Shelley E. Kohan (00:03)
Hi everyone and thanks for joining our weekly podcast. I’m Shelley Kohan I’m very excited to have Katie Thomas with us from Kearney Consumer Institute. Welcome, Katie.

Katie (00:15)
Thank

you. Thank you, Shelley. It’s great to be here.

Shelley E. Kohan (00:19)
It’s fun because today we’re going to talk about something that is all over the news. But ⁓ I’d love to hear your view on this because you kind of look at this a bit differently. So everyone’s talking about the K-shaped economy. And I think a lot of retailers and brands are reacting, as we do, to the very specific model of the K-shaped economy. And you’re saying that

It’s not wrong, it’s just an incomplete kind of story being told, which can misguide a lot of retailers and brands. So let’s start with kind of your general overview of what’s happening with that K economy.

Katie (00:55)
Absolutely, yes. mean, like you said, we all see it in the news all the time, but I found that over time it just wasn’t getting any more contextualized. It was sort of just the same analysis of like essentially to like the rich are getting rich and the bottom of like the haves and the have nots, like so to speak. And I didn’t like that either. Like as someone who does try to advocate for the consumer, not only did it feel a little bit oversimplified, but at times, you know, starts to feel a little bit offensive even if asked

if it are true or people who are part of those groups feel that that’s the case. ⁓ It just felt like we could add more dimension to it and really understand a little bit about better about the consumers that live within those pieces of the K. So that’s what we tried to do was really just add context to it beyond the income alone. So we did technically keep the top of the K and the bottom of the K, but we split both of those into instead of into just one group into three groups based around, you

like buffers that they may have, what they may be exposed to in certain choices or lifestyle decisions that they’re making, that we think better inform consumer behavior and spend as we think about the K in general and certainly from a brand or retailer’s perspective.

Shelley E. Kohan (02:11)
And I know Kearney just came out with the great report, which will tell everyone the name of that report and where they can get it, because it just dropped recently. part of this idea is this, I’ve heard a lot of people talking about the middle class is shrinking or disappearing. And when you look at the K, that kind of gives you that reference when you look at the kind of ⁓ K economy, the symbol of it. But I think what you’re saying instead of that is that it’s not just one

Katie (02:34)
Yeah.

Shelley E. Kohan (02:40)
general segment of the middle class, but there’s all these other factors that have to be considered. So we’re actually further segmenting that middle class, even higher and the lower social levels as well, but when we put them in these nice little buckets, we’re actually misclassifying customers. So then we’re making decisions about pricing, assortment, and messaging that is maybe missing the mark.

Katie (03:06)
Absolutely, I mean there’s a couple different ways to think about the declining middle class. Again, part of it is sort of true, but when you think of the K, like when I talk about it, there’s what I would say the bottom of the top of the K and the top of the bottom of the K. And some of those folks are, I mean really beyond that, people are still considered middle class, but those folks are actually quite mobile. So you can actually jump from the bottom of the K to the top of the K if you get a good job or move to a lower cost of living area.

Shelley E. Kohan (03:35)
Mm-hmm.

Katie (03:36)
and vice versa. So that’s what we call this one group over leveraged, right? Or on thin ice, which is you could be the top of the K and actually be quite exposed to a job loss or a stock market crash or a tough housing market because you’re over leveraged and you’re living in a high cost of living area and your assets are not liquid and you’re not actually able to just spend in the way we assume the top of the K is spending right now.

Shelley E. Kohan (04:03)
It’s really interesting. think the other, you have this idea about the trading up and trading down, and you really don’t look at it as trading up or trading down. You kind of have this idea that consumers are selectively reallocating their personal resources. So tell us about that. That’s super interesting.

Katie (04:21)
Yeah, for a long time, I have never loved the concept of trading up and down because it implies this linear behavior on behalf of consumers and that they’re just looking at, in particular, when it comes to trading down, it’s like, oh, instead of buying this brand, I’m going to trade down to this cheaper option. And what we hear from consumers is they really, first of all, they consider themselves savvy and they’re making trade-offs across categories. So it’s not these like super linear competitive choices that

they’re making, but they’re saying, I am going to try to really optimize what I spend at the grocery store so I can still spend on my vacation, or I can still go to the mall on Saturday and treat myself to something fun. And so that’s a lot of what we see is this real thoughtfulness around where they’re putting their money and what they still want to be able to afford, as opposed to, again, across categories trading down. And a lot of times if they are truly quote unquote

trading down, they don’t necessarily feel that that’s the case. They feel like there’s a price value mismatch. And so they actually, again, think I’m paying for the product that feels like the right price quality connection and not that I’m paying more for less almost. Yeah.

Shelley E. Kohan (05:28)
Mmm.

Right, that’s interesting.

I think the other thing, you mentioned it earlier, but maybe you can tell us a little bit about these quote unquote buffers. Because I think that we always are looking at income. Again, we’re doing this segmentation that’s very large and it feels like we’re putting people in buckets and categories. But we have to actually look at lifestyle, circumstance, and other factors that are really impacting how retailers and brands should be looking at the business.

Katie (06:11)
Absolutely. that’s a great deep dive there. So when we think about buffers, it’s just what it sounds like. in particular, when you think of the top of the K, a fair amount of people in that group have either generational wealth or a reasonable amount of family help. So when you’re even looking at income, their money isn’t necessarily coming from income. Again, sometimes you look at net worth or other assets, but there’s a lot of protection there that exists in higher income that

like simply may not exist elsewhere. Then there are the pieces of it that are choices. So it could be where you live. You could live at a high cost of living like California. The state of California is a great example there. And if you work in tech, I mean, maybe you do feel like you don’t have a choice or if that’s where you’re from, that’s where you want to live. So you’re living in a high cost of living area. So that eliminates some of the buffer. Whereas on the bottom of the K, frankly, you actually can see the reverse, which is people living in a low cost of living area, or maybe they don’t have this, you know,

family wealth in the same way, but they have a supportive community. And that’s what actually keeps everybody in the bottom of the K from like, quote unquote, struggling too much. But all of these things also then start to feed into what you’re exposed to. So the other piece of it is your lifestyle choices, right? Like lifestyle creep is very real. And it can be even worse, frankly, at the top of the spectrum than at the bottom, which is like if you’re living in a nice house, all of sudden you want a nice car and you pay

Shelley E. Kohan (07:16)
Mm-hmm.

Katie (07:41)
pay

a lot for landscaping, and you have to furnish that whole house, and all of a sudden it becomes a lot more than you realize when you were well-intentioned to start with to try to live in a nice neighborhood. And so that’s the other piece of it, is so many of these things feed together, that then all of a sudden, if you are stretched that thin, all it takes is one of the things we’ve been talking about from a macroeconomic perspective, job loss, AI bubble burst, being stuck in the housing market.

Shelley E. Kohan (07:53)
Mm.

Katie (08:11)
market situation and then all of sudden your financial situation could change and you’re spending to go with it.

Shelley E. Kohan (08:16)
Yeah. Yeah, that’s interesting.

I also think ⁓ the idea of a comfortable living, I lived in California, I loved it. I love Cali, but it is expensive. Now I live in New York, which is also expensive. ⁓ But this idea of a comfortable living has really changed over time. Our consumer expectations are much higher. So tell us a little bit about what you’ve seen in your work and research that you’ve done about this change and what comfortable looks like today.

Katie (08:24)
Yeah.

Yeah.

Absolutely, Shelley. This was a question that really has been nagging at me because again, know, wherever you are in the K, I just feel increasingly like I hear from people, like I just, I don’t feel like I have this idea of a normal, comfortable life. I feel, you know, like we’re a dual income household, but when all the bills are added up, I still don’t feel like I can go out to eat a couple times a week. Or I feel like I have to order delivery multiple times a week because I don’t have the time to figure out cooking or other

And so that’s what we looked at as well,

which was this cost of a comfortable life and how much the combination of both norms and prices have ballooned in the last 60 but 30 years. I think of myself growing up in the 90s, right? And what that experience was like and how different it feels

now in terms of the amount of clothes we have has doubled. And one example why there is whether you’re a man or a woman, business casual.

Shelley E. Kohan (09:42)
See you.

Katie (09:46)
actually. So people used to have like almost a uniform that you wore to work. And in fact, things like business casual have made it so that you have a lot more clothes or more shoes. You don’t just have the one pair of shoes, you have all of these shoes and trend cycles for men and women are faster than ever. So you’re now buying new sneakers all the time. And you know, the tricky part with some of this is it’s easy to like get in this mode of like finger wagging at consumers around spend, which I also don’t love, right? Like, well,

you’re just shopping too much. It’s a reality we live in, which is like, you know, people expect to be able to order delivery. They see clothes all the time served to them on Instagram and TikTok and home decor items and all these things that have just continued to increase. You’ve seen childcare costs go up because more women are in the workforce. So like all there’s all these things that have been on collision courses that have just made people feel like this life I thought I was gonna have, I don’t have.

Shelley E. Kohan (10:24)
Right.

It’s interesting, and I want to ask one question about debt because I think, you know, especially with the Gen Z and Gen Alpha, as they’re looking at, you know, either furthering their education or going to trade schools, they are so debt adverse.

And so they’re making these lifestyle decisions because they don’t want to come out of school or trade school with this huge amount of debt that they’re faced with. So does that play into this kind of comfortable class not having debt?

Katie (11:17)
Absolutely. I think, mean, the debt has always been an interesting discussion when it comes to consumers, because for better or worse, when you look at most ⁓ of the government data on debt, it’s literally just going up. like, like we’re all like credit is just like the amount of credit or loans or mortgages and just ⁓ say what the country, right? It’s just like, we’re just going up. It never feels like it really comes down. So clearly there’s, there’s an issue there, but it’s also

like.

not a data point I always reference at large because it’s not like it goes up and down. It’s just kind of on this like upward trajectory. I do think what’s what Gen Z and Gen Alpha have the benefit of is learning from, you know, what student loans and certain things people have gone through, or even the cost you’re hearing it about kids, right? I’m not sure I can afford to have a kid. And I think what’s good for those generations is they do actually feel like they have options, whereas, you know, a lot of the

Shelley E. Kohan (12:09)
Right.

Katie (12:18)
generations prior to that, it felt like you were being funneled into one direction. Like you had to go to college, you had to try to buy a house, you had to. So I think that piece of like debt as a component of that decision making ⁓ is good and will maybe help kind of stabilize some of these costs that do feel like they’ve gone up a little inexplicably at times. Costs of education, cost of you know houses, etc.

Shelley E. Kohan (12:44)
And I know that we’ve always, we kind of look at the K economy and we always kind of think that the bottom levels, the lower levels that are on that K are more fragile than the top. But your report suggests the opposite, actually.

Katie (13:02)
Well, I wouldn’t say that they, there are certainly consumers in that subset that are far more fragile, ⁓ or that are more fragile, but not everybody in there is struggling, right? ⁓ A lot of people know how to live within their means. They aren’t necessarily, so lifestyle creep is real for some people. It’s not for other people. Other people are like perfectly happy with the lives they have available to them. And so that’s the choices that they’re making there, which is again,

a little bit of those buffers or a little bit of like, you’re just, you’re happy with a simple lifestyle, you’re not as exposed and you’re also still able to spend. So that’s the other thing I find that sometimes is a little bit insulting is like, well, again, they just want cheap, cheap, cheap. And that’s not the case at all. mean, sometimes like that’s exactly where, you know, people are looking for quality and they’re absolutely willing to pay more for higher quality and they have the ability

to do so, and it can be just insulting to strip quality out of a product to hit a price point and assume that’s what someone’s looking for. Again, they’re making these thoughtful decisions across the wallet. so, over time, brands will be exposed if they think cheapening a product quality is gonna be what keeps them in the fold.

Shelley E. Kohan (14:24)
I think the other interesting thing is that we’ve been hearing, I don’t know, for nine months, six, nine months about how consumers are going to pull back. Consumers are going to pull back spending. They’re going to pull back spending. Yet, you know, I get the reports every month, you know, and I’m looking at, I’m not seeing the pullback. Why is that?

Katie (14:39)
I

mean, I know that’s what some of we’re trying to tackle here too. And they’re not pulling back yet. They don’t feel like they’re living a comfortable life. It is like all of these data points do feel in conflict. ⁓ So I think it is a little bit of those things coming together where some of it has to do with some of the frustration and the negativity are ⁓ that the economy has grown, but the average consumer didn’t necessarily benefit from that. So to benefit from economic growth typically means you have to be invested in a

Shelley E. Kohan (14:47)
Right.

Katie (15:09)
meaningful way or have like

really well-timed real estate, and that’s just not the reality for most of us. So, you know, people may not have a huge investment account, they may not have like, they have the house they live in, but they’re not necessarily gonna be able to profit from real estate on a regular basis. And so some of the frustration and negativity comes from like feeling like, again, there’s this growth that’s happening that people aren’t benefiting from, or that their net worth is tied up in these like illiquid assets. mean, retirement account,

is an investment account, but it’s illiquid to the average consumer. And then the other piece of ⁓ it is just, like, we’ve seen consumers possibly, I think, my hypothesis is that you’re seeing people forego some long-term ⁓ spending for short-term. So that’s why spending is held up, which is like, there’s just been a real emotional strain on the consumer. And people like,

It’s like retail therapy, essentially, but it’s also a sense of control and normalcy, which is, know, I can still go to the mall, I can still have my simple pleasures, I can still go shopping, and the job market has stayed relatively healthy. I mean, that’s the thing I’m most aware of, where I think could lead to a pullback in spend is a job market, you know, getting worse. And so that’s the number one thing I’m watching. But for the most part, feel like, sort of to your question even on debt,

Shelley E. Kohan (16:26)
Mm-hmm.

Katie (16:38)
I think people are also like maybe not saving for a house. They’re kind of just like, I’m gonna live my life right now. I’m gonna take the trip. Yeah.

Shelley E. Kohan (16:47)
Yeah, I think

it’s interesting because you know talked about retail therapy. It’s a real thing. It makes people feel better and I do think this whole idea of wellness, you know, since the pandemic but it’s grown but now it’s very sticky because people want that work the what I call life work balance, right? They want to feel wellness. So I think there’s a lot to that whole idea of retail therapy and wellness.

Katie (16:52)
Totally. Yeah.

And self care, I mean, that’s

like how we see it is these small moments of self care. So that’s why I also think, know, wellness is a funny category right now, because we go after a lot of the vices people have, right? Like, ⁓ you know, don’t drink and don’t eat sugar and don’t, like people gotta live. You know, I think we go to like hard assuming that we’re gonna eradicate all these indulgences and vices even, ⁓ because I think a lot of times like those are the simple pleasures of life.

Shelley E. Kohan (17:31)
This

Katie (17:42)
too.

Shelley E. Kohan (17:43)
Yeah.

So tell me, let’s get to the nitty gritty now. What should retailers and brands be thinking about? How should we be moving this forward? Based on our conversation and what I read in the report, my key takeaway is you could have two customers in the exact same segment, but actually should be treated very differently behaviorally because they’re making different choices, right? So they’re going to respond differently to pricing, promotion, or product launches.

How should retailers and brands navigate through this?

Katie (18:18)
The biggest thing brands can be doing right now is having honest conversations about price value and the value mismatch because that’s exactly what you’re seeing is retailers and brands sometimes still have a little bit of a bias to like the old good, better, best model, right? This like price tiering of like, let me just like, I just have to hit these price points and then I check the boxes for everybody. And that just structurally doesn’t seem to be working well anymore, right?

Shelley E. Kohan (18:35)
yes. ⁓

Katie (18:48)
people really, have as consumers, have more options than ever. assuming like, me cheapen some things to hit a certain price point, but also let me assume premium is going to hold up. ⁓ Both of those are risks. like the luxury market we’ve seen, you know, stabilize, we’ll call it in recent years, because they just so many of those traditional fashion houses just kept taking prices up. And even if you could afford it, nobody wants to feel like they’re being taken for a ride.

that’s kind of what you started to see is like even at the high end, there are people like, well, why would I spend that much on something? And that’s the thing I’ve seen in general is we’ve seen a lot of brands just continue to take price because they feel like they can, and consumers are really questioning this value equation. And that’s not going to be a change you see overnight. It’s going to be you’re getting this slow churn out, and then a year or two from now, you’re going to be in a tough position. So if I’m a brand, that’s the conversation.

I’m having is really like, what do we really want our price value to be? What is the right mix? If I’m an apparel retailer, what does that look like for basics and statement pieces? In the near future, what I’m hearing from consumers is actually they know how to optimize their basics. They know how to find simple white T-sym. What they want is the good statement pieces, but that doesn’t mean you can’t have basics, right? So it’s really like trying to have that honest dialogue about

what those value matches and mismatches are.

Shelley E. Kohan (20:22)
That’s super fascinating. I think that ⁓ when you talked about luxury, something popped in my head and this is the whole idea of this bifurcation of luxury. have a lot of the luxury houses, ⁓ they’ve gone up.

So you have a lot of the luxury brands have actually outpriced themselves from this aspirational shopper. And then you have the other luxury brands that have kind of valued out some of their, so you don’t have this aspirational luxury. Like where’s that coming from now?

Katie (20:58)
Yeah, I mean, in some ways, if you’re like sort of on the upper end of what you’re describing, we’ve seen a big shift to jewelry. So that’s why because jewelry has not taken ⁓ price in the same way as like leather goods, basically. So you’re seeing like Van Cleef, Cartier, they’ve done really well the last couple of years because now what used to be way more expensive than a bag is the same price as a bag and arguably has better long term value. So for if you’re like still a

able to spend. That’s a lot what I’m hearing from consumers. And then in the truly more aspirational, mean, that’s where you get a lot of those interesting brands like a Pauline, even like Totem is not priced quite as high. So you’ve seen even that market become more diverse with interesting brands and people again, really saying like, okay, I want a nice leather bag. What is the right price point for me? And I love like, I don’t know if you’ve ever seen ⁓ the guy Tanner Leatherstein who like

like

rips apart luxury bags and helps. So consumers are educated too on like how good products are. So I think like even there, there’s been, you know, room for some of those. And what I’ve loved to see too is like the Renaissance of brands like Coach, right? There’s room for brands that actually did have a strong enough history to come back into the fold ⁓ and were able to kind of go back to that heritage that they had. And so I think that’s what you’re seeing too from the aspirational consumers.

Shelley E. Kohan (22:01)
I love it.

Yeah, I think that’s great too. I love it when brands resurrect themselves and come back strong. It’s really fun to see. Yeah. They’re killing it. I know, it’s great. Anything else you want to add, Katie?

Katie (22:33)
We’ve seen some good ones in last few years. Yeah, Abercrombie, like I remember wearing an Abercrombie sweater in my like eighth grade yearbook photo and here we are again. Yeah.

⁓ I mean, I think we’ve captured all of the big things. Again, it’s really just, I just think it’s interesting to think about the level of exposure and what that means to ⁓ how consumers will actually behave and spend. And when will we see this pullback? ⁓ Maybe we won’t, but ⁓ I think that’s optionality. know, right? Yeah.

Shelley E. Kohan (23:12)
Let’s hope not.

Where can our listeners find your newest report hot off the press? know you’re featured in it, so love that.

Katie (23:22)
Yes, yes, so

they can find it on Kearney’s website. So if you go to Kearney and look for the Kearney Consumer Institute, it’s called Hidden Dimensions of the K-Shaped Economy. So you can find it there. Quick Google, LinkedIn. You can find me on LinkedIn as well. ⁓ any of those places.

Shelley E. Kohan (23:41)
Great, Katie, thanks for being on Retail Unwrapped. was a pleasure having you here and helping us look more deeply into what’s happening in our consumer mindset.

Katie (23:50)
Yeah, this is a great conversation. Thank you so much, Shelley.

Shelley E. Kohan (23:53)
Absolutely.