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Retailers Grapple With Mounting Pressures as Middle Class Takes a Hit

As ongoing economic pressures shrink the middle class, retailers are being challenged to either cut prices and step up their deals and discounts or make a play for high-income consumers. 

Indeed, years of financial challenges are eating away at the middle class’s spending power. A PYMNTS Intelligence study from October found that middle-income consumers had seen their readily available savings in real terms plummet by 18% in the last year.

Against this backdrop, middle-tier retailers are taking a hit. For instance, amNewYork reported Friday (March 8) that music retailer Sam Ash is closing 18 stores, including its flagship NYC location. Macy’s recently shared that it intends to close roughly 150 stores by 2027. Last year, Bed Bath & Beyond’s bankruptcy kicked off the closure of 360 Bed Bath & Beyond stores and 120 buybuy Baby locations. Foot Locker, too, closed dozens of stores.

Plus, as PYMNTS reported in September, brands targeting shoppers seeking lower-priced luxury have seen sales slow, and so-called “aspirational goods,” lower-priced merchandise put out by luxury labels, were also seeing slower sales.

Retailers are taking note. For instance, luxury eCommerce platform Mytheresa recently shared on a call with analysts that it is redirecting its efforts to its biggest-spending customers.

“Aspirational customers … are looking for deals. They are looking for discounts. The pressure [they feel] in the economic situation is continuing,” CEO Michael Kliger said. “So, we are totally focused on our top customers. [We’re not focused] on winning back market share from the aspirational customers. … Our focus remains strongly, on the [big] spenders that have the far better economics, that have the far better loyalty ratios and have the far higher average order [value].”

Conversely, many retailers are touting their value offerings. Throughout this period of financial challenges, for instance, discount retailers have seized on the opportunity to gain share.

Big Lots, for instance, shared in its earnings call Thursday (March 7) that it will continue its “extreme bargains” campaign into 2024 as it looks to improve sales, expecting bargains to account for three-quarters of all sales.

How the Middle-Income Consumer Shops

The February/March installment of the “New Reality Check: The Paycheck-to-Paycheck Report,” a PYMNTS Intelligence exclusive series of studies, drew from a January survey of more than 4,200 U.S. consumers to understand the financial lifestyles of U.S. consumers and the factors contributing to their financial status.

The results reveal that, among middle-income consumers — those who make between $50,000 and $100,000 annually — roughly two-thirds live paycheck to paycheck. The most common reason these consumers cite for their lack of financial safety net is that they live with a large amount of debt, followed by the fact that they do not make enough income to meet their needs. Only 12% cite nonessential spending as the top reason for living paycheck to paycheck.

Moreover, 88% of these consumers say their wages have not kept up with inflation.

These consumers estimated that, in the next month, they would spend 30% of their personal income on housing-related expenses, 20% on groceries and household supplies, 12% on other regular expenses and 10% on everyday personal expenses.

Only after these expenses do they get to splurge on items that they want. These consumers expected to spend 8% on recreation, leisure and entertainment activities and 7% on clothing, accessories and personal care items. 

Plus, these consumers are forced to make difficult tradeoffs in the face of ongoing economic challenges. Two-thirds of middle-income consumers said they have cut down on nonessential spending due to retail product price increases last year, and 41% have cut back on the quality of their purchases.