Bron: Bloomberg
Consumer Bifurcation
The economic stress weighing on low and middle-income consumers in the US is starting to spread to the companies that serve them.
Rue21, a mall mainstay whose customers have an average annual household income of around $50,000, filed for court protection for the third time earlier this month and will close all its stores. The fashion retailer, which has over 500 outlets across the US, said its customers “struggled significantly to cope with quickly rising inflation” and reduced their discretionary spending.
Another retailer focused on cash-strapped shoppers, 99 Cents Only Stores, is also in the process of liquidating its shops, which are concentrated in California. The company said it faced “significant consumer resistance” and fewer store visits after it was forced to raise prices.
On a macro level, such belt-tightening has been offset by the profligate habits of the wealthy, according to James Knightley, chief international economist at ING, who notes that the top 20% of consumers spend as much as the bottom 60%. But for the businesses serving the lower income group, trouble is mounting.
“The bottom 60% of households are increasingly feeling more and more stress, Knightley said. “Discretionary spending is really starting to be cut.”
Dental aligner SmileDirectClub’s median customer had a household income of $68,000, a demographic that was “particularly susceptible to the devastating impact of the Covid-19 pandemic, including with respect to rising inflation, underemployment, and a struggle to pay household expenses,” the company’s chief financial officer wrote in bankruptcy papers. The orthodontics company shut down in December.
Clearance chain Big Lots, meanwhile, received a $200 million loan from Gordon Brothers Capital to help boost its liquidity while it works on turning around operations in what its chief executive officer has called a “challenging consumer environment.”
More pain could be on the way. In a recent report, analysts at S&P Global Ratings said factors including weak demand from low-income consumers is likely to hurt performance at dollar stores like Dollar General and Dollar Tree — though those remain investment-grade — at least through the remainder of the year.
“This consumer is still spending, but they’re definitely being more discerning,” said Anthony Chukumba, an equity analyst at Loop Capital Markets.