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The US used to see itself as a middle-class country, united by common aspirations, shared pastimes and mass-market brands. Now companies are working overtime to stratify consumers, separating the haves from both the have nots and the have yachts, as they seek to extract as much money as possible.
You can see it at Disney World, which once used phrases like “everyone is a VIP” and eschewed line-skipping services. It now offers VIP tours priced at up to $900 an hour, admission tickets not included. Warehouse club Costco not only charges people to shop at its stores but also offers special reserved hours for those willing to pay for a higher priced “executive” membership.
Delta Air Lines has turned differentiation into an art form with deluxe “Delta One” lounges on top of its ordinary airport clubs. It told investors last month that it will soon start making more revenue from premium tickets than all of its main cabin customers combined.
From a short-term profits perspective, this strategy makes perfect sense. The American economy is deeply split, with those at the top enjoying unparalleled prosperity and the rest of the country struggling to make ends meet.
The top 10 per cent of earners now account for almost half of all spending, up from about a third in the 1990s. Many are feeling particularly flush as they enjoy the fruits of a strong stock market — the S&P is up more than 15 per cent this year, despite a few wobbles.
For everyone else, the picture is gloomy. Lay-offs are surging, consumer sentiment has fallen by 30 per cent year on year to near-record lows, and three out of four Americans tell pollsters that the economy is in fair or poor shape.
That fissure is showing up in corporate results. Luxury group LVMH reported a 3 per cent increase in US sales in the third quarter, but fast-food chain Chipotle slashed its forecasts because of a “massive pullback” by lower-income customers. One senior US airline executive told me his group had identified a clear customer divide: households with more than $225,000 in annual income are still spending freely. Those below have cut back dramatically on travel.
Using artificial intelligence to comb through reams of data has made it significantly easier for companies to identify desirable — that is to say rich — customers and target them with specific offers. That makes it awfully tempting for companies to concentrate on the wealthiest decile, or even just the top 1 per cent.
Both American Express and JPMorgan Chase recently ratcheted up fees on premium credit cards while also increasing some perks. United Airlines is rolling out a luxury business class offering that includes caviar service and seats that are 25 per cent larger.
But there are risks to this strategy. Concerns about affordability, inflation and high energy prices helped drive Democratic victories in last week’s local elections from New York City to Virginia and Georgia. Companies that do not appear to care about their less well-off customers could easily find themselves in the political crosshairs.
Early signs of this pitfall emerged last week when US President Donald Trump reacted to Republican election losses by taking action to drive down the cost of specific goods.
First Trump cut deals to slash prices on several popular obesity drugs — which are widely used by wealthy people but not covered by many insurance plans. Then the Department of Justice opened a price-fixing investigation into the largest meatpacking companies amid popular complaints about high beef prices.
There is also another problem. Even the plushest of consumer-facing companies cannot survive by appealing exclusively to the wealthy. As one chief executive explained to me, luxury goods command a premium because a wide swath of society sees them as something to aspire to. When Rolex sponsors the US Open, it is not just pushing products today but also shaping the dreams of younger tennis fans in the hope they will eventually treat themselves to a luxury watch.
But a growing section of US society no longer feels plugged into that upwardly mobile vision. The share of Americans who describe themselves as middle class has dropped from 85 per cent a decade ago to 54 per cent. Over 40 per cent of Americans consider themselves lower or working class, suggesting that many of the finer things feel completely out of reach.
Today’s Dom Pérignon and Birkin bag buyers will eventually grow old. Companies may regret today’s reliance on pay-to-play marketing strategies when it comes time to replace them.
brooke.masters@ft.com
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