Morgan Stanley has put out an exhaustive report on inequality, in which the investment bank muses about the possibility of the middle class slowly going extinct.
Growing inequality “can disrupt business models, fuel political discontent and trigger policy missteps,” the bank warns.
“It pre-determines individuals' positioning along the income and wealth distribution independently of their efforts…. Therefore, it undermines incentives to work hard and invest in further education and improve skills.”
But, being an investment bank, Morgan Stanley also sees an upside to inequality — especially for the businesses best positioned to take advantage of the disappearance of the middle class.
Portugal is most unequal: Morgan Stanley published this chart ranking the world's wealthy countries by degree of inequality. It shows that southern Europe and the U.S. have the highest degrees of inequality in the developed world, while Scandinavia has the least.
So if you’re a business and your middle class customers are disappearing, what do you do? You get rid of your mid-priced items and start segmenting into high-priced luxury goods and low-priced bargain goods.
In Morgan Stanley’s view, businesses that don’t do this, and continue to target middle earners with mid-priced items, are in trouble. Those that will thrive will be those that move up the income ladder, or down the income ladder, or both.
Below are the companies that Morgan Stanley says will win in a world where the middle class is an endangered species. To see the complete list, check out the full Morgan Stanley report.
Global food giant Nestle, which owns brands such as Nescafe, Smarties and Maggi, is among the best-positioned companies in a middle-class-free world because it has done the best job in going upscale (think Nespresso) while launching a program to bring low-cost foods to the developing world.
Formerly known as Kraft Foods, Mondelez owns such brands as Oreo, Toblerone, Dentyne and Halls. Morgan Stanley says the company is well-positioned to thrive in an increasingly unequal world because it’s doing well moving into the more upscale “better-for-you foods” segment, while for the low-end market, the company is “innovating through new packaging formats.” Smaller servings, perhaps?
LOREAL and ESTEE LAUDER
Most of the big beauty companies can weather the disappearance of the middle class, but Estee Lauder and L’Oreal stand out for Morgan Stanley as two of the strongest. Estee Lauder’s strength, the bank says, is that it’s “a pure-play prestige beauty company,” meaning the rich will continue to gobble it up. L’Oreal’s strength is being able to play to both high-end and low-end markets. The bank also mentions Reckitt and Blue Buffalo as two other notables in this category.
Luxury goods stores don’t have much to worry about in the unequal future, but Morgan Stanley says two in particular stand out: Jeweller Richemont and fashion conglomerate LVMH, whose flagship chain is Louis Vuitton. “Rising consumer wealth and the number of high-net worth individuals is positive for all the luxury brands,” Morgan Stanley says, but LVMH and Richemont are the “most exposed” to gains in wealth at the top of the income ladder.
WINNERS (TJX Companies)
TJX Companies owns numerous retail chains, including Winners and HomeSense in Canada, and T.J. Maxx and Marshalls in the U.S. Along with Ross Stores, Inc., and Burlington Coat Factory, it’s been gobbling up market share from middle class-oriented department stores like Target and JC Penney. “Over time we expect rising inequality to trigger greater market polarization, benefitting lower priced retailers at the expense of the broader 'middle' segment,” Morgan Stanley says.
Low-cost airlines have boomed as the middle class has shrunk, doubling their market share in Europe and growing it 50 per cent in the U.S. over the past decade. Morgan Stanley says this trend will continue, and predicts the prominent low-cost carriers (RyanAir and EasyJet in Europe, Allegiant and Spirit in the U.S.) will benefit most.
MARRIOTT, and other luxury hotels
Marriott International recently bought Starwood Hotels for US$12.2 billion, and Morgan Stanley says Starwood, along with Hyatt and Shangri-La, are the best-positioned hotels to weather the death of the middle class. Why? Because those hotels rely the least on middle earners and the most on high earners, with more than 80 per cent of their rooms in the luxury segment.