At a moment when many consumers in this country are jittery about their personal finances, the term K-shaped economy has taken hold. Proponents of the concept assert that, bolstered by high real estate valuations and a solid stock market, wealthy Americans are doing just fine and spending freely, while their fellow citizens at the lower end of the income spectrum are pulling back.
New research from the Kearney Consumer Institute uncovers some hidden aspects of the trend, which, of course, has serious implications for both mass market retailers and consumer packaged goods companies.
“The K-shaped economy is not necessarily wrong, it’s just incomplete,” said Katie Thomas, who heads up the institute, which is part of the Kearney Foresight network. “Income alone no longer predicts who is stressed, who is vulnerable or who is willing to spend. Two consumers earning the same salary can respond in completely different ways to the same price increase of economic shock.”
The study, “Hidden dimensions of the K-shaped economy: how income, lifestyle and circumstance shape consumer stress and spending,” found that the finances of people in high-income brackets can be fragile, while those of consumers who are less well off may be relatively stable. The results bear close scrutiny from executives in the retail and CPG sectors as they work to ensure their companies stay in step with changing dynamics in the marketplace.
Perhaps the most surprising finding uncovered by Kearney is that almost 50% of high-income households face meaningful financial risk. Such factors as housing costs, job security, interest rates and market volatility are having an impact on everyone, no matter where they fall within the K-shaped economic model. The report points out that spending by wealthy individuals can sometimes exceed their income, leaving them overleveraged and closer to serious financial difficulties than one might think.
Consumers at all income levels must contend with increasing prices for food and other consumer products. The report states that those costs — coupled with always-on technology, multiple vehicles and expensive extracurricular activities — raise the bar for attaining “what was once considered a middle-class lifestyle,” resulting in economic stress even when earnings grow.
Despite the challenges inherent in the current economic and social climate, some lower-income consumers are finding ways to cope, according to the study. The level of success in that endeavor is affected by a number of factors, including household structure, geography and liquidity.
A far more complex picture emerges from the Kearney report than the bifurcation represented by the K-shaped economy. Reliance on a model that fails to reflect the full scope of current economic conditions could trip up retailers and CPG companies, leading to serious mistakes in decisions about product assortment, pricing and marketing.
“Brands that respond to uncertainty by racing to the bottom on price or assuming premium consumers are insulated are making the same mistake,” said Thomas. “Consumers aren’t trading down or up in unison — they’re selectively reallocating their personal resources.”
In light of those insights, the report advises retailers and suppliers to bring a new mindset to segmenting their offerings. In addition to income level, they need to consider the full range of factors that influence consumers’ purchasing decisions. Pigeonholing shoppers in different economic tiers is no longer sufficient at a time when they are engaged in making trade-offs in the products they buy.
Artificial intelligence and related technology will make it much easier for companies to address the needs of customers individually. The data gleaned from the process will give retailers and CPG companies a leg up in understanding where consumers are headed, a task that, if anything, will become more complicated in the near term. Among the macroeconomic forces identified in the Kearney report that could reshape shopper behavior unevenly are AI-driven job disruption, shifts in the housing market and inflation volatility tied to the Trump administration’s tariff policies. Unforeseen developments will, no doubt, also have to be dealt with.
“Understanding today’s consumer requires moving beyond labels and averages to the lived realities that shape how people decide, defer and occasionally splurge,” Thomas said. “Brands that can do that will be better prepared not just for volatility, but for whatever version of ‘normal’ comes next.”
