When Virginia jeweler Jerry McBride closed one of his Glassner Jewelers stores in a mall-based location last year, he told The Roanoke Times that he just “didn’t figure out what the clientele wanted. We’re in the middle [neither high-end nor low-end],” he said. “That didn’t work here.”

McBride isn’t the first in the industry to experience this polarization. Jewelry designers, including Judith Ripka and David Yurman, are diversifying lines into low- and high-end to appeal to a variety of budgets. Analysts have noticed that the new breed of customer—new luxury players—aren’t afraid to mix store brands, such as Target for commodities and Neiman Marcus for better goods, to maximize their dollars. “People are saving money selectively by going to places like Costco, and then can afford to buy something else,” says Bill Matassoni, a partner in the Boston Consulting Group. And all this change is occurring because the 44 million U.S. households that earn between $50,000 and $200,000 in annual income are changing their purchasing patterns.

Consider the following evidence:

• Value seekers shy away from malls now. Consumers are tired of the “pricing roulette” going on at department stores, says jewelry industry analyst Ken Gassman. As a result, sales at mall-based jewelry stores have been down for more than 18 months. Shoppers go to Wal-Mart, which is at least priced “consistently,” he says.

• Spending at luxury retailers is strong. “Tiffany’s is knocking them [other retailers] dead,” observes Gassman. January same-store sales at other high-end merchants including Neiman Marcus, Saks, and Nordstrom were strong, with growth surpassing analysts’ expectations at 12.8%, 8.7%, and 6.6%, respectively. “People are seeking out luxury or discount, and there’s minimal growth in the middle,” according to Gassman.

What’s happening? Middle-market consumers are changing their purchasing patterns for five main reasons.

• Information. Widely available information from sources such as magazines and the Internet has empowered consumers. “My brother-in-law used to drink jug wine, and now he reads Wine Spectator,” says Matassoni. Middle-market consumers are so educated, in fact, that 81% of those recently surveyed by BCG “agree that even in this economy, it’s worth paying more for certain premium-quality products because that’s a smarter way to spend money.”

• Demographics. Demographics play a role in the disappearing middle market. Some 76 million Baby Boomers can afford luxury, while their children—71 million “Millennials”—can’t. In the middle is Generation X, 41 million strong. “We’ve never had to deal with this type of [stratified] marketplace,” observes Pam Danziger, president of Unity Marketing, Stevens, Pa., and author of Why People Buy Things They Don’t Need.
  Baby Boomers love luxury and are primed for spending on jewelry. According to David Sternblitz, senior director, investor and public relations for Zale Corp., they spend more than any other demographic group on jewelry, and they’re shopping at Saks and Tiffany’s, say marketing analysts. “[Boomers] won’t scale back,” observes Susan Miller, a demographic analyst in Jackson, Miss. “They want a good standard of living.”

• Selective spending. The stratified marketplace to which Danziger refers is one of extremes and opportunities: Consumers are reaching up for luxury and down for discounts as they see fit. In Unity’s most recent survey on the luxury market, findings revealed that luxury consumers were “bargain shoppers,” buying “home luxuries” at the discounters and at off-price stores and “fashion, beauty, and jewels” at specialty retail and department stores. Research from BCG reinforces Unity’s data: “Consumers will pay a premium for quality, remain loyal to those brands … but when it comes to commodities, they will look for bargain prices,” according to Trading Up: The New American Luxury , written by Michael J. Silverstein and Neil Fiske for BCG.
  Tiffany even confided to the Wall Street Journal about a tactic it uses to lure “less-well-to-do” shoppers: putting price ranges in its ads. According to a 2002 article, “Its first such ads disclosed that while Tiffany’s diamond engagement rings ran as high as $850,000, they started at $850.”

• Discretionary income is up. Consumers can afford more now thanks to the presence of so many women in the workforce. From 1990-2000, the median household income in the United States rose 28.4%. Incomes in the $50,000-$74,999 and $75,000-$99,999 ranges rose 48.6% and 56.5%, respectively. (See chart.)
  Some feel the results of this monetary evolution are overdue. “With extra income comes extra pressure,” observes Matassoni. “People are beaten up by the pace of life.” Luxuries are part of the “break” consumers feel they have earned.

• Better and more meaningful products. New luxury consumers choose “high-quality” and “emotionally satisfying goods and services” to “connect better with others,” “feel a sense of accomplishment and even excitement,” “reward [oneself],” “balance out stress,” and just because “it’s more enjoyable and satisfying to have,” according to BCG data.
  Nice merchandise doesn’t hurt, either: “Luxury merchants and specialty stores have more exciting products [than middle-market merchants],” observes Matassoni.

The future. Some retailers are well positioned to take advantage of new realities, no matter what happens. Take Zale Corp., for example, the parent company of both Zale stores (with average annual ticket prices of $284) and Bailey Banks & Biddle, where the average ticket is $916. “Middle America—we’re well-positioned to maximize on that category,” says Sternblitz. “From the moderate to the high end … we’ve got jewelry covered.” Plus, he observes, “Zale has a lot of focus on bridal because it’s stable.”

The Signet Group, too, is prepared for changes. The company plans to keep growing: According to David Bouffard, director of store promotions, the company aims to “increase selling space by 6%-8% per year.”

Heads up, retailers: This isn’t a passing phenomenon. Gassman suspects “there will be consolidation to six or so [major middle-market jewelry retailers in the next decade].” Danziger’s forecast is that “the great big middle [market] is declining in the next 10 years.” Matassoni agrees: “The action is at either end of the market.”

To be a player:

• Appeal to consumers’ emotional values. Matassoni illustrates the point with a story about premium dog-food makers: “They put 20% more into the product and they got 100% more out of the price.”

• Give yourself an identity so you don’t have to compete on price. For example, taking surrounding cultures or large demographic groups into consideration could help shape an identity, suggests Miller.

• Think like an industry outsider to compete. Loosen up thinking about traditional jewelry-industry standards, such as displays or markup, in order to “analyze elements at work … and make connections between elements that have not been made before and then create a new frame of reference for [you] and the category,” advises Chapter Three of Trading Up: The New American Luxury. “Outsider thinking … enables the entrepreneur to import ideas and practices from other industries and cultures and apply them to every aspect of strategy …”

Decades of household income compared

INCOME	1990	2000	CHANGE
Source: U.S. Census Bureau Select Economic Characteristics 2000 & 1990
>$10,000	14.2 million	10.1 million	-41%
$10,000-$14,999	8.1 million	6.7 million	-21%
$15,000-$24,999	16.1 million	13.5 million	-19.3%
$25,000-$34,999	14.6 million	12.8 million	-12.3%
$35,000-$49,999	16.4 million	17.5 million	6.3%
$50,000-$74,999	13.8 million	20.5 million	48.6%
$75,000-$99,999	4.7 million	10.8 million	56.5%
$100,000-$149,999	2.6 million	8.2 million	68.3%
$150,000-$199,999	1.4 million	2.3 million	39.1%
$200,000&&/td>	N/A	2.5 million	N/A
Total number of households	92 million	105.5 million	12.8%
Median household income	$30,056	$41,994	28.4%