How Do Brands Grow During the Cost-of-Living Crisis?
What is the K-shaped economy, how Maslow explains about it, and how can brands grow through a cost-of-living crisis.
Danling Xiao
Illustration: Samantha Poon
Summary
The top 1% of US households now hold 31.8% of all household wealth, the highest share since records began in 1989. A cost-of-living crisis does not depress spending evenly: it splits the market into a K, where asset-rich households keep spending and everyone else trades down, leans on Buy Now, Pay Later and protects a few small luxuries. This playbook reads that divide through Maslow’s hierarchy and sets out a strategy for each arm of the K, including the trapped middle.
Key takeaways
The top 1% of US households hold 31.8% of all household wealth, the highest share since records began in 1989; the bottom 50% hold 2.5% (Federal Reserve, Distributional Financial Accounts).
Essentials consume 61% of spending in the lowest US income group against 42% in the highest (TD Economics). The divide is driven by asset ownership, not income alone.
Australian CPI peaked at 7.8% at the end of 2022, the highest in 32 years (ABS). The average household needed an extra $7,844 over the year to September 2022 to buy the same basket (IPA).
Around 80% of UK consumers said they were willing to buy private-label packaged food, against 50% across Europe (EY Future Consumer Index, 2023), so trading down is mainstream rather than a last resort.
UK lipstick sales rose nearly 10% in the 12 weeks to 18 September 2022, drawing roughly 310,000 new shoppers (Kantar Worldpanel, via The Guardian). People cut big-ticket spending and protect small treats.
Table of contents
What is a K-shaped economy?
Why is the cost-of-living divide sharper in Australia?
How does Maslow’s hierarchy explain spending in a downturn?
Defensive buying: trading down on essentials
Borrowing to belong: Buy Now, Pay Later
Small luxuries: the lipstick effect
Why does Maslow’s model no longer fit the modern consumer?
Which arm of the K should your brand serve?
The upper arm: premium that feels earned
The lower arm: radical value with dignity
The trapped middle: pick a side or build a bridge
How do brands grow through a downturn?
A prolonged cost-of-living crisis does not depress spending evenly. It splits the market into a K-shaped economy: asset-rich households keep spending while everyone else trades down, leans on Buy Now, Pay Later, and protects a few small luxuries. The top 1% of US households now hold 31.8% of all household wealth, the highest share since the Federal Reserve began tracking in 1989, while the bottom 50% hold 2.5%.
The strategic error is still designing for an average customer who no longer exists. Every brand must decide which arm of the K it serves, then commit. The brands that win practise Dual-Tier Branding: satisfying safety and esteem at once, rather than forcing a choice between value and aspiration.
Walk down any Australian supermarket aisle and you will see the contradiction. The same shopper swapping a branded cereal for the Woolworths home-brand box will, two aisles over, drop $7 on a single artisan chocolate bar, and feel good about it.
This is not irrational. The old economic assumption was simple: when money tightens, non-essential spending contracts.
Inflation stopped being a spike, people waited out and became a permanent, accumulated burden, what analysts now call a permacrisis. People adapted. They did not simply spend less. They re-sorted what spending means.
What is a K-shaped economy?
There is no longer an average customer. The K-shaped economy describes a recovery in which income groups diverge sharply. The upper arm is high-income households, lifted by property and equity gains, who keep spending. The lower arm is middle- and lower-income households, where real wages have lagged prices and discretionary spending is contracting (U.S. Bank). The divide is driven by asset ownership, which is why it has widened even as headline inflation has cooled.
The split shows up most clearly in how much of each household’s budget is consumed by essentials. The higher you sit, the more freedom you keep:
Where a household sits | Share of spending going to essentials |
|---|---|
Lowest US income group | Around 61% |
Second-lowest US income group | Around 57% |
Highest US income group | Around 42% |
Source: TD Economics.
The strategic consequence is blunt. Retail is consolidating at the two extremes, premium and value, while the mid-tier, offering neither the lowest price nor a clear reason to pay more, is losing share fastest (RetailStat). We return to what the trapped middle should do later in this piece.
Why is the cost-of-living divide sharper in Australia?
Australia’s version of the squeeze arrived later than the US but bit hard. CPI inflation peaked at 7.8% in the December 2022 quarter, the highest annual reading since 1990 (ABS). To buy the same basket of goods as a year earlier, the average household had to find an extra $7,844 over the year to September 2022, with housing, food and transport making up almost 68% (67.8%) of that increase (IPA).
Two local features make the Australian divide especially sharp. Household debt is heavily tied to variable-rate mortgages, so RBA rate rises hit spending power faster than in many economies. And the private-label shift has a uniquely Australian face: Aldi’s steady share gains and the expansion of Woolworths and Coles own-brand ranges show value-seeking is now mainstream behaviour, not a fringe response. For an Australian brand, the K is not an imported idea. It is the shape of your own customer base.
How does Maslow’s hierarchy explain spending in a downturn?
Maslow’s Hierarchy of Needs: a 1943 model of human motivation arranged in five tiers, physiological needs, safety, belonging, esteem and self-actualisation, usually drawn as a pyramid. Marketing has traditionally sold from the top: aspiration and identity.
When money tightens, attention slides down the pyramid toward safety and stability. But people do not abandon the higher tiers. They find cheaper routes to them. Three behaviours capture the whole pattern.
1.Defensive buying: trading down on essentials
Budgets shift toward food, housing and utilities. Brand loyalty gives way to price sensitivity, and around 80% of UK consumers said they were willing to buy private-label packaged food, against 50% across Europe (EY Future Consumer Index, 2023).
2. Borrowing to belong: Buy Now, Pay Later
Buy Now, Pay Later platforms such as Afterpay and Klarna split a purchase into a few interest-free installments, typically over 6 to 12 weeks. People use future income to hold a present lifestyle in place. Australia was an early adopter, which is part of why Afterpay began here.
3. Small luxuries: the lipstick effect
The lipstick effect: sales of small, affordable treats rise even as big-ticket spending falls. UK lipstick sales rose nearly 10% in the 12 weeks to 18 September 2022, drawing roughly 310,000 new shoppers into the category (Kantar Worldpanel, via The Guardian).
This is the Paradox of Pessimism that BCG identifies: people are gloomy about “the world” yet keep spending based on “my world”, their own job security and savings (BCG). Emotion, not pure economics, drives the purchase. People are not just buying products. They are buying a feeling of control.
Why does Maslow’s model no longer fit the modern consumer?
The hierarchy fails in two ways that matter for strategy. First, needs are not a staircase. Maslow’s original framing implied lower needs must be met before higher ones. Wahba and Bridwell (1976) found little evidence for that strict sequence, and Maslow himself later said satisfaction is not an all-or-none phenomenon. A BNPL-funded treat is proof: people will trade a little financial safety for a moment of esteem.
Second, the model carries a Western, individualistic bias. It frames the summit as personal self-actualisation, when much of the world finds meaning through community and shared identity. Brands that read a downturn as “everyone retreats to private survival” miss the pull of belonging and collective resilience. Use Maslow as a compass, not a map: it points to safety and value as the dominant mood, but the winning brands keep a door open to joy and status at the same time.
Brands that read a downturn as “everyone retreats to private survival” miss the pull of belonging and collective resilience.
Which arm of the K should your brand serve?
The crisis has not made consumers cheaper. It has made them sort themselves. Before any tactic, a brand must answer one question: which arm of the K do we serve? The answer dictates everything else. What follows is two playbooks for the two arms, and a third path for the brands trapped in the middle.
Dual-Tier Branding: the practice of satisfying a consumer’s safety needs and esteem needs within the same brand, or even the same product, rather than forcing a choice between value and aspiration. It is the thread that runs through all three playbooks below.
Strategy 1. The upper arm: premium that feels earned
High-income households are still spending, but the psychology has shifted from conspicuous display to justified consumption. The move is of quiet value at the top: lead with longevity, craftsmanship and time saved rather than logo status, and let cost-per-use logic do the persuading. This cohort buys experiences over objects and will pay to remove friction, so seamless access and membership matter more than discounts.
Case studies
Patagonia turns a premium price into a moral one. Rather than selling status, it sells a reason: buy less, buy better, and keep it for life. Its "Worn Wear" programme repairs gear, resells used items, and openly tells customers to repair before they replace.
The result is a brand whose higher price feels like an act of values rather than vanity, and whose repair and resale activity deepens loyalty instead of cannibalising it. The cost is justified by meaning and longevity, and the same ethos bridges directly into the resale economy we turn to in Strategy 3.
Strategy 2. The lower arm: radical value with dignity
The lower arm is trading down, and the winning brands remove the shame from it, even make it feel smart.
Three principles:
Price with everyday-low transparency rather than fake discounts
Resist shrinkflation
Turn constraint into a treasure hunt, where finding the deal is itself a small joy.
The home brands are no longer the fallback. For many shoppers it is the proud, rational first choice.
Case studies
Dollar Tree added 3 million new households in the three months to 1 November 2025, and about 60% of them earned over $100,000 — proof that trading down is now cross-income behaviour, not a poverty signal (CEO Michael Creedon, via Fox Business).
Five Below monetises affordable “small joys” at scale: fiscal 2025 net sales rose 22.9% to $4.76 billion with comparable sales up 12.8%, on a 36.0% gross margin (Five Below). In Australia, Aldi’s share gains and Kmart’s reinvention as cheap-but-desirable are the same playbook in local form.
Strategy 3. The trapped middle: pick a side or build a bridge
Mid-tier brands with no price advantage and no prestige advantage are losing fastest. Standing still is the one option that guarantees decline. There are three honest choices, and each demands a real trade-off:
Trade down deliberately. Re-engineer toward transparent value and win on volume and trust. The trade-off: you likely surrender premium perception for good.
Trade up deliberately. Move to “affordable apex”, become the best in a small category and justify a premium through quality or meaning. The trade-off: a smaller addressable market and a duty to truly deliver, not just reposition.
Build a bridge with Offer a clear value tier and a clear premium tier under one brand, cleanly separated. The trade-off: operational complexity and the risk of blurring the brand if the tiers are not signposted.
Case studies
Resale sits exactly where safety meets esteem. The global secondhand apparel market is on track for roughly $350 billion by 2028, growing far faster than traditional retail (ThredUp’s 12th Annual Resale Report, via FashionUnited). In a US survey published in Scientific Reports, 79% of 18 to 24 year-olds had bought secondhand against 57% of over-65s (Sharma et al., 2025) — though the same study cautions that heavy secondhand buyers often churn through clothes much as fast-fashion shoppers do. On Vestiaire Collective’s own figures, pre-loved is on average 33% more affordable per wear than new fast fashion (Vestiaire Collective, 2024 Circularity Report). One purchase delivers two Maslow tiers at once: the safety of a lower price and the esteem of a brand otherwise out of reach. This is why brands like Patagonia and Decathlon have launched their own branded resale, building the bridge inside their own walls.
What not to do. The losing move is to sit in the middle and hope. A brand offering neither the cheapest price nor a defensible reason to pay more is not playing it safe. In a K-shaped market, the centre is not a position. It is a gap.
How do brands grow through a downturn?
Sustained high living costs do not merely restrict spending. They rewire consumer psychology into a simultaneous pursuit of safety and esteem. The K-shaped economy has bifurcated the market, the mid-tier is thinning, and people now defend their psychology as carefully as their cash flow. The brands that grow through a downturn deliver uncompromising value and safety on the essentials, and offer accessible, guilt-free ways to indulge, belong and feel like themselves again.
Decide which arm of the K you serve, commit to it, and use Dual-Tier Branding to meet both needs at once. The middle is not a refuge. It is the gap the market is closing.
Sources
BCG, why gloomy consumers keep spending (Paradox of Pessimism)
U.S. Bank, the K-shaped economy
TD Economics, US K-shaped consumer spending
Federal Reserve, Distribution of Household Wealth in the U.S. since 1989
RetailStat, the K-shaped economy
ABS, CPI international comparisons
IPA, Australia’s rising cost-of-living challenge
EY Future Consumer Index (via Retail Tech Innovation Hub)
The Guardian, the lipstick effect
Fox Business, Dollar Tree’s higher-income shoppers
Five Below, FY2025 results
FashionUnited, global resale to $350bn by 2028 (ThredUp)
Scientific Reports, secondhand fashion consumer behaviour (2025)
Wahba & Bridwell, Maslow reconsidered (1976)
Vestiaire Collective, 2024 Circularity Report
Frequently asked questions
What is a K-shaped economy?
A K-shaped economy is a recovery in which income groups diverge instead of rising together. The upper arm is high-income households, lifted by property and equity gains, who keep spending. The lower arm is middle- and lower-income households, where real wages have lagged prices and discretionary spending is contracting. The divide is driven by asset ownership, which is why it widens even as headline inflation cools.
How can brands grow during a cost-of-living crisis?
By deciding which arm of the K they serve, and committing to it. Sustained high living costs do not simply reduce spending; they split the market and push consumers to pursue safety and esteem at the same time. The brands that grow deliver uncompromising value on the essentials and offer accessible, guilt-free ways to indulge. The losing move is to sit in the middle and hope.
Which arm of the K should my brand serve?
Answer this before any tactic, because it dictates everything else. Premium and value retailers are both gaining market share while mid-tier players lose fastest. So the real choice is between serving high-income households who will pay for justified quality, or trading-down households who reward transparent value. In a K-shaped market the centre is not a position, it is a gap.
How should premium brands sell in a downturn?
High-income households are still spending, but the psychology has shifted from conspicuous display to justified consumption. Lead with longevity, craftsmanship and time saved rather than logo status, and let cost-per-use logic do the persuading. This cohort buys experiences over objects and will pay to remove friction, so seamless access and membership matter more than discounts.
How do value brands win without feeling cheap?
By removing the shame from trading down and making it feel smart: price with everyday-low transparency rather than fake discounts, resist shrinkflation, and turn constraint into a treasure hunt where finding the deal is itself a small joy. Trading down is now cross-income behaviour — Dollar Tree added 3 million new households in the three months to 1 November 2025, about 60% of them earning over $100,000.
What should mid-market brands do in a K-shaped economy?
Mid-tier brands with no price advantage and no prestige advantage lose fastest, and standing still guarantees decline. There are three honest choices, each with a real trade-off: trade down deliberately and win on transparent value, trade up to an affordable apex and justify a premium through quality or meaning, or build a bridge with a clear value tier and a clear premium tier cleanly separated under one brand.
What is dual-tier branding?
Dual-tier branding is the practice of satisfying a consumer’s safety needs and esteem needs within the same brand, or even the same product, rather than forcing a choice between value and aspiration. It is what lets a brand serve a shopper who trades down on essentials and still wants one thing that feels like a treat.
Why do small luxuries keep selling when big-ticket spending falls?
Because people are buying a feeling of control, not just a product. The lipstick effect describes sales of small, affordable treats rising even as large purchases fall: in the 12 weeks to 18 September 2022, UK lipstick sales rose nearly 10%, drawing roughly 310,000 new shoppers into the category (Kantar Worldpanel). Accessible indulgence is a growth lever, not a consolation prize.
Is Maslow’s hierarchy still useful for marketers?
As a map of motives, yes. As a staircase, no. Needs are not strictly sequential — Wahba and Bridwell found little evidence for that, and Maslow himself said satisfaction is not an all-or-none phenomenon. A Buy Now, Pay Later treat proves it: people will trade a little financial safety for a moment of esteem. The model also carries a Western, individualistic bias.
Relevant links
Author
Danling Xiao
Founder & Strategic Director, ReCo
Danling Xiao is an award-winning entrepreneur and Strategic Director at ReCo. With over a decade of experience spanning brand strategy, customer insight and content marketing, she helps founders and leadership teams navigate complex, highly regulated markets to make confident, high-stakes decisions.
