It's Rich Man/Poor Man With the Middle Class

According to The Wall Street Journal, Procter & Gamble's (NYSE: PG  ) Gain dish soap represents a major change in the company’s strategy. For the first time in its history, the detergent maker has launched a bargain-priced brand.

Feel the squeeze
P&G's venture into budget-friendly territory is a response to what Citigroup (NYSE: C  ) calls the "Consumer Hourglass Theory." Basically, Citi believes that the weak economy and collapse in housing prices have squeezed the middle class and bumped many of them down to the lower class. This creates a society of the haves and have-nots. As a result, retailers and consumer-goods makers can expect to see the majority of their growth at the far ends of the market.

Citi now recommends that investors focus on the companies that are best positioned to serve the far ends of the consumer spectrum. It's also created an index of 25 companies that fit this model, with high-end retailers like Saks (NYSE: SKS  ) at the top and extreme discounter Dollar General at the bottom.

Let's check the comps
I think the theory has some merit, as even deep discounters are undercutting the previous low-cost king, Wal-Mart, whose comparable-store sales fell 0.9% year over year. Target, meanwhile, got a 3.9% boost in comps from adding groceries and giving a 5% discount for purchases made with Target's credit and debit cards. But if you take these out of the equation, its comps were on par with Wal-Mart's.

Now, if you look at the comps for higher-end specialty retailers, you find a completely different story. For example, U.S. comparable-store sales at iconic jeweler Tiffany rose 22% year over year in the last quarter. It's not the only higher-end store to do well, either. Here's a sampling of stores located at the tonier shopping centers near me.

Company

Comparable-Store Sales, YOY

Coach (NYSE: COH  ) 10.6%*
lululemon athletica (Nasdaq: LULU  ) 18.0%
Teavana Holdings (NYSE: TEA  ) 9.0%
Whole Foods Market (Nasdaq: WFM  ) 8.4%

*North American stores only.

The performances at Teavana and lululemon are especially surprising when you consider that neither store sells essential products, and they both offer certain items that you probably could probably find cheaper elsewhere.

At the other end of the spectrum, deep discounters posted respectable, if not jaw-dropping, results.

Company

Comparable-Store Sales, YOY

Dollar General 5.9%
Dollar Tree (Nasdaq: DLTR  ) 4.7%
Family Dollar 5.6%

Meanwhile, warehouse clubs -- which sit somewhere between the big boxes and the deep discounters -- also posted encouraging results.

Store

U.S. Comparable-Store Sales, YOY*

Costco 6%
BJ’s Wholesale Club 3.8%
Sam’s Club 5%

*Excluding fuel sales.

Foolish takeaway
The Consumer Hourglass Theory almost feels too simple to be true, but I think Citigroup may be right. Its Hourglass index posted a 56.5% return between Dec. 10, 2009 and Sept. 1, 2011. Given the slow recovery, it's likely that the middle class will continue to face hard times. I might not structure my entire portfolio around the theory, but I would keep in mind as I make investment decisions.

If you'd like more information on the state of retail, then check out this special report, The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail. The report is free, so download it today.

The Motley Fool owns shares of Citigroup, Coach, Whole Foods Market, lululemon athletica, Costco Wholesale, Coach, and Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of lululemon athletica, Coach, Wal-Mart Stores, Whole Foods Market, and Procter & Gamble and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Patrick Martin owns shares of Teavana Holdings. You can follow him on Twitter, where he goes by @TMFpcmart03. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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