The Rising Tide

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The lower middle class now accounts for one-sixth of the U.S. population, amounting to a market worth as much as $120 billion per year. Why have mainstream marketers paid so little attention to those in the lower-income echelons?

“There's a significant issue in this market that no one wants to discuss: Everybody has this image that they're blue blood. People either don't see [the working poor] market or they don't want to be associated with it.�

“A lot of people think you can reach this community by delivering a dumbed-down, unbranded product. But this demographic is probably more brand conscious than higher-income people.�

On a nippy afternoon in January, Bernadette Mosley joined the technology vanguard without knowing it.

With her 3-year-old daughter Stephanie in tow, Mosley entered the ATM vestibule at North Fork Bank in the Jamaica section of Queens, New York to cash her social security check. Rather than head to a teller, Mosley stood before a machine that looked just like an ATM, check in hand. She entered the check's value into the machine, typed in her social security number, fed the check into a slot, and peered into the attached camera lens. Seconds later, the machine whirred, and a wad of cash poured out.

For Mosley, an unemployed warehouse worker from the Bronx, the check-cashing machine represents the kind of liberator that ATMs are to most Americans. For Innoventry, the San Francisco-based company that developed the machine, technology is a way to tap into an oft-neglected market. “One can create enormous value for consumers and for shareholders by offering services to people no one else wants to serve,� says Frank Petro, Innoventry's chairman and CEO. “This is a market that's not only underserved but is actually abused.�

For decades, most businesses have all but ignored the lower middle class, deeming it neither wealthy enough to pay for premium services, nor impoverished enough to receive the attention and support given to the poor. But a handful of retailers, financial institutions, technology companies, and service firms such as Innoventry are beginning to spot the potential of this demographic. With some creative thinking and aggressive use of technology, these businesses are proving that this segment of the population can be served just as well as others, and can be a profitable market too.

Often referred to as the working poor, sometimes characterized as the “unbanked,� but always painted in stereotypes, America's lower middle class represents a broad cross section of ethnicities and cultures, languages and races with two characteristics in common: they are employed; and they earn between $17,000 and $34,000 per year. For them, basic facilities most Americans take for granted such as financial services or quality retailers are largely out of reach. They are typically snubbed by businesses afraid of a seemingly complex, fragmented market, only to be served, instead, by predatory institutions delivering much-needed services at a hefty price.

Why have mainstream marketers paid so little attention to those in the lower-income echelons? After all, the lower middle class now accounts for one-sixth of the U.S. population, amounting to a market worth as much as $120 billion. And, as the threat of recession looms, social scientists expect their ranks to further increase. The answer is that the lower middle class is a demographic group burdened by stigma. To many, the term is synonymous with welfare moms, urban blight, and undereducation. This stigma is so ingrained, in fact, that many of the retailers contacted by American Demographics preferred either to comment off-the-record or not at all, fearing association with those stereotypes. “There's a significant issue in this market that no one wants to discuss: Everybody has this image that they are blue blood,� says Petro. “People either don't see [the working poor] market or they don't want to be associated with it.�

Stereotypes and facts

Most of these stereotypes are either unjustified or misguided. What really defines the working poor is not their lack of work, but the lack of adequate remuneration for their work, says Gregory Acs, senior research associate at the Urban Institute in Washington, D.C. The working poor share many traits with both the middle class and the poor, and yet they do not fit in the politics of either group. “The focus on those not working has upstaged the very real struggles of people in the lower middle class,� says Acs. “We drew an arbitrary line, and we may not have been concerned for the people at the upper end of the poverty spectrum.�

To complicate matters even further, drawing an exact picture of this demographic can be quite difficult. If you simply take a slice of Americans who earn between the federal poverty threshold and twice that level — between $17,000 and $34,000 a year — you are left with 40 percent of the population. Yet many within that slice are either retired persons or young people at the early stages of their careers, facing few of the challenges of the working poor.

To get a more accurate view, the Urban Institute goes several steps further, leaving out retirees and focusing on persons in families working at least 1,000 hours a year, with incomes below $34,000. That definition, says Acs, means the total hours worked can vary depending on the number of people in a family, while acknowledging that two-parent families have more potential workers than single-parent families. Collectively, that group amounts to 16.7 percent of the U.S. population.

The picture grows even clearer when coupled with data from the National Survey of America's Families. As it turns out, the biggest difference between families classified as working poor and other families is whether or not they have kids — 80 percent do, and more than 40 percent have three or more. And contrary to popular belief, two-thirds of lower-middle-class American families have two adults present, while only one out of six live in single-parent families. Fewer than 10 percent have extended family present, while another one-sixth have no children at all.

In many ways, the working poor closely resemble the middle class. Two-thirds are white, 18 percent black, 11.6 percent Hispanic, and the remainder are non-Hispanic. And compared with middle- and upper-middle-class Americans, the working poor have a larger rural base — 26.7 percent do not live in a metropolitan area, while only 17.6 percent of wealthier families live in rural locales. Many own property, with 84 percent owning cars, according to the National Survey, and a significant number own homes.

Yet the central factor in the condition of the working poor is a lower level of education. According to the Urban Institute, close to half the household heads of all low-income families have only a high school diploma or GED, with only 10 percent having graduated from college, compared with one-third of the heads of wealthier families who have both a high school and college diploma.

That, researchers agree, determines the kind of work and level of pay such families can attain. A large number of lower-middle-class Americans are employed as service workers, transportation operators, and in technical services, in that order. In fact, service industries employ one-third of all working poor, followed by manufacturing and wholesale and retail trade, which account for one-fifth. That all translates to low wages. The average salary of this group is $6.73 an hour, less than half the hourly rate of $14.42 that other Americans earn, according to the Urban Institute. And to make matters worse, the working poor receive fewer government benefits than non-working families do, and must therefore foot the bill for child care, health care, and other critical services.

Yet the condition of the lower middle class is better than it has been in decades, says Jared Bernstein of the Economic Policy Institute (EPI) in Washington, D.C. As welfare reform forced many Americans off government assistance in 1996, a booming economy pulled many of them onto payrolls and into a tight labor market. More significantly, their wages began to rise, especially since 1999, helping to close the gap between middle- and lower-middle-class earnings. While fewer than 17 percent of the 7.7 million poor Americans were employed full-time in 1979, more than 25 percent of the 11 million poor entered the economy with full-time jobs in 1998, according to The State of Working America, the EPI's biannual analysis of the U.S. labor market.

Yet the fundamental question looming over this group is: How will it weather turbulence in an economic downturn? “The rule of last hired, first fired still applies here,� says Bernstein. “When the economy sneezes, these people catch pneumonia.�

New consumers

The long work hours, low pay, and family burdens of the lower middle class create a different kind of consumer. Those marketers who have succeeded in reaching this segment highlight several important characteristics of the group. They tend to look for value rather than cheap products. They are very sensitive to issues of trust and will spread word among family and friends when things go right — and wrong. And equally important, they tend to be very brand loyal.

No factor plays as big a part in this group's purchasing patterns as their lack of access to financial services, however. According to research by the Federal Reserve Board, some 10 million low-income Americans have no bank or checking accounts to speak of. In surveys, some families say they eschew bank accounts because they do not need them; some say they don't trust banks; others say they can't manage checking accounts. For those who are undocumented, banks pose a variety of legal risks, while for others, identification requirements are a source of irritation, although not a complete barrier. Still others have suffered as mergers in the financial sector caused the closure of branches in their vicinity (mostly rural areas) and left them without a bank in which to deposit money. And for those living from paycheck to paycheck, the waiting period for checks to clear can create financial hardships they would rather avoid.

For most of the unbanked, check-cashing services, supermarkets, and other outlets fill in the blanks. Studies estimate that one out of every five Americans cashes checks for a fee, primarily through supermarkets, but also through banks and check-cashing stores. Generally, those consumers cash more than three checks a month, with an average face value of $300, paying about $180 a year in fees. In total, some $230 billion a year is cashed outside of banks, generating $3.5 billion in fees for cashing institutions.

According to Innoventry, this is a market ripe with opportunity and crying for new technology. The company has been rolling out its network of check-cashing machines nationwide, amounting to almost 900 machines by the beginning of 2001. The machines utilize technology that scans checks and determines if they're legitimate, eliminating the need for a cashier altogether. Meanwhile, photometric technology identifies people based on their facial structure, and a call center with multilingual customer service representatives who speak Spanish, Vietnamese, and English is available to help users whenever there's a problem. “Check-cashing stores are basically a bank branch out of the 1950s,� says Petro. “In our case, we apply technology to deliver value.�

The RPM machine offers competitive check-cashing rates — it takes a 1.75 percent fee to cash printed payroll and government checks, and 3.5 percent to cash handwritten payroll checks — but its main draw is convenience, Petro notes. Users like Mosley appreciate the anonymity and the ability to use the machine at any time of day. For banks, the machines reduce the burden on tellers while offering a chance to sell users on the benefits of a real bank account. And for supermarkets, they eliminate stores' risk of bounced checks, while bringing in new customers likely to shop in the store once they've got cash in hand.

Many banks have also begun to extend their services to the lower middle class, partly under pressure from regulators, but also out of a strategic business goal. Fleet Bank's Community Banking Group, based in Boston, is a model for such efforts. The decade-old “bank within a bank� targets low-income communities, offering retail, small-business development, real estate, and community banking services to communities that have either been redlined or just plain underserved. Despite all the doubts from many in the banking industry, Fleet has proved it can operate a community bank profitably, while delivering high-quality service to those who need it most.

“This business isn't profitable on a per-household basis, but on a per-acre view, it's more profitable because of the population density,� notes Sean Stanton, senior VP of commerce and strategic planning for the community banking group. “I think more and more people are realizing this is one of the last untapped markets in the U.S. — it's our emerging market.�

For Fleet, the key was to go where the people go, Stanton says. The bank's agents developed a rapport with community groups and churches in their neighborhoods and made their pitch in venues where the community felt most comfortable. They also sought to understand why many in the communities avoided banks, helping them gain access to computers and online banking to better manage their funds, and offering small business loans to help jumpstart business ideas. And most significantly, Stanton says, everything was done at competitive rates.

Countless retailers have also increased efforts to reach lower-income Americans, driven partly by government incentives and partly by the changing character of the lower middle class. Drugstores, supermarkets, and newfangled retailers in particular, have stepped up construction in lower-middle-class neighborhoods in recent years.

The stalwarts among them are Wal-Mart and Kmart, both of which have proved that delivering value and quality service to underserved communities can mean profits. Despite ongoing criticism that the discount retailers hurt smaller businesses in every market they enter, many laud their efforts at raising the bar on the retailing efforts in those areas. The secret to it all, many analysts say, is in treating less affluent customers just as well as you treat wealthier ones.

“What's changed is retailers' mentality that to reach lower-income people, their stores had to look and feel poor,� says Marc Gobe, CEO and executive creative director of branding consultancy d/g* Worldwide and author of Emotional Branding: The New Paradigm for Connecting Brands to People (Allworth Press, 2001). “Emotions don't only belong to the wealthy. So the challenge isn't to differentiate between people of different incomes but to make shopping a great experience for everyone.�

Meanwhile, so-called dollar stores like Dollar General, Dollar Tree, and others have discovered another secret to reaching the working poor — brand affinity. Despite the economic boom, bargain-basement dollar stores have been the fastest-growing packaged-goods retail channel in the country, reportedly increasing at double-digit levels over the past four years by targeting lower-income consumers. Their impact has been so significant, according to various reports, that it has forced the packaged-goods industry to emphasize such products over unbranded goods.

The dollar stores' main strengths have been offering an assortment of brands along with private-label programs, and simple pricing schemes (almost everything in the stores is 99 cents). When Procter & Gamble relaunched the Pantene hair-care line as a premium line costing $1 to $2 more last year, for example, the consumer goods giant kept the original formulation and branding for its dollar and discount stores, which have continued to sell the product.

Others have also made major efforts in the market. Radio Shack, one of the nation's largest electronics retailers, says it has stores within one mile of 94 percent of Americans, including a significant presence in inner cities and rural areas. Although the company says it has not specifically targeted any one demographic, business analysts point to the number of stores in lower-income neighborhoods.

“A lot of people think you can reach this community by delivering a dumbed-down, unbranded product,� says Eric Solis, CEO of SaveDaily, an Irvine, California-based start-up trying to bring mutual fund investing and saving to the lower middle class. “But this demographic is probably more brand conscious than higher-income people.�

Still, the question dogging retailers on the sidelines is how to make marketing to the lower class pay off. The answer for those plowing into the market is simple: Take a very long-term view. “Is it worth my while to market to people who don't have much money to spend? If I can get enough volume, absolutely,� Acs stresses. “Do they have frustrations that could be addressed in a profitable way? Absolutely.�

The Nuclear Family

Nearly 70 percent of Americans classified as working poor are married, and 82 percent have kids to take care of. Percent of non-elderly persons, 1996.




Any children in

the family
82.1% 64.9% 61.7%
Number of children in the family (for families with children)
One 20.2% 25.2% 35.5%
Two 36.5% 31.6% 41.6%
Three or more 43.3% 43.2% 22.9%
Age of youngest child (for families with children)
Less than 3 yrs 33.8% 35.0% 25.1%
Between 3 and 6 yrs 24.3% 22.8% 18.5%
Marital status
Married (including

68.9% 45.2% 83.0%

17.3% 25.6% 8.9%
Never married 13.9% 29.2% 8.1%
Education of family head
Less than high

22.4% 35.2% 4.3%
HS grad or GED 45.7% 39.3% 35.0%
Some college 21.5% 17.9% 24.7%
College grad 10.4% 7.6% 36.0%
Race of family head
Black 18.0% 26.5% 9.4%
Hispanic 11.6% 10.7% 3.9%
White, non-Hispanic 66.0% 56.2% 82.5%
Nonwhite non-Hispanic 4.5% 6.6% 4.2%
Other factors
Family head has a

work-limiting health

11.6% 27.6% 7.1%
Lives in a metro-

politan area
73.3% 76.9% 82.4%
Owns a car 84.1% 66.7% 96.4%
Note: Families with annual incomes less than 200% of the federal poverty line are labeled poor; families are defined as working if their average annual hours of work per adult in the family exceeds 1,000 hours; in working families, the highest-earning adult in the social family is the family head. In families where no adult works, the adult with the highest education is deemed the family head.
Source: Urban Institute

The Income Divide

Working poor families tend to hold lower paying jobs.







Occupation of primary earner

15.1% 43.3% 16.4% 49.2%
Sales 8.6% 10.2% 9.2% 11.6%

9.9% 8.5% 21.4% 18.4%
Service 20.1% 7.4% 29.7% 7.5%
Craft/repair 15.8% 15.4% 4.8% 6.8%
Operators/transportation 18.9% 11.1% 13.6% 4.7%
Laborers 11.5% 4.1% 4.9% 1.9%
Industry of primary earner
Construction 9.3% 8.2% 2.7% 5.0%
Manufacturing 20.5% 22.5% 15.3% 19.0%

6.7% 9.8% 5.0% 9.6%
Wholesale/retail trade 19.2% 12.3% 22.5% 9.8%

real estate
3.7% 6.3% 5.0% 8.0%
Services 30.5% 31.6% 44.4% 42.7%

public administration
10.1% 9.3% 5.0% 5.8%
Note: Families are defined as working if their average annual hours of work per adult in the family exceeds 1,000 hours; families with annual incomes less than 200% of the federal poverty line are labeled poor.
Source: Urban Institute tabulations from the 1997 National Survey of America's Families

Support Cushion

Working poor families use the safety net less frequently than non-working families. They primarily rely on such services to help their kids. Use of safety net services and private assistance, 1996.

AFDC/TANF, General Assistance and/or Emergency Assistance
% receiving 7.2% 24.8% 1.0% 15.2% 57.8% 2.2%
median benefit $2,200 $3,845 $2,448 $2,068 $4,200 $3,600
Food Stamps
% receiving 19.8% 43.8% 1.6% 33.8% 76.6% 2.7%
median benefit $1,440 $2,268 $960 $1,380 $2,400 $900
Supplemental Security Income
% receiving 3.8% 15.4% 1.1% 4.7% 17.2% 1.5%
median benefit $5,160 $5,568 $5,300 $5,076 $5,640 $5,000
Child Support
% receiving 13.8% 11.5% 7.3% 36.3% 29.4% 43.1%
median benefit $2,244 $1,272 $3,420 $2,400 $1,200 $4,360
Financial assistance from family or friends
% receiving 7.0% 9.6% 3.6% 10.5% 11.8% 10.0%
median benefit $550 $500 $1,200 $435 $300 $700
Family member received Medicaid or other state-run public program
% health insurance 27.4% 52.1% 4.2% 40.9% 83.0% 5.9%
Note: Families with annual incomes less than 200% of the federal poverty line are labeled poor; families are defined as working if their average annual hours of work per adult in the family exceeds 1,000 hours; average benefit calculated only for those families that received the service.
Source: Urban Institute tabulations from the 1997 National Survey of America's Families
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