Harvey Jones is not likely to be able to provide you with a new, upscale kitchen for a long time. The Body Shop will no longer be the best place to buy ethically sourced creams. Burberry issued a profit warning while John Lewis closed stores and cut prices in its Waitrose chain.
Each company’s problems are caused by different factors. When you add it all together, one thing is clear. Aspirational middle class are being squeezed by rising taxes and cost of living. This means that companies that are focused on the middle-market are going to be destroyed.
Harvey Jones’ ability to avoid administration remains to be determined. There are still talks going on, and it is possible that a deal could be struck at the last minute. The luxury kitchen market, whether it’s saved or not is in serious trouble. Fewer people can afford to spend more than £20,000 on a new island, compared to the past decade.
The administrators have already taken control of The Body Shop and are planning to close hundreds of stores and layoff thousands of employees.
Jonathan Akeroyd, chief executive of Burberry, admitted that the company’s trading had been “challenging” due to the slowdown in luxury demand.
While Dame Sharon White deserves a lot of blame for the current state of John Lewis & Waitrose, it is impossible to deny that the chain was also facing a particularly difficult market.
M&S does well but the trend is that brands and companies that serve the middle class in Britain are having trouble.
Why would anyone be surprised? The financial squeeze has primarily affected the middle class in the past year. The Chancellor Jeremy Hunt may have thought that freezing thresholds was a clever idea, but it certainly has raised a large amount of additional tax revenue. 6.1 million people are now paying 40pc compared to 1.6 millions when the rate was originally set.
The middle class is affected by “fiscal drag” and the additional billions raised for the Treasury are money that cannot be spent in private industry.
The Government may have saved money by not spending it on those who earn more than £50,000 per year, but many families are now facing marginal tax rates as high as 60% or more. This reduces their purchasing power.
As young professionals start earning good money for the very first time, repayments start to take a big chunk out of their income.
The rise in interest rates is the worst part of all. It has affected anyone who still owes a mortgage on their house. The ageing of society is reflected in the fact that more homeowners own their home outright rather than having a mortgage.
The pain of these increases falls on households with outstanding debt (and even narrower still, on those who have fixed-rate agreements that ended in the past 12 months).
It is not surprising that someone in their 30s and 40s is not going to Harvey Jones for some kitchen upgrades, to order some cosmetics or to buy some treats at Waitrose.
The squeeze is not as significant at the lower end of the scale because incomes are protected by government benefits, mortgages do not matter, and student loan repayments don’t need to be made.
Pensioners are, of course protected by triple-lock and many of these pensioners benefit from increasing interest rates. The rich are never required to cut back on their spending. The middle classes have been the hardest hit over the past year. We are finally starting to see the effects of this in corporate results.
British companies have traditionally made their money in the middle market. The middle market was large and people had the disposable income necessary to make meaningful sales with reasonable profit margins. The sweet spot was where the retailers, restaurant chains, kitchen suppliers, auto dealers, banks, and insurance companies made their biggest profits. The sweet spot.
It is turning into a bloodbath with falling sales and costs that continue to spiral out of control. In the past few weeks we have seen the first signs of this, as some companies went bankrupt and others reported weaker sales and profit.
There is no indication that the squeeze on middle class will ease anytime soon. This means that the companies who serve them are in for a lot of pain.