Good, Better, Best: The Trifurcation of the Middle Class

Spend Matters would like to welcome a guest post from Cort Jacoby, Principal at Archstone Consulting.

We are all aware of the old cliché -- "The rich keep getting richer and the poor keep getting poorer." However, in today's economic climate, the quote should be updated to read "The rich keep getting richer and the middle class...what happened to the middle class???" The US middle class has always been regarded as the backbone of the US economy. However, it appears that the middle class is experiencing substantial attrition. Here are a few statistics as a reference point.

  • 83 % of all U.S. Stocks are in the hands of 1% of the population
  • More than 40 million Americans are on food stamps with that number on the rise in 2011
  • Unemployment continues to hover at 9.1 %
  • The most recent U.S. government census reports that 46.2 million people (or 15.1% of the U.S. population) live in poverty, and 49.9 million live without health insurance

In addition, due to economic uncertainty and low consumer confidence, portions of the middle class have changed their discretionary spending habits to be more representative of the lower class.

So if the middle class is disappearing (or behaving as such), what does this mean for the average company that has historically competed for consumers seeking moderately priced goods? A recent Wall Street Journal Article outlined CPG giant P&G's new strategy for moving from a "one size fits all" product philosophy to a more stratified approach. P&G has traditionally sold its household goods at moderate prices with the end goal of targeting the general public or middle class. However, as this segment of the population is shrinking, P&G has modified its product strategy to capture the growing high and low ends of the product market. For example, in the last year P&G introduced its first new dish soap (a bargain item) into the market in 38 years and re-branded its Cheer laundry detergent to compete with private label. In the same year, the company introduced its most expensive razor and toothpaste ever!! With products in over 98% of American households, P&G market research often supplies an accurate depiction of the aggregate market trends. With that said, it is likely that we will see other companies follow suit and look to expand their product offerings to fit multiple consumer demographics.

This may seem like a simple change at first glance but once you scratch the surface, an abundance of potential dilemmas appear. For example, what does this mean to the effectiveness of the supply chain function? More specifically, how does this affect the procurement organizations? Offering multiple tiers of products where there used to be only one or two inevitably creates a great deal more complexity. My general concern is that the market is calling for a greater level of variety and companies have begun answering before they have fully thought through what they need to do strategically.

Some major potential issues that are being discussed here at Archstone are as follows:

  1. Broadened Number of Suppliers = Increased Supplier Complexity -- More products at different price points translates to a broadened array of specs -- both in formulation and in packaging. When leading companies align sourcing categories to internal category managers or sourcing professionals, they align it by category. Is this the optimal way to do this or should companies start to align sourcing along the lines of low and high cost supply chains? A leading CPG company has done just this, experiencing improvements at both ends -- lower cost on the low end and a higher degree of collaboration around innovative formulas at the high end. When is it appropriate for your company to consider such a change?
  2. Supply/Demand Imbalances -- Forecasting is going to grow even more treacherous than ever before. Changing consumer preferences, new products addressing different price/value combinations and more complex supply chains are all contributing to an environment that is increasingly less certain.

    We all have seen the negative implications of the stock-up policy where slow moving items need to be cut after a year of poor sales. Our practice is seeing leading companies infusing improved flexibility and responsiveness into their supply chains to counteract this problem. For instance, at a leading manufacturer, we see increasing emphasis placed on evaluating supply capabilities of all upstream participants (not just direct suppliers), improving visibility to inventory and run schedules, and aligning product development with supplier capabilities in order to enable quick ramp up and ramp down. To date, it appears that the focus on flexibility has been reserved more for logistics and manufacturing. However, going forward, it is critical for procurement to be part of this effort as lead times have grown longer and more variable.

  3. Enhanced Capabilities -- With each passing day, the role of Procurement gets more and more challenging. Specialist or Generalist? Low Cost or High Service? Collaboration or Co-operation? Up-front Concessions or Continuous Improvement? There is a point where procurement professionals are getting stretched too thin and choices have to be made. Yes, the organization can be supportive through training programs and better alignment of skill sets to the changing marketplace. However, there is a point where the training can only take the organization so far and additional capabilities are needed -- new metrics, procurement groups differentiated by type of supply chain, and enhanced integration with other supply chain functions, product development, and suppliers to name a few.

These are all emerging capabilities that are increasingly being addressed by leading companies. As your customers change, have you taken the steps to determine how your procurement organization should be changing along with them? We are anxious to hear what you have found to be most successful in enabling this type of change. What do you see as potential issues from CPG companies moving to a more bifurcated/trifurcated product portfolio? How do we best make this change happen as seamlessly as possible?

-- Cort Jacoby, Principal, Archstone Consulting

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