Department stores have been closing their doors at alarming rates, and analysts attribute it to a single overarching factor.
Over the past decade, the retail industry has undergone significant transformations. Traditional department stores like Nordstrom ($JWN), Myer ($MYR), and Marks & Spencer have faced declining margins and store closures. But at the same time, budget retailers like T.K. Maxx ($TJX) and luxury brands like LVMH ($LVMUY) have experienced record revenues.
What’s driving this phenomenon, known as “retail bifurcation”? Analysts point to a significant issue that poses challenges not only to the retail sector, but to global economies and industries at large: the dwindling middle class.
Defined by the OECD as people living in households earning between 75% to 200% of a country’s median income, the middle class has noticeably shrunk from being 64% of the OECD population in the 1980s to 61% by the mid-2010s. If it seems like a minor change, note that 3% represents about 41m people. The U.S. has it even worse: in the last 40 years, 11% of the country’s population has been displaced from the middle class.
Amidst various contributing factors, the crux of the matter is: stagnant income growth and rising living costs have hindered a significant portion of the younger generation from attaining middle class status. Just 37% of single-earner households belong to the middle class today, in striking contrast to 54% in previous decades.
The middle class plays an essential role in macroeconomics. Data has proven that a thriving middle class spurs economic growth thanks to a larger labour force and more stable demand for goods and services. Moreover, they exhibit greater resilience to economic downturns compared to lower and upper classes. And socially, a larger middle class fosters stronger trust between social classes – it softens income inequality and enables more people to attain a comfortable standard of living.
Where the population split goes from here will depend heavily on global policy and governance. The retail sector is merely mirroring the changing demographics: the top and bottom are growing, while those in the middle are struggling.
Stella is a markets analyst and writer with almost a decade of investing experience. With a Masters in Accounting from the University of Sydney, she specialises in financial statement analysis and financial modelling. Previously, she worked as an equity analyst at Australian finance start-up, Simply Wall St, where she took charge of the market insights newsletter sent out to over a million subscribers. At Stake, Stella has been key to producing the weekly Wrap articles and social media content.