Ginger

Retailers that cater to the middle class flourished when the economy was strong. Now analysts say the field is too crowded, and more store closings are likely.

By JACKIE CROSBY, Star Tribune
Last update: December 11, 2010 - 10:41 PM

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As the wealth of middle-class consumers hemorrhaged during the Great Recession, so did the retailers that catered to them.

Circuit City, Linens 'N' Things, KB Toys and Levitz Furniture have disappeared, while Starbucks, Blockbuster, Ann Taylor, Gap and Ritz Camera have closed hundreds of stores.

Even as retail sales improve and the recession is officially behind us, the bleeding is likely to continue.

"We are still way over-stored in the U.S.," said Sherif Mityas, a partner in the retail practice at A.T. Kearney. "The casualties will come in that middle range."

During the past decade, retailers rushed to appeal to the free-spending, upwardly mobile middle class. Stores that sold clothes, furniture, household décor, expensive coffee, garden equipment, candles and soap cropped up like dandelions.

Those consumers now are stuck in homes that are losing value, and with investments that have tanked, wages that are shrinking, and debt that may still be stifling.

The result is a barbell effect in the retail industry. Discounters and luxury brands are rebounding, while the vast middle continues to flounder. Too many brands and too many stores are trying to persuade an ever-more-practical consumer to come and spend.

During the recession, chains such as Plymouth-based Christopher & Banks, Lane Bryant, Men's Warehouse and Chico's lost ground to off-price retailers such as T.J. Maxx and Marshalls. On Friday, TJX Companies Inc. said it would convert 91 of its floundering A.J. Wright stores in the northeast into T.J. Maxx, Marshalls or HomeGoods, and close the brand's 71 remaining stores.

Bookstores, once a mainstay of malls and strip centers across the country, continue to disappear. Waldenbooks and B. Dalton disappeared this year. Now, a move is afoot by Borders' largest shareholder to buy out Barnes & Noble and merge the two mega-booksellers.

Sears and Kmart have seen same-store sales declines. Other department stores, such as J.C. Penney, Dillard's, Kohl's and BonTon's brands, which includes Herberger's, are fighting to differentiate themselves.

Macy's has picked up some of their market share, finally finding some footing by tailoring merchandise to local markets and adding exclusive brands -- such as Tommy Hilfiger and Madonna's Material Girl -- to its staple of house brands.

"The key is identity," said Mityas. "You see Macy's and certain retailers creating an identity for themselves. Others don't know what they stand for. That's the kiss of death in retail. Why would people come to your store as they drive by dozens of others?"

"If this turns out to be a lousy holiday season," expect a bloody first quarter, said Ken Perkins, an analyst with RetailMetrics Inc.

"The middle market was having difficulties before the onset of the recession," he said. "They were feeling squeezed by the inability to compete on price with the low end and an inability to compete on services at the high end. Now there's this fight in the middle for market share of a stagnant pie."

Teri Dewey, a part-time substitute teacher and mother of boys in the sixth and ninth grades, said she and her husband have become "more prudent and more practical." The changes came from the uncertainties of the recession and by a desire to teach the boys how to make smart buying decisions.

A once-regular stop at Jamba Juice has become an indulgence every six weeks or so, Dewey said. She's snapping up cashmere coats at consignment shops rather than at Nordstrom, and buys nearly everything for her house at Target.

"Where I would have appreciated a nice splurge at Anthropologie before, the fun of that splurge is replaced by the satisfaction I get when I find something I really want for the right price," said Dewey, who lives in southwest Minneapolis.

Tina Wilcox, CEO and creative director of Black, a Minneapolis retail brand agency, ticks off five things that, as she said, are "making the middle market ill."

Global competition from the Internet; the foot-dragging of many midsized retailers to get into e-commerce for fear of cannibalizing their brick-and-mortar stores; lack of differentiation; and getting beaten out on price because they're not as big as Wal-Mart, Target or other category killers.

"But the No. 1 cause of the downfall of the middle segment was trips," Wilcox said. "The consumer consolidated unnecessary trips." They went to fewer stores and spent less time -- and money -- once they were there.

"If you look incrementally, that was a huge downfall for that middle segment," she said. The middle, Wilcox predicts, declining to name names, "is going to fall out.

"Many of these organizations were started by not-super-savvy businesspeople," she said. "All of a sudden there are 10, 30 and 50 specialty retail chains. They grew so fast in the 1980s, some of them now have 800 or 900 stores." 

Some middle-market retailers are getting squeezed out by high-end specialty stores that are offering great promotions, said Mary Van Note, co-founder of Ginger Consulting in Minneapolis.

Banana Republic and Ann Taylor have "brand cachet" that consumers want. Ann Taylor Loft, the sportier and less expensive brand, keeps promotions simple, Van Note said, with 40 percent off storewide, unlike Macy's, which sometimes irritates shoppers with the long list of limitations on their deals.

In that spirit, Herberger's now markets some coupons saying, "Now with fewer exclusions!"

Kohl's, with its "very, very clear bargains, is doing fabulously well," said Van Note.

"The middle-income consumer tends to have things to buy for the husband, kids, grandkids, aging parents. They don't have a lot of time or money," she said. "They need to have the deal, and it needs to be simple."