Two Tier Marketing
He was the little tan bear millions of kids grew up with. He tagged along with Christopher Robin, stuck his hand in the honey pot, and figured out new ways to cause harmless mischief. And no matter where children came from or what their parents did for a living, the name Winnie-the-Pooh conjured up a single image gleaned from the classic books by A.A. Milne.
Today's kids, however, won't have that common touchstone. These days, their image of Pooh depends a lot on where they live and how much money their parents make. That's because the Walt Disney Co., which owns the rights to Milne's make-believe menagerie, is carefully marketing two distinct Poohs. The original line-drawn figure appears on fine china, pewter spoons, and pricey kids' stationery found in upscale specialty and department stores such as Nordstrom and Bloomingdale's. The plump, cartoonlike Pooh, clad in a red T-shirt and a goofy smile, adorns plastic key chains, polyester bedsheets, and animated videos. It sells in Wal-Mart stores and five-and-dime shops. Except for at Disney's own stores, the two Poohs do not share the same retail shelf.
"TIFFANY/WAL-MART." It's a strategy that more of America's biggest marketers are adopting--and for good reason. The middle class, which once seemed to include almost everyone, is no longer growing in terms of numbers or purchasing power. Instead, it's the top and bottom ends that are swelling. The statistics are by now familiar: Since 1980, the wealthiest fifth of the population has seen its income grow by 21%, while wages for the bottom 60% have stagnated or even dipped, according to Census Bureau data. Despite small gains by the middle class in the current recovery, the '90s have seen a greater polarization of income in the U.S. than at any point since the end of World War II, Census Bureau statisticians say.
While politicians and social critics squabble over why this has happened and what, if anything, should be done about it, marketers are taking action. Saatchi & Saatchi Advertising Worldwide warns of "a continuing erosion of our traditional mass market--the middle class." PaineWebber Inc. has advised investors to follow a "Tiffany/Wal-Mart" strategy and "avoid companies that serve the `middle' of the consumer market." And Roper Starch Worldwide, the New York-based polling firm, has presented clients with a report called Two Americas, suggesting ways to sell to a society divided along economic, educational, and technological lines.
Think of the restaurant business as a metaphor for the economy, says Lester C. Thurow, an economist and former dean of Massachusetts Institute of Technology's Sloan School of Management. "The $4 meal is doing all right, and the $50 meal is doing all right. The $20 meal is in trouble."
That implies a dramatic shift in the way consumer goods are designed, advertised, and sold. From the dawn of the modern ad agency early in the century through the golden age of mass-marketing in the 1950s and 1960s--when returning GIs bought truckloads of near-identical toys and TV sets for their Baby Boom offspring--marketers have set their sights squarely on that metaphorical $20 meal. America's most venerable brand names, from Levi's jeans to Ivory soap, were built on the premise that a reasonably good product, properly packaged and hyped, could be sold to almost anyone.
Even through the me-generation of the 1970s and the acquisitive 1980s, which brought a host of specialized retailers geared to more individualized tastes, most brands kept their focus squarely on the middle. But with the two ends of society increasingly alienated from one another in the 1990s, that time-tested strategy no longer assures success. "The more successful companies are trying to treat the market in a more segregated way," says Robert J. Untracht, national director of Ernst & Young's consumer-products industry group. "There's been a major shift."
Indeed, from Detroit to Fifth Avenue, from Silicon Valley to Main Street, Corporate America is rethinking the way it markets its goods and services. Just as Winnie-the-Pooh once meant the little tan bear, banking once meant standing in line at the neighborhood branch, pretty much no matter what your balance was. Phones and phone service were about the same, no matter how large or small the house. And for most folks, the family car meant an affordable new station wagon or sedan. But today, in industry after industry, the market is bifurcating--between private banking services and check-cashing outfits, high-speed data lines linked to the Internet and prepaid phone cards, leather-upholstered sport-utility vehicles and spiffed-up used cars. "We're looking at two marketplaces," says Denise Offutt, head of market research at Epson America Inc., one of many computer companies struggling to extend sales of its products to the lower half of the market. "It's a two-hump camel."
CLASS MATTERS. This new dual world affects far more than just the way goods are sold. It has become yet another force tearing at the country's fraying sense of community. Back in the days when virtually everyone gathered around the flickering national hearth to watch The Ed Sullivan Show and then trooped out to buy its sponsors' brands, mass marketing was a unifying force. Now, "certain brands become the brands of certain classes, and it helps put people in their uniforms," says Seth M. Siegel, co-chairman at Beanstalk Group, a New York licensing firm. That's true whether it's Prada's hot-selling $450 black vinyl backpack or the Kathie Lee line of clothing at Wal-Mart.
Of course, neither the mass market nor the middle class has evaporated. Coke, Tide, and an array of powerhouse brands still sell to virtually everybody. And the middle class, though less inclusive, is still a powerful force. But the economic trends of the past 30 years have altered its spending habits as well as its composition.
Nowhere have those changes wreaked more havoc than in retailing, where even consumers with a solidly middle- class income have become inveterate bargain hunters. With proportionately fewer customers able or willing to pay department store prices, venerable chains such as Gimbel's and Woodward & Lothrup have struggled or disappeared. At the same time, discounters including Wal-Mart have risen to dominate the landscape. Just look at shopping patterns over the most recent Christmas season. The bright spots were at the two extremes. On Mar. 5, K-Mart and Tiffany, for example, reported earnings surges in the fourth quarter. Meanwhile, mid-scale chains such as J.C. Penney & Co. Inc. suffered from weak holiday sales. "What do you think the chances are that, just by accident, all of the idiots could have been managing the middle-class stores?" Thurow asks of the retailers' rocky fortunes. "You could run the perfect store, and if your customers go broke, you go broke with them."
Some companies have responded by slanting their product lines much more heavily toward the households that have benefited from the huge amount of wealth created over the last decades. Consider the auto industry. For decades, the Big Three and their rivals organized their marketing efforts around the midrange family car, one of the great symbols of the middle class's postwar ascent. The best-selling cars of the mid-1960s--the Chevrolet Impala and Ford Galaxie--fetched about $2,600, roughly $13,000 in 1996 dollars, making them accessible to a broad swath of society. In contrast, the top vehicles of today, such as Ford's F-Series truck and the Taurus, cost some $20,000, putting them out of the reach of many middle-class consumers. Similarly, one of the fastest-growing segments of the auto industry has been the upscale leather-upholstered sport utility vehicle with a luxury name plate.
MILLIONAIRE'S WORLD. Why? The income trends of the past three decades have left fewer people overall with the capital to buy a new car--but more people looking to spend big on a high-end vehicle. The results have been dramatic. In the '90s alone, the median price of a new car has risen by 22% in constant dollars, according to J.D. Power & Associates Inc. The highest-earning fifth of the population now accounts for 54% of new-car sales volume, up from 40% in 1980. "The shift is of epic proportions," says Paul D. Ballew, J.D. Power's chief economist.
Auto companies are hardly alone in following the money. Gucci has pulled its line of luxury goods from midscale Macy's to concentrate on upper-end stores, while Saks Fifth Avenue has decided to direct much of its marketing effort toward its 100,000 best customers. Electronics companies, meanwhile, are pushing home entertainment systems complete with satellite dishes and theater-like sound systems that fetch up to $25,000. The pool of consumers able to pay those hefty prices is steadily growing. By 2005, millionaires will control 60% of the country's dollars, according to the Affluent Market Institute in Atlanta.
The rest will be controlled by middle-class and poorer people stretched thinner than ever. More families can no longer afford things that were once seen as the birthright of the middle class--the occasional new car, the new clothes, the annual vacation. Many have cut back in areas their counterparts wouldn't have considered skimping on in decades past.
Ironically, however, the shift has created a lucrative opportunity for marketers who can provide low-end goods and services that are palatable to a straitened consumer with middle-class aspirations. Marketers have come to realize that as a group, low-wage earners control a powerful amount of disposable income. As a result, that swelling demographic has gone from an underserved minority to a group with clout and choice.
Some companies are cashing in by providing affordable simulations of the good life. Other marketers are remaking the image of once-shunned industries. General Motors Corp.'s Saturn unit, a leader in auto marketing since it introduced no-haggle buying in 1990, has blitzed the marketplace over the past year with pitches for "pre-owned" cars. Partly, that's because the boom in leasing has left GM with a glut of used cars. At the same time, opening a used-car lot is also a way to reach customers who can't afford new sticker prices. But selling a used car to a middle-class customer who aspires to buy new is not as simple as vacuuming the floor mats and knocking out the dings, so Saturn tries to reassure customers about their status. "When it came to buying a used car, they didn't make us feel like second-class citizens," reads one ad that shows a happy customer on his tree-lined street.
Other formerly declasse businesses are dressing themselves up to capitalize on the middle-class squeeze, too. Check-cashing outfits, once relegated to inner cities, are moving into middle-class suburbs. There are 5,500 outlets across the country today, more than double the number in 1988. Neighborhood Check Cashing Corp., in a working-class section of Rosedale, N.Y., has decided not to sell lottery tickets so that it will feel more like a bank. "It's cheaper than writing a check," says Janice Ligon, a toll plaza manager and customer. Ligon has a checking account but can write only three checks per month before getting charged 50 cents per check. The check-cashing business charges just 29 cents for a money order and, unlike her bank, it never closes. ACE Cash Express Inc., the country's largest chain, builds lobbies at the front of its stores to mimic banks--and refuses to buy gold, lest it be seen as a pawnshop. Pawnshops, meanwhile, have cleaned up their storefronts and become one-stop financial-service centers for people who live paycheck to paycheck. The check cashers and pawnbrokers still charge exorbitant fees. But as banks hike their charges to customers with smaller balances, those fees no longer look so unreasonable.
The same thing is happening in retail. Second-hand clothing, once the sole province of thrift shops and winter coat drives, has gone upmarket. Sales of clothing and other used goods have doubled since 1987; since 1994, they have grown at almost triple the pace of retail as a whole. "Our pricing is really excellent for struggling young parents, people who grew up understanding what good brands are but who can't afford them now," says Walter F. Hamilton Jr., president of Children's Orchard, a fast-growing children's resale chain. To make those young parents feel O.K. about buying used overalls, Children's Orchard repackages many of its items in shrink-wrap--just like they were new.
But even as some companies aim for either the top or the bottom of the market, there are plenty such as Disney, with its upstairs and downstairs Poohs, hoping to land customers on both sides of the divide. Gap Inc. is remodeling its Banana Republic stores to make them more upscale and has increased the size of the chain by almost 50%--or 68 units--in the past five years. At the same time, it has headed off some of the competition from the likes of Wal-Mart by creating a hip lower-end chain called Old Navy. Since 1993, the San Francisco company has opened 193 Old Navy outlets, compared with just 21 new Gap stores.
The National Basketball Assn., meanwhile, has raised its prices faster than any other professional sports league. Front-row seats in New York's Madison Square Garden--the ones where Jerry Seinfeld and Spike Lee hang out--now go for $1,000 apiece. But, worried they might lose the fans who can't afford to plunk down the typical $200 for a family's night out at an arena, the NBA's marketers have also launched an array of much more affordable merchandise and entertainment properties. The biggest: a traveling basketball exhibition that has made stops in 120 cities over the past year. It's an 18-wheel truck known as JamVan that folds out into an amusement park, complete with baskets low enough for kids to dunk on and the size-22 sneakers of star Shaquille O'Neal. "It's all about touching basketball," says Rick Welts, president of NBA Properties Inc. "It creates a bigger-than-life feel about the game, no matter what your income is."
"ROSEANNE, NOT SEINFELD." Nobody puts as much effort into dual marketing as the telecommunications industry. Technology allows telephone companies to tailor services to discrete socioeconomic groups. AT&T offers add-on services such as 1-500 numbers that allow users to be contacted at any phone. Next year, Motorola Inc. hopes to offer a worldwide satellite phone service to globe-trotting executives--at an incredible $3,000 a phone and $3 per minute. At the same time, telecom providers have churned out prepaid phone cards and calling arcades to serve the growing number of customers who can't afford their own telephone or a credit card. Indeed, calling arcades, with their banks of pay telephones, have become a common feature of the urban, and even suburban, landscape.
The differences in phone service show how invisible the two ends of the market are to one another. Most of AT&T's 1-500 customers will never see the inside of a calling arcade, just as many folks who use prepaid phone cards have probably never heard of the high-end services. That's because the media that once carried mass advertising have splintered along the same divide. When executives at V.F. Corp. in Wyomissing, Pa., decided to target Wrangler jeans more narrowly to the $50,000-a-year-and-under market, they reexamined exactly where their TV commercials aired. "We look at Roseanne, not Seinfeld," says Angelo LaGrega, V.F.'s mass market president. "We culled down our audience." The advertising campaign has succeeded: While V.F. as a whole has floundered, Wrangler has been growing at 10% a year for the past decade.
Companies that have failed to recognize the split in the market have paid the price. The banking industry, for example, sat back and watched as its middle market was pulled in two. Over the past 20 years, the number of U.S. families without a checking account has jumped from 9% to 13%, according to the Federal Reserve. Over the same period, wealthy Americans turned increasingly to brokerage houses such as Merrill Lynch & Co. and Fidelity Investments, where they can receive investment options along with a checkbook. "While the affluent market has been going through the roof, banks have been giving the market away," remarks David Ross Palmer, a banking consultant specializing in that upper-end niche. Since 1978, the percentage of households' financial assets tucked away in commercial banks has slipped to 29% from 37%, according to Furash & Co., a financial-services consultancy in Washington, D.C.
Now the banks are fighting back. Citicorp, NationsBank, Wells Fargo, and a host of others are setting up separate offices to woo investors who have, say, $100,000 in investable assets, but not enough to qualify for traditional private banking services. Today, Citicorp has 240 CitiGold offices around the country--and it sets up one in every new branch it builds.
How many other brands will be singing a similar sad song a decade from now? That will depend to a great extent on how well they navigate the new marketplace. It's a through-the-looking-glass world, with the spoils likely to go to those companies that are best able to scale back the mass in mass marketing. Those that persist in trying to reach the most people possible may find instead they reach no one at all.