The dying middle class is driving department stores out of business

The deterioration of the middle class in America is decimating department stores.

Shares of Macy’s, Dillard’s, Kohl’s, and JCPenney spiraled as much as 15% this week after the companies reported weak quarterly sales.

The retailers were hammered despite all four showing signs of modest improvement following years of steep declines in traffic and sales.

Investors’ response indicates there’s little faith left in the long-term value of retailers that target mid-tier customers.

Investors are instead putting more faith in companies like Walmart, Amazon, TJ Maxx, and dollar stores, which target customers on opposite ends of the income spectrum.

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Operating income growth forecasts signal more trouble for department stores, while dollar stores and off-price retailers are expected to thrive. Moody’s Investors Service

The middle class used to be a prime target for retailers.

“From postwar to about the late 1970s, you wanted to be in the mid-tier of retail. That is where everybody was making a fortune,” Doug Stephens, a retail-industry consultant, told Business Insider earlier this year. “Then from 1980 onward, you wanted to pick a side, because it started to become clear that the middle class was evaporating.”

The deterioration of union jobs, the shift of manufacturing jobs overseas, and the growth of the knowledge economy that led to a boom in high-skilled jobs contributed to this trend.

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After the Great Recession, several other factors aggravated the problems facing mid-tier retailers.

Consumers started saving more money and mall traffic plunged, along with spending on apparel and accessories.

People started shifting their spending from durable goods to experiences, travel, and restaurants. Consumers also started dealing with higher fixed expenses from increasing technology and healthcare costs.

As shoppers’ spending habits changed, the middle class declined. Between 2000 and 2014, middle-class populations decreased in 203 of the 229 metropolitan areas reviewed in a Pew Research Center study.

That’s why today, both high-end retailers and discount retailers are thriving — or at least surviving — while companies that relied heavily on middle-class spending, like Macy’s, Sears, and JCPenney, are closing hundreds of stores.