Strategies for Dealing with the Loss of the Middle Class Market
Did you know that currently the middle class market is starting to disappear. This trend is called a market bifurcation. The market is split into two, namely the lower class market and the upper class market, while the middle class market is getting smaller. If your company is currently targeting the middle class segment, you may have felt for yourself how bloody the competition is to win the wallets of customers in that market. what is a market bifurcation like and what do you need to do to get around it? Let's find out.
We will begin by examining the disappearance of the middle class market that has fueled the bifurcation trend in the United States and worldwide. Then we will dive in to discuss the middle class market in Indonesia. Finally, we will review how you can set a business strategy so that not only can it survive but can actually grow by taking advantage of this bifurcation trend.
Trend Bifurcation in the World
The results of a 2018 Deloitte survey of more than 2000 respondents in the United States found that retailers who sell their products at low-cost provide value through a combination of price and promotion generally perform worse than those who sell at the lowest possible price or those who value the product offering or a unique flagship experience at a premium. In five years, premium retailers' revenue jumped 81 percent, while price-based retailers' revenue increased 37 percent over the same period. This contrasts with the bearer retailers whose income only increased by 2%. In addition, Deloitte also found that consumers are more likely to recommend premium retailers or price-based retailers than low-cost retailers.
This suggests that retailers at both ends of the spectrum are more attuned to changing customer needs and also better at meeting consumer expectations than mid-range and low-cost retailers.
Despite the positive macroeconomic trends in America, the last ten years have actually been a bad period for most Americans. Those in the low-income group find themselves struggling to make ends meet, while the middle-income group finds their spending power shrinking. This is because the costs have skyrocketed drastically, for example health care costs have increased by 60%, education 41%, food 17% and housing 12%.
Indonesian Middle Class
The bifurcation trend is not only happening in the United States, other European countries are also experiencing the same thing. Experts at the International Labor Organization found a direct link between the continued increase in income inequality in European countries and the decline in middle-income consumer groups in these countries. In 2019, the Organization for Economic Cooperation and Development (OECD) issued a report which concluded that the middle class in countries that were members of the OECD were also experiencing erosion or shrinking in number.
Then, what about Asia? In contrast to the number of middle class in America and Europe which continues to decline, it turns out that the middle class in Asia is actually increasing. The Brooking Institute projects the number of middle class in America to fall from 17% in 2020 to 13% in 2030. Then in Europe it will fall from 20% in 2020 to 14% in 2030. Meanwhile the number of middle class in Asia is projected to rise from 50 % in 2020 to 60% in 2030.
So, what about Indonesia? Data from the World Bank shows that the middle class group in Indonesia is the fastest growing group compared to other groups. Ten percent per year between 2002 and 2016. The World Bank defines the middle class group in Indonesia as those who have an expenditure of between 7.5 and 38 dollars per day or IDR 100,000 to IDR 530,000 per day. And currently there are at least 52 million Indonesians or one out of every five Indonesians belonging to the middle class group.
This middle class has been a key driver of Indonesia's economic growth as the consumption of this group grew by 12 percent annually since 2002 and now represents almost half of all household consumption in Indonesia. Therefore, in July 2020, the World Bank also upgraded Indonesia's status to an upper middle income country.
The head of macroeconomics and finance at the Institute for Development of Economics and Finance (INDEF), Abdul Manan Pulungan, reminded him not to be too proud of the increase in the number of the middle class in Indonesia. The growing middle class is still new, he said. They are only strong on the consumption side, not production, so they are currently an import market. This view is in line with the Mckinsey Global Institute report which states that Indonesia's economic growth relies on consumption factors, unlike other Asian countries, whose growth relies more on the export and manufacturing sectors.
The Indonesian middle class likes to collect credit cards, spend on lifestyles and go into debt for consumptive purchases such as buying a motorbike or new gadget. That is what makes the middle class in Indonesia very vulnerable to economic turmoil. Data from the World Bank shows that in Indonesia only 50% of those who had become middle class in 2000 were able to survive in the middle class in 2014. While the remaining 40% fell to Aspiring Middle Class and the other 10% actually returned to being middle class in 2014.
In addition to consumptive behavior, according to Sofjan Wanandi, chairman of the Indonesian Employers Association Apindo, the disappearance of the middle class at that time was also due to the difficulty of small businesses to be able to climb up to become middle class companies. This is due to the difficulty of competing with imported products.
When the COVID-19 pandemic entered Indonesia in 2020, this middle class group immediately shook their financial condition. As a result, many of them were then downgraded to become Aspiring Middle Class and some of them even belonged to the poor group. In July 2021, the World Bank downgraded Indonesia's status from an upper-middle-income country to a status that had just been obtained in 2020 to a lower-middle-income country.
Strategy to Win in the Middle
This dwindling middle class group is bad news for businesses that are targeting the middle class and relying on growing purchasing power to grow. This also explains why there is currently extreme competition among businesses working on this segment. With limited growth in customer purchasing power, the only way a business can boost above-average growth is to try to take market share from its competitors.
So, what do you need to do if your company is currently targeting the middle class? It turns out that the retailers who will succeed in working on the middle market are those who understand the financial situation of their consumers and then offer a value proposition that is in line with their needs, both in terms of product categories and in terms of price position.
Deloitte conducted a follow-up study in 2019 involving 3000 respondents and 1100 brands. The aim is to see the relationship between the financial condition of consumers and the products they buy. There are seven categories that they examined are clothing, shoes, food, drink, health and beauty, electronics and games or hobbies. They found that as consumers' financial condition improved, spending in all of these categories increased. But the most significant increase was in the categories of clothing, health and beauty, electronics and games or hobbies, while when financial conditions fell, clothing spending experienced the most decline, followed by shopping for shoes, beverages and electronics, while food, health and beauty and toys or hobbies categories. It turns out that their shopping patterns tend not to change and when they look more deeply into each category of Brand with what kind of price offer position it is that has won the customer's wallet.
Deloitte found that for the clothing category, it was fast fashion and private labels that offered value for money that would then win. Meanwhile for the shoe, food, health and beauty categories, value for money and premium brands will then win the market. For the category of electronics and toys or their hobbies with the middle price, they won. So, interestingly for drinks, premium brands will win.
Deloitte also found that the propensity to buy online versus buying in-store was highly correlated with income. Low-income consumers are 44 percent more likely to shop at discount retailers, supermarkets and department stores than wealthier people. On the other hand, consumers with high incomes are 52 percent more likely to shop online.
So, what is your strategy to win the wallet of this middle class group? what is your product mix like? What is the pricing strategy? The answers to these questions can determine how middle class customers will respond to your offer.
Reference: https://youtu.be/Pv2nzccu3Og
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