middle. Middle-class is not safe anymore, who has shrunken to the lower end for household staples.  Citigroup calls the phenomenon the “Consumer Hourglass Theory” and since 2009 had urged investors to focus on companies best positioned to cater to the highest-income and lowest-income consumers.

Income gap is widening. According to Gini index, a widely accepted measure of income inequality that ranges from zero, when everyone earns the same amount, to one, when all income goes to only one person. In 2009, the most recent calculation available, the Gini coefficient totaled 0.468, a 20% rise in income disparity over the past 40 years, according to the U.S. Census Bureau.

P&G aims High and Low

P&G’s profits boomed with the increasing affluence of middle-class households in the post-WWII economy.  Its long-term approach is to make best-in-class products and charge a premium, expecting middle-class Americans to pay up.  The analysis of current situation forced P&G to tier their portfolio up in terms of value as well as tier the portfolio down.

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