Fighting for a Dollar

The tenacity of economic contraction and stagnation in the US economy continues to fool many companies (clearly it is fooling politicians) who want to wish growth into existence. Even though the recession was just announced to have technically ended in mid-2009, its lagging effects continue to force an unwilling transformation of the world's largest economy from the bottom up. 

One effect of this transformation has been to take an innovation strategy--developing products for sub-$1 price points to appeal to low-income markets--into a mainstream approach to product development. I can recall standing in ideation workshops five or six years ago, before the recent recession suddenly landed on front pages, having discussions about the sub-$1 market. Companies had it on their radar, but it was more of a shoulder market, a way to pick up additional consumers at the low end that looked like they might join the middle class as easy credit continued to expand. 

Now, belatedly, the sub-$1 product making its way up the development chain. Wal-Mart, that behemoth of retail, is not only pushing for a wider range of low-cost products to suit its new urban footprint, it wants to take this approach across its giant network of superstores. Continuing a long-term strategy of eating the business of standalone retail, Wal-Mart and its competitors in the superstore space are aggressively going after the dollar store. 

Why does making products in small packets at low cost sound familiar? Because this is what the major global CPG companies have been working on as a strategic initiative in the rest of the world for some time, seeking to penetrate new markets where consumer classes are expanding, in India, Africa and other developing regions. 

This shift in the US has some interesting possible implications. First, while we may not see it on the surface, American consumers will increasingly face products developed not with them in mind as the world's "premium" purchasers, but created for distant markets, with packaging and distribution strategies forged in Durban or Chennai. This has already happened with cars and to some extent PCs (see the netbook boom for examples). Second, the long climb of the massmarket retailers in the US toward the sub-premium market, with well-designed tables and lamps, fast fashionable clothing and organic products may get hollowed out from below. Lastly, following consumers back into the urban space from the sagging suburbs may create urban shopping environments that resemble the retail of the first half of the 20th century, when center city department stores thrived on the dollars of less affluent but ambitious urban residents.