America Inc: Heinz meanz big or small beanz

Please read my column in this weekend's Australian Financial Review called America Inc:

Americans are getting a sense that the nation has split into haves and have-nots. Corporate America already knows it.

Since the industrial revolution, American business prospered on the back of a simple strategy: sell to the growing middle class. That formula produced corporate icons such as Ford, Procter & Gamble, Johnson & Johnson and Avon.

As the middle class grew, so did Corporate America’s reach. Products like Campbell’s Soup and Tide laundry detergent could be found in any home across the nation. So universal were certain consumer products that in the 1960s Andy Warhol famously painted Campbell’s soup, Coke and other household names.

“What's great about this country is that America started the tradition where the richest consumers buy essentially the same things as the poorest,” Warhol said. “You can be watching TV and see Coca-Cola, and you know that the President drinks Coca-Cola, Liz Taylor drinks Coca-Cola, and just think, you can drink Coca-Cola, too. A Coke is a Coke and no amount of money can get you a better coke than the one the bum on the corner is drinking. All the cokes are the same and all the cokes are good. Liz Taylor knows it, the President knows it, the bum knows it, and you know it.”

Today perhaps the only household product Warhol could paint is Google. With the growth of premium products, organic goods and fancy foods, there aren’t many brands appealing to all levels of customers.

Welcome to the bifurcated market. Selling to consumers in the U.S. means picking a side: the haves or the have-nots, the high end or the low. And tellingly, companies are preparing for the change to last.

In the past two years, the trend toward segmentation has accelerated. This is due to greater inequality and an economic recovery weighted towards the top. While unemployment remains stubbornly high at close to 9 percent, the stock market has been very strong. The Dow Jones Industrial Average is up 85 percent since its low back in March 2009.

Some companies are scrambling to capture the high end. Ford is one example. Finding itself on the back foot in one of the fastest growing markets in the industry, luxury cars, Ford is investing heavily to revamp Lincoln, its premium brand. In a much anticipated launch this January, Ford has promised to deliver a luxury vehicle unlike any other on the market. And analysts say the launch is critical to the carmaker’s success.

Focusing on the opposite end of the market are companies like H.J. Heinz, maker of ketchup, frozen foods, baked beans and condiments. Heinz recently announced a drop in earnings largely due to flat sales in its North American consumer products division. As a result, it has changed its strategy and will accelerate product launches targeting consumers at the low end of the income scale, essentially households earning less than $50,000 a year.

Heinz found that more consumers at the low end were buying smaller sizes of products because they came with a lower price tag. To get at this market segment, Heinz will launch a 10 Oz package of ketchup in a stand up pouch at a suggested retail price of 99 cents. In addition, Heinz will sell other products like mustard and beans at 99 cents.

Procter & Gamble, traditionally selling to the middle class is also being forced to change course, repositioning its products away from the middle but toward both the high and low end. For the first time in 38 years, Procter & Gamble launched a new dish soap called Gain with a bargain price.

But those companies already positioned at either end of the spectrum aren’t sitting still. The high end is going more up market and the low end more down market.

This is evident in prices where luxury retailers are raising prices while low-end retailers are discounting heavily. For instance, the most expensive pair of shoes at Saks Fifth Avenue cost a bit over $1,000 a year ago. Since then it’s passed $2,000. Increasing prices for premium products and services are evident in everything from business and first class air travel, wine, jewelry, restaurants, and clothing.

Operating in a market where perceived value is often measured by price, high-end retailers want to make sure they are seen as the ultimate for luxury. After all it’s a lucrative market. The top 5% of income earners accounts for about one third of spending.

At the same time, companies like Walmart, catering to the low-end, have to watch their step. Walmart has to be careful not to be undercut by other discounters such as Family Dollar Stores, a growing low price merchant.

What’s good for companies is good for investors. Two years ago, Citigroup created a stock market index of two dozen or so companies that are best positioned to benefit from the segmentation of the consumer market. Included in the list of companies are Saks and Estee Lauder at the high end, with Family Dollar Stores and Kellogg at the low. Since its formation, the index has outperformed the broader market.

It’s hard to foresee any change in a trend that’s fracturing the American market. It would probably take a sharp drop in unemployment and a convincing rise in wages to reverse the momentum. And the chances of that happening anytime soon are pretty slim.