• by Sarah Mahoney  @mahoney_sarah, September 5, 2007

A new study from IRI Insights finds that retailers are ignoring the fastest-growing segment of Americans--lower-income shoppers. These consumers--about 40% of the U.S. population--actually outspend more affluent types, and will shell out $85.3 billion on consumer packaged goods in 2007. In the next decade, IRI estimates this group will generate an additional $84 billion in incremental spending on packaged goods.

But because of the explosion of the luxury market in the last five years, it's a group many retailers have neglected. "This represents one of the most underserved shopper segments," says Sean Seitzinger, leader of the IRI Center for Retail Innovation. "They are a major growth 'silver bullet'."

But not all segments of the lower-income group are as fast-growing, he says. "We found huge variations in shopping frequency and spending levels. This group is a lot more diverse than people give them credit for," he says. Among the fastest-growing spending segments are singles and married couples ages 25-34 and Hispanics; consumer-product spending among African-Americans, however, is actually declining.

(The lower-income demographic does not include the poor. In fact, the government released new data last week indicating that the official poverty rate actually declined for the first time this decade, falling from 12.6% in 2005 to 12.3% in 2006. That amounts to about 36.5 million people in households earning less than $20,614.)

To better serve this lower-income group, Seitzinger says, retailers need to understand that these shoppers have all the same wants as more affluent ones--they want more convenience, more choices, innovative and healthier products, as well as brand names that put them at ease.

"This is a weak spot for retailers, because store brands are clearly not meeting their needs across all categories," says Seitzinger. "Progressive retailers can drive private-label growth if they focus on building stronger relationships with lower-income shoppers by improving variety and packaging."

What's especially misguided, he says, is the creation of supersized packages by marketers in an attempt to sell this group "bargain" sizes. "These people don't have the money to buy two weeks' worth of a product. Typically, they're buying things that are going to be consumed in the next 24 to 72 hours. But that doesn't mean they don't want plenty of choices and varieties in smaller sizes."

Certain of the dollar-store formats, he says, have gotten the formula right. And Target has also nailed it, managing to straddle a market position that not only welcomes middle-class shoppers willing to trade down for occasional bargains, but also entices lower-income shoppers to trade up. "These lower-income people go to Target to buy their nicest outfits," he says.

But it's also got an "understanding that the dialog with lower-income shoppers isn't just about price," he adds. Target's Choxie chocolates, for example, cost far less than Godiva, but are a lot more interesting than a bag of M&Ms: "It's offering lower-income shoppers a high-end indulgence in a form they can afford but still makes them feel luxurious."

Other winners, he says, are Nike's recent pairing with Payless to create the low-cost Tailwind running shoes, and Toyota, which has found a sweet spot with its Scion. "While it's focused on the low-income consumer, it's a completely customizable solution," Seitzinger says.