Go Lean ...
Caribbean
Blog – The Erosion
of the Middle Class
By: Nelson D. Schwartz - The Middle Class Is Steadily Eroding. Just
Ask the Business World – 02/02/2014
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Go Lean
Commentary
As for the direct issues in this article, the experience
has been the same in the Caribbean. The high-end tourist resorts have
flourished since the Great Recession, while properties catering to the
general middle class have floundered. The one exception being the emergence
of the cruise industry as a viable vacation option for the general American
population. The CU therefore plans to empower the industry directly, and to
elevate the cruise industry’s impact on Caribbean society.
This issue of income inequality
has been covered widely in the book, Go
Lean ... Caribbean. The reality of the middle class is that their numbers
represent too many of the population to ignore. To foster growth in the
economy, there must be growth for the middle class, or something amazing
happens: people leave. This is the experience of so many in the Caribbean
Diaspora. If despite the adherence of best practices (education, law-abiding,
savings-and-investments), the average middle class family cannot obtain
societal progress and contentment, they will simply relocate. For the Dutch
and French Caribbean, this relocation eventuality has resulted in emigration
to The Netherlands and France; for the American Caribbean territories, the
emigration has resulted in the abandonment of the islands for the US mainland.
For example, Puerto Rico has 4.7 million people living in the US mainland
(compared to 3.9 million on the island) identifying themselves with a Puerto
Rican heritage. The ratio is the same for the US Virgin Islands. The
English-speaking Caribbean has many expatriates that have abandoned their island
homes for foreign shores, often in England, Canada and the US. The region’s
Diaspora is estimated at 10 million.
The Go Lean roadmap advocates a 10-Step
approach to elevate the middle class of Caribbean society. This advocacy
championed the belief that the “American”
Dream is viable for other locations as well. So a balance must be carefully
maintained for the CU efforts to impact an achiever class versus efforts of
egalitarianism. We want to raise all the poor to middle class status
(egalitarian in theory), and all the middle class to wealthy - One Percent - status, but that’s not
what happens in reality. Achievers will always emerge ahead of their peers.
The CU posits that there should be no impediments to this emergence, rather
excellence should be fostered and even incubated. With this roadmap, the
Caribbean can be a better place for all to live, work and play.
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New York Times, February 2, 2014 - In Manhattan, the upscale
clothing retailer Barneys will replace the bankrupt discounter Loehmann’s,
whose Chelsea store closes in a few weeks. Across the country, Olive Garden
and Red Lobster restaurants are struggling, while fine-dining chains like
Capital Grille are thriving. And at General Electric, the increase in demand
for high-end dishwashers and refrigerators dwarfs sales growth of mass-market
models.
As politicians and
pundits in
If there is any doubt,
the speed at which companies are adapting to the new consumer landscape
serves as very convincing evidence. Within top consulting firms and among
Wall Street analysts, the shift is being described with a frankness more
often associated with left-wing academics than business experts.
“Those consumers who have
capital like real estate and stocks and are in the top 20 percent are feeling
pretty good,” said John G. Maxwell, head of the global retail and consumer
practice at PricewaterhouseCoopers.
In response to the upward
shift in spending, PricewaterhouseCoopers clients like big stores and
restaurants are chasing richer customers with a wider offering of high-end
goods and services, or focusing on rock-bottom prices to attract the
expanding ranks of penny-pinching consumers.
“As a retailer or restaurant chain,
if you’re not at the really high level or the low level, that’s a tough place
to be,” Mr. Maxwell said. “You don’t want to be stuck in the middle.”
Although data on consumption is less
readily available than figures that show a comparable split in income gains,
new research by the economists Steven Fazzari, of
In 2012, the top 5 percent of earners were responsible for
38 percent of domestic consumption, up from 28 percent in 1995, the
researchers found.
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Even more striking, the current
recovery has been driven almost entirely by the upper crust, according to Mr.
Fazzari and Mr. Cynamon. Since 2009, the year the recession ended,
inflation-adjusted spending by this top echelon has risen 17 percent,
compared with just 1 percent among the bottom 95 percent.
More broadly, about 90 percent of the
overall increase in inflation-adjusted consumption between 2009 and 2012 was
generated by the top 20 percent of households in terms of income, according
to the study, which was sponsored by the Institute for New Economic Thinking,
a research group in
The effects of this phenomenon are
now rippling through one sector after another in the American economy, from
retailers and restaurants to hotels, casinos and even appliance makers.
For example, luxury gambling properties like Wynn and the
Venetian in
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Among hotels, revenue per room in the
high-end category, which includes brands like the Four Seasons and St. Regis,
grew 7.5 percent in 2013, compared with a 4.1 percent gain for midscale
properties like Best Western, according to Smith Travel Research.
While spending among the most
affluent consumers has managed to propel the economy forward, the sharpening
divide is worrying, Mr. Fazzari said.
“It’s going to be hard to maintain
strong economic growth with such a large proportion of the population falling
behind,” he said. “We might be able to muddle along — but can we really
recover?”
Mr. Fazzari also said that depending
on a relatively small but affluent slice of the population to drive demand
makes the economy more volatile, because this group does more discretionary
spending that can rise and fall with the stock market, or track seesawing
housing prices. The run-up on Wall Street in recent years has only heightened
these trends, said Guy Berger, an economist at RBS, who estimates that 50
percent of Americans have no effective participation in the surging stock
market, even counting retirement accounts.
Regardless, affluent shoppers like
Mitchell Goldberg, an independent investment manager in
“Opulence isn’t back, but we’re
spending a little more comfortably,” Mr. Goldberg said. He recently replaced
his old Nike golf clubs with Callaway drivers and
And while the superrich garner much
of the attention, most companies are building their business strategies
around a broader slice of affluent consumers.
At G.E. Appliances, for example, the
fastest-growing brand is the Café line, which is aimed at the top quarter of
the market, with refrigerators typically retailing for $1,700 to $3,000.
“This is a person who is willing to
pay for features, like a double-oven range or a refrigerator with hot water,”
said Brian McWaters, a general manager in G.E.'s Appliance division.
At street level, the divide is even
more stark.
Sears and J. C. Penney, retailers
whose wares are aimed squarely at middle-class Americans, are both in dire
straits. Last month, Sears said it would shutter its flagship store on
Loehmann’s, where generations of
middle-class shoppers hunted for marked-down designer labels in the famed
Back Room, is now being liquidated after three trips to bankruptcy court
since 1999.
The Loehmann’s store in
Investors have taken notice of the
shrinking middle. Shares of Sears and J. C. Penney have fallen more than 50
percent since the end of 2009, even as upper-end stores like Nordstrom and
bargain-basement chains like Dollar Tree and Family Dollar Stores have more
than doubled in value over the same period.
Competition from online giants like
Amazon has only added to the problems faced by old-line retailers, of course.
But changes in the restaurant business show that the effects of rising
inequality are widespread.
A shift at Darden, which calls itself
the world’s largest full-service restaurant owner, encapsulates the trend.
Foot traffic at midtier, casual dining properties like Red Lobster and Olive
Garden has dropped in every quarter but one since 2005, according to John
Glass, a restaurant industry analyst at Morgan Stanley.
With diners paying an average tab of
$16.50 a person at Olive Garden, Mr. Glass said, “The customers are middle
class. They’re not rich. They’re not poor.” With income growth stagnant and
prices for necessities like health care and education on the rise, he said,
“They are cutting back.” On the other hand, at the Capital Grille, an upscale
Darden chain where the average check per person is about $71, spending is up
by an average of 5 percent annually over the last three years.
LongHorn Steakhouse, another Darden
chain, has been reworked to target a slightly more affluent crowd than Olive
Garden, with décor intended to evoke a cattleman’s ranch instead of an Old
West theme.
Now, hedge fund investors are
pressuring Darden’s management to break up the company and spin out the more
upscale properties into a separate entity.
“A
separation could make sense from a strategic perspective,” Mr. Glass said.
“Generally, the specialty restaurant group is more attractive demographically.”
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