Shoppers walk past a J.C. Penney store in New York City. Northfoto/Shutterstock.com
There was a time in my life when a sweater from J. C. Penney was considered nice. Not Saks Fifth Avenue nice — though at age nine that name meant nothing to me — but a modest, desirable nice. It would have been nice to own that moderately priced purple fleece sweater, because it was featured on the mannequin. And buying full retail price at mall department stores wasn’t in my budget as the daughter of Chinese immigrants (the breadwinner of the two was a Ph.D student on a measly teaching assistant’s salary).
For me, at that point in my life, J. C. Penney was aspirational. It was part of the American Dream: to own instead of rent, to send your kid to college, and to make enough money to afford a few nice things here and there. Essentially, to be part of the middle class.
I own that sweater now, or at least symbolically. My parents made it. They attained all of these middle class goals, and I, the avid consumer, am part of their American Dream legacy. But we were lucky. The American Dream is fading, and there’s no better indication than the catastrophe that is J. C. Penney and the once-great American department store.
In 2013, after some risky marketing changes, J. C. Penney lost a whopping $1.4 billion in sales. Since then, the department store has reported a narrowing of losses and a rise in its revenue, thanks to the guidance by a new CEO, but its recovery is far from complete.
The outlook is pretty grim for most mid-tier retailers. For one, department stores have been on the decline since the early 2000s. According to census figures compiled by the St. Louis Federal Reserve Bank, the last peak in department store sales was January 2001 — more than $19.9 billion when seasonally adjusted. Last month, sales totaled $13.8 billion.
Stores like the Gap and J. Crew are also dealing with dismal earnings. Earlier this summer, Gap and sibling brands Banana Republic and Old Navy announced it will close 175 stores and lay off 250 employees in North America this year. Around the same time, J. Crew said the company is eliminating 175 jobs, mostly from its headquarters in New York.
On the other hand, it’s no news that luxury retailers, and their discount counterparts at the other end of the spectrum, are thriving. Among the top higher-end performers are Nordstrom and Macy’s, which also owns Bloomingdale’s. On the lower end, successful fashion chains include Ross Stores, H&M and TJX, the parent company of TJ Maxx and Marshall’s. In the last three years, Nordstrom’s stock value rose by nearly 24 percent. J.C. Penney, on the other hand, has seen a decline of 64 percent.
Meanwhile, the classic black lambskin Chanel flap purse, purchasable for no less than $4,900, now costs twice as much as it did in 2008. According to a 2015 report, the global luxury market will be valued at up to $374 billion in 2020. So, under the logic of an age-old proverb, retail companies are now adapting to the polarization of the market — if you can’t beat ‘em, join ‘em.
With its new ambition to attract more high-income customers, Target is already reporting impressive sales. Likewise, in full panic mode, Gap bought the luxury brand Intermix in 2013 and J.C. Penney brought its partnership with high-end makeup store Sephora to the forefront in revamping its retail strategy.
But is it a good thing that modest, nice retail is slowly but surely being replaced by either expensive, luxury retail or discount wares? According to Brendan Duke, an economic policy analyst at the Center for American Progress, the polarization of the industry is a warning of a coming crisis of the middle class.
“These companies are doing what companies do — they adjust,” he says. “But the issue isn’t that only the very top and the very bottom are doing well. The issue is that there’s shrinking middle class consumption.”
The Role of the American Middle Class
The American middle class, as it turns out, has been diminishing since the 1960s. Up until the 2000s, The New York Times reports, this was due to the fact that more people were entering a higher echelon of earners. But in the past decade, it’s been the opposite: More and more households are falling into lower income brackets. Beyond the decline in the number of households earning between two-thirds and twice the median income, median income itself has waned.
According to a Pew Charitable Trusts analysis, most states have seen a drop in median household income between 2000 and 2013 when accounting for inflation. New York for instance had an average of $57,369 in 2013. At the beginning of the new millennium, that figure was $59,796. In Ohio, the fall is even starker, with a negative difference of more than $8,000.
Between 2009 and 2012, the top 1 percent of earners in the U.S. captured more than 90 percent of all real income gains.
“Who even is the middle class?” asks Janna Pea, a spokeswoman for the Retail, Wholesale & Department Store Union. “It just doesn’t exist anymore.”
The RWDSU represents workers from large retail chains including Macy’s and H&M.
Of course, changing demographics in age, education and geography are all factors in economic trends, but it’s undeniable that the middle class has been going through a rough patch, and that rough patch includes shopping less at Wal-Mart and more at Dollar General.
Or not shopping at all, as essential life costs such as education, retirement and housing have considerably risen, putting households in a position in which impulsive buys and dining out are simply not options.
Despite the success of luxury brands and the spending power of American’s financial elite, declining middle class consumption has affected the entire retail industry. While data points to steady growth in overall retail performance after the Great Recession, that growth is barely adequate. According to a report written by Dukes in March, core retail sales per person are still 14 percent behind pre-recession trends.
This is because the rich don’t spend nearly enough to compensate for middle class buying power.
“The rich save more than the middle class does,” Duke writes in his report, “suggesting that a smaller portion of their income gains translate into retail sales than middle-class income gains would.”
If income growth had been equally distributed among classes, Duke goes on, consumer spending between 2009 and 2011 would have been $45 billion greater than actual figures.
To Duke, the hollowing out of the retail sector is a direct reflection of the U.S. economy: steeping inequality, mounting debt and rising obstacles to the American Dream.
Still, some experts are more optimistic.
“You never know if this will be permanent or transitory,” says Kevin Kliesen, a business economist at the St. Louis Federal Reserve Bank. Underneath the bifurcation of retail and weak income growth, he says, “There may be evolving trends that take a while to play out.”
Kliesen points to the aging population — right now, people 65 years or older make up about 14 percent of the U.S. population. But 2060, there will twice as many people in that age bracket. As discretionary spending peaks at middle age, retired households tend to spend less on food, transportation and clothing.
Car sales also offer a contrasting view on middle class spending. “Auto is through the roof right now,” Kliesen says. “2015 will be a 10-year high and it’s not high-income individuals who are spending that money. It’s middle class consumers.”
But people are not buying cars for the sake of having new cars. People are buying cars out of necessity. Right now, the average age of the American automobile fleet is 11 years. During the recession, consumers naturally held off big-ticket items, but as the Federal Reserve lowered interest rates thereafter, they had powerful incentives to buy. Likewise with age, if we look at data omitting the over 65 population, sales per person still doesn’t match up to its pre-recession rates.
Even the major shift toward online shopping doesn’t change the slow pace at which the consumption is growing. “Just because people are buying more on Amazon doesn’t mean people are buying more period,” Duke says.
The Ensuing Effects of Decreasing Demand
The problem, simply put, is what Duke calls a “cycle of stagnation.” The poor demand for midscale products has led retail to cut labor costs, thereby reducing wages. Lower income for retail workers inevitably leads back to lower demand because workers have less and less financial means for discretionary spending. As one store’s employee is another store’s consumer, businesses are essentially hurting each other in this unfortunate pattern.
Even though GDP is growing and the economy is doing well at face value, wages are actually going down. During the recession, a huge portion of job loss was in the middle-class range, jobs that paid between $14 to $21 per hour. Since then, however, these positions have not been sufficiently recovered. What is been increasing is the low wage sector — jobs that pay under $14. And right now, according to Pea, most retail workers are in this camp.
If this is the accurate economic diagnosis for our retail problem, then the good news is that there are potential economic remedies. Higher wages and better labor practices would be a solid starter — a $10.10 hourly minimum wage alone could raise GDP by 0.3 percent, as Duke notes. Last year, Gap announced it would raise its minimum wage to $10. This year, Wal-Mart and T. J. Maxx pledged higher rates as well. The most effective remedy, however, is a sweeping federal minimum wage.
Pea also brings up the issue that companies are squeezing workers not only through cutting pay but through changeable hours. She recommends ending the on-call process, which sees employers ask workers to keep a large block of their schedule free to go into work if needed.
“Especially in the retail sector,” Pea says, “We need more than the minimum wage so these people have the opportunity to join the middle class.”
And a progressive tax reform would even out economic growth across class lines. Currently there are a handful of loopholes for the rich and closing them will only affect the rich’s savings rates and allow the government to be more lax on the middle class. Duke and his cohorts at the Center for American Progress also call for student loan re-financing and strengthening unions like the RWDSU.
“It comes down to political actions,” Duke says, “this isn’t destiny, it’s a choice. And come 2016, Americans need to think about who they want to lead the country, who’ll put the middle class first.”