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Olive Garden, JC Penney and the Death of the Middle Class

Mid-level restaurants and hotels are floundering as luxury spending soars

- Lauren McCauley, staff writer

(Photo: Armando G Alonso/ cc via Flickr)Business is booming for both Barney's and Bargain Basement, but as middle-income workers continue to get hit by recessionary pressures and wage stagnation, restaurants and retailers that once enjoyed the spending habits of the American middle class are dying off as their customer base falls back towards poverty.

Providing further evidence that the post-recession economy is one in which only the rich have prospered, a New York Times analysis published Sunday says that, as evidenced by the current winners and losers in the business world, the middle class is undoubtedly "eroding."

"The post-recession reality is that the customer base for businesses that appeal to the middle class is shrinking as the top tier pulls even further away," the Times reports.

For example, since 2005, the number of diners eating at "midtier" restaurants such as Red Lobster and Olive Garden have dropped in every quarter but one, according to John Glass, an industry analyst at Morgan Stanley.

The Times reports:

With diners paying an average tab of $16.50 a person at Olive Garden, Mr. Glass said, “The customers are middle class. They’re not rich. They’re not poor.” With income growth stagnant and prices for necessities like health care and education on the rise, he said, “They are cutting back.”

In comparison, high-end restaurant chains like Capital Grille—where the average check per person is about $71—have seen an annual increase of 5 percent over the last three years.

Similarly, revenue per room for luxury hotel chains such as the Four Seasons and St. Regis has jumped 7.5 percent in 2013 compared with just 4.1 percent in growth in revenue for "midscale" chains like Best Western.

According to the piece, brands who target the "expanding ranks of penny-pinching consumers" have also grown in this economy.

Since the end of 2009, shares for retailers such as Sears and J.C. Penney—which market themselves "squarely" for middle-class shoppers—have fallen more than 50 percent at the same time "upper-end stores like Nordstrom and bargain-basement chains like Dollar Tree and Family Dollar Stores have more than doubled in value."

As Robert Reich explained last week in a piece lamenting the current economic picture in the US: "Middle incomes are sinking, the ranks of the poor are swelling, almost all the economic gains are going to the top, and big money is corrupting our democracy."

Citing research by the economists Steven Fazzari, of Washington University in St. Louis, and Barry Cynamon, of the Federal Reserve Bank of St. Louis, the Times reports that since the recession ended in 2009, "about 90 percent of the overall increase in inflation-adjusted consumption was generated by the top 20 percent of households in terms of income."

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