On a sunny February afternoon, Wendy Morales locked up Blue Star Cafe & Pub for the last time. After decades of serving great omelets, old bloody marys, and french fries, a beloved Seattle’s Wallingford eatery has closed for good.
“Our lease is coming to an end,” Morales said. “There was no choice. Money, I call it the squeeze, is an inevitable thing. It’s something we can’t control. You can raise your prices very high … with who our customers are, they don’t eat out, they choose to skip eating at restaurants in our group and maybe save for a special dinner.”
Blue Star was one of many businesses that catered to middle class consumers under the weight of the affordability problem. They are victims of what economists call the “K-shaped economy,” a phenomenon in which consumers are divided into high- and low-income groups and the middle is hollow.
“When we look at who’s closing stores across America, they’re mostly aimed at middle-class buyers,” said Brandon Svec, director of retail analysis at CoStar Group, which conducts real estate research across the country. On the other hand, when we look at who is expanding the fastest, opening the most stores, we generally see them on both sides. Luxury does very well and discounts, discount retailers like TJ Maxx or Ross also do very well.
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It’s a pattern being played out across Washington, with mid-market businesses like Eddie Bauer, Blazing Bagels, and Wild Waves announcing closings or bankruptcy.
Declining sales is a driving factor, but it’s not the only factor this group of companies is facing. Rising material and labor costs are putting pressure on medium-sized businesses on the other side.
“In areas with a high cost of living, especially on the coast like Seattle, with a high cost of living and a high cost of daily living, we’re seeing consumers trying to make their dollars stretch further,” said Svec. “It’s definitely going to have a big impact on our high-priced coastal neighborhoods, especially because of housing prices.”
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Businesses that cater to affluent customers are immune to those challenges. Oasis Luxury Yacht Charters has been profitable since Greg Holloway bought the 70-foot, 1,800-square-foot yacht at the beginning of the pandemic. Fees start at $1,000 an hour, more if customers want to play Husky’s big game.
“You get business fees, you get personal fees,” Holloway said. “We’ve done a few Seahawks players and Mariners players.”
Those types of consumers account for an increasing share of consumer spending. According to a Moody’s report, the top 10 percent of income earners account for more than half of consumer spending in the United States. It’s a historic high.
Meanwhile, discounters like Dollar General are aggressively opening new stores and adding more high-income shoppers looking for the best deals.
After World War II, American businesses boomed: diners served apple pies and unlimited coffee, Sears sold a washing machine to every household. But since the 1970s and 1980s, the middle-class consumers who fueled the economy have been shrinking. The decline of labor unions, the rise of globalization, and the shift in tax policy that favored the wealthy all contributed to the decline of the middle class.
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That pressure on the middle class has increased dramatically in recent years, as households with investments in the stock market and real estate have seen record gains, while rising costs of essentials have spurred everyone else. Recent tax cuts favoring high-income families and corporations have made this process even more difficult.
However, some argue that the K-shaped economy is a sign of progress, because more families are moving up the economic ladder. And it’s true, the share of American households in the upper bracket has increased, according to Pew Research. But so is the share of households in the low income bracket. The risk of such a bifurcation is at least less economic, according to Svec.
“It makes our economy more vulnerable in a number of ways,” he said. “First of all, with reduced savings, our low- and middle-income customers are more concerned about job losses or any kind of economic crisis in their lives…the real estate markets, it can have the opposite effect, I think that leaves us exposed on both sides.
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