For Richer For Poorer

The UK’s poverty gap has now hit Third World proportions, driving a wedge between rich and poor. This inequality is neutering mass markets and limiting consumer growth. The challenge for marketers is to bring the poor back into the mainstream.

This week’s Budget was the 18th in a row from a Conservative chancellor and Kenneth Clarke can claim, without fear of contradiction, that the UK economy has been transformed since 1979.

On the surface, marketing people have done well from the “Thatcher Miracle”. Deregulation and privatisation have opened markets in telecommunications, financial services, media, pharmaceuticals, gambling and even state institutions such as the National Health Service.

When the Conservatives came to power, consumption stood at about 60 per cent of national output. By 1994 that had risen to 64 per cent. Latest figures from the Central

Statistical Office show that real incomes have risen by 40 per cent since 1979. But such increases mask a problem that is often ignored but centrally important to consumer goods marketers.

The most enduring legacy of the period, and the one that could have the most serious impact on marketers, is not the opening up of “free” markets, but the rise in inequality. Three times more people, 14 million, now live below the unofficial poverty line. And every one of them is excluded from the consumer society in which companies need to sell their products.

Ironically the free-market policies which many marketers have sup-ported are actually limiting the oppor tunities to expand their businesses.

Will Hutton, editor of The Observer and author of the best-selling book The State We’re In, argues that the growth in inequality should be of central importance to the marketing community, even if many have not yet realised it.

“The main reason mass markets have disappeared has been because of the growth in inequality. Markets have shrunk because 30 per cent of adults have been made economically inactive, the next 30 per cent are frightened and insecure about debt.

“Marketing people are left with the remaining 40 per cent to target their advertising at. They are faced with contracting markets and the need to target smaller groups with direct marketing. Retailers like Sainsbury’s, Tesco and Safeway are all hurriedly trying to woo the top 40 per cent, while the other 60 per cent of the population is being left to the discount warehouses.”

It is indicative of the situation that nobody has calculated the potential impact of bringing people back into mainstream consumer society. Instead the issue of cost has dominated thinking. If the budget had included a cut in the lowest rate of tax from 20p to 15p in the pound for the lowest paid, 4.6bn could be converted into consumer spending – the low paid tend to spend all their money, they don’t save.

The national minimum wage has supporters in business, most notably, the chief executive of Whitbread Peter Jarvis. Hutton argues that, privately, members of the CBI support the call for a minimum wage and are concerned when they hear of wage rates below 3 per hour, as this directly affects purchasing power. But most company boardrooms are not marketing focused and are controlled by money men who see the imposition of a national minimum wage as a net cost rather than as part of an opportunity to raise consumer demand.

The problem is that marketing people have remained silent while their companies – through the Institute of Directors – have often opposed the Social Chapter and a national minimum wage. Moreover, financial services companies have campaigned for the removal of state pensions, which, in the light of the so-called pensions scandal, has effectively robbed the economy of consumer spending.

“The hardline free market economist view that it is economically efficient to push down wages and remove labour regulations is fantastically short-sighted and economically inefficient,” says Hutton. “All it does is increase inequality and make the economy less competitive because vast swathes of the population are excluded from consumer society.”

But the IoD argues that “any increases at the bottom end of the wage scale would clearly put pressure on differentials and ultimately push up costs.” A survey of its members in May found that most opposed the minimum wage. Many businesses are involved in cause-related marketing, such as Tesco’s Computers for Schools and WH Smith’s Books for Schools. There are also Business in the Community (BIC) schemes such as the Local Investment Fund, Business Bridge and Opportunity 2000. A BIC spokesman says the organisation exists to mobilise business resources to promote social and economic regeneration.

“Companies should get involved because economic competitiveness demands social cohesion; to have prosperous high streets you need prosperous backstreets,” he says.

“Some would say business should not get involved with social issues, they would say it is just about shareholder value. We would completely disagree with that. It is the Government which needs to sort out the wider socio-economic issues. Having islands of prosperity in a sea of deprivation does not make good business sense.”

However, most of these schemes are tinkering at the edges, and are often as much to do with improving the image of the company, or sales, as with creating a real impact on social and economic regeneration.

Hutton argues that the marketing community should support proposals such as the minimum wage to halt the economic inactivity of the bottom 30 per cent. And oppose deregulation of labour markets to increase job security for the middle 30 per cent to reduce fear and encourage spending.

Based on Government figures, the Low Pay Unit estimates that the number of people below the poverty line – people who receive less than half the average annual income – has almost trebled from 5 million in 1979 to nearly 14 million today, a quarter of the UK population. The UK now accounts for one in four of the poor throughout the European Union.

Since 1979 the number of homeless people has trebled to 200,000, two-thirds of whom have children.

The poorest households have been left behind by the general rise in prosperity. The average gross household income for all types of household in 1995/96 is 381 a week. The poorest fifth of households have an average gross income of 83.64 a week.

A United Nations report earlier this year showed that the gap between rich and poor in the UK is now as great as in Nigeria, and that Britain is the most unequal country in the West.

According to the Council of Europe, the number of total workers below the decency threshold – those who earn on or below two- thirds of average employee earnings (this accounts for 10 million adult employees out of 22 million in the UK, including part-time workers) has increased from 38 per cent of the total to 48 per cent.

Basic taxes have increased since 1979 by 7p in the pound to pay for Government spending and cuts in direct taxation. Since the Conservatives came to power, VAT has gone up from eight per cent to 17.5 per cent and prescription charges have increased from 25p to 5.50 per item. Since the last general election 22 new taxes have been imposed. Taxes on alcohol and tobacco hit the poorest hardest and the advent of the National Lottery has also soaked up more money from the poorest sectors of society.

The net effect is that low income groups are helping to pay for the tax cuts of the rich. So while the richest tenth of the population has enjoyed a rise in real income of 65 per cent since the Conservatives came to power, the poorest tenth has lost 13 per cent in the same period.

Tracy Rubinstein of the WPP-owned research company The Henley Centre says there has been a fundamental social shift because of the removal of welfare support. As a result, the total number of consumers is not increasing, merely the income of the few who are spending their money in selective areas.

As a result mass marketers have lost out. The impoverishment of vast sections of the community has restricted consumer markets further. They are all searching for that illusive 40 per cent.

So marketing directors are increasingly seen as alchemists who come up with more ingenious ways of squeezing extra demand out of loyal consumers. Companies have responded by segmenting brands and encouraging changes in behaviour, getting existing consumers to buy more goods more often, rather than recruiting new ones.

There has also been huge growth in loyalty schemes – there are now 20 million supermarket loyalty cards in circulation, 13 million people in petrol loyalty schemes and 17 million credit cards with a loyalty element attached.

Marketing is now less about discovering new markets and consumers and more about trying to prevent the erosion of market share. This is due partly to markets opening up to competition, but more significantly to saturation.

From Bob Hoskins flogging “Friends and Family” to BT customers, car companies selling finance as well as the cars, to food giant Kellogg encouraging customers to eat Corn Flakes at night, marketers have valiantly tried to come up with more ways of coping with the restrictions on consumer demand.

But all this needs to be put in the context of polarising, and perhaps excluding, poorer consumers. The process can be seen in banks and building societies sacking unprofitable customers, and in retailers and packaged goods companies clamouring to move out of the “mass” market. More ominously, the poorer part of the population is also being excluded from the communications revolution in computers and digital technology.

But it is not just the very poor who are being excluded. Only with the advent of the welfare state after World War Two and the growth of the C2s, did working class consumption of mass-market consumer goods become a reality. The famous C2s rose in the Fifties as a result of the boom in consumer demand and a rise in real wages.

The safety net of the welfare state allowed working class consumers to spend less on basic welfare and more on consumer goods. Cookers, fridges, washing machines, television sets, cars and foreign holidays came within the scope of consumption for unskilled workers. There were also thousands of new white collar jobs created in health, education, social services and council housing.

In the early Sixties C2s accounted for 38 per cent of the UK population. Now they account for 23 per cent, partly as a result of Britain’s long-term decline in manufacturing. But only partly.

According to The Henley Centre’s Rubinstein, the C2s have really suffered as a result of the Thatcher era. She argues that the growth in the underclass can be attributed to the decline of the C2s who have slipped through the net unskilled, unable to retrain for better paid jobs and enter the C1 bracket.

“We are suffering a permanent hangover from the Eighties,” she claims. “The Thatcher era produced a shift of risk from the welfare state to the individual.”

If marketers are looking at kick-starting consumer demand, it will now be difficult to find it among the middle classes. Rubinstein says where people previously perceived that the welfare state and job security would be there for them, this is no longer the case. In 1975 about 55 per cent of the adult population had a full-time job, in 1993 that figure was 35 per cent.

“There have been five years of economic growth, but not a growth in consumer confidence. Though there have been tax cuts, people are not spending more because of the levels of insecurity,” says Rubinstein.

The increase in income from tax cuts enjoyed by the middle classes is not being spent on consumer goods but on risk avoidance: through spending on healthcare, education, savings and private pensions. The progressive removal of state pensions, for instance, will have a deep effect on consumers’ ability to spend on consumer goods.

The reason marketers see the rich as the most fruitful targets is clear – the richest households spend ten times as much as the poorest, 72 per cent of the top ten per cent have two cars or more compared with one in five households in the poorest ten per cent.

But those at the bottom of the income scale save less and spend more for every pound of income. Ultimately, the redistribution of income from poor to rich has lowered effective demand and increased savings.

The relative drop in income for the bottom ten per cent of wage earners by about seven per cent means their spending power has been cut by 3bn.

In the past, marketing people have been among the strongest supporters of the “Thatcher Miracle”, lauding free markets and reduced barriers to competition, while ignoring the social consequences of rampant deregulation.

Deregulated markets have always been perceived to be a good thing. But removing the constraints of regulation has ironically increased the constraints on consumer demand.

Arguably, there needs to be a change in mindset within companies, routinely obsessed as they tend to be with short-term issues. Businesses, in their own enlightened interest, need to become more focused on social marketing, supporting schemes which could alleviate poverty, and bring consumers back into the mainstream. Marketers should not dismiss calls for a national minimum wage, a reduction in the lowest rate of tax, support for state pensions and state-provided housing lightly.

In the rush to support free markets, companies have suffered from marketing myopia. They are so obsessed with the minutiae of their own markets and overly eager to reduce regulations in such areas as credit and pricing that they are failing to see the bigger picture.

Trickle down economics, in fact, is of questionable long-term benefit to marketers. The wealthy use much of their extra income on savings and luxury goods. Economic growth does not necessarily feed through.

On the surface, the good times are supposed to be coming back. Trade in UK shops is the best since 1988, spending on credit cards is running at more than 4bn a month, and house prices are beginning to rise. But the new boom, as with the previous one, is unevenly concentrated in the South-east and among certain sections of society.

The inequality gap will increase with the proposals to remove state pensions. Rather than spending more resources marketing to fewer customers, marketers need to consider expanding consumer markets by bringing poorer people back into the mainstream of consumer demand.

Factfile, page 40

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