The latest Consumer Price Index report is a welcome sign of slowing inflation following a year marked by record-high prices. Still, with annual inflation at 6.5% in December – and fears of an impending recession on the minds of many – consumers continue to feel the pinch and are adjusting their spending habits accordingly.
The shift toward value-driven purchases over the past year is not going away any time soon, according to Gautham Vadakkepatt, a professor of marketing at George Mason University’s School of Business and director of the Center for Retail Transformation.
“Fundamentally, consumers will look for lower prices, better value and switch shopping behavior based on that,” he said.
Whether it’s trading down to private label brands and discount stores or buying less (or bulk quantities) of certain products, finding ways to stretch the dollar has become the norm for many consumers. That has also meant cutting back on discretionary purchases such as clothing, electronics, furniture and dining out.
A June 2022 survey by NielsenIQ found that 42% of U.S. consumers intend to spend less on dining out over the following year, and 46% intend to spend less on out-of-home entertainment. Meanwhile, 40% of respondents said they plan to spend more on groceries. In other words, “people will stock up on the essentials,” said Vadakkepatt.
While it remains to be seen whether the U.S. economy will go into recession this year, drawn-out speculation and chatter still holds power over consumers’ collective psyche.
“When the word recession is thrown around, it congers up images of hardship: layoffs, living paycheck to paycheck. As a consequence, you start preparing for that,” said Vadakkepatt. “You start saving money, you start cutting expenditures in different ways, you postpone big purchases and perhaps even small purchases, you will not travel as much. You’re living on an edge in some ways.”
For the non-discretionary grocery industry, shifts in consumer behavior show up in the subtle choices shoppers make. Pam Mehnert, outgoing general manager of Milwaukee-based Outpost Natural Foods, has noticed similarities between the shopping patterns of today – with the fear of recession looming – and those of 2009, when the U.S. economy was actually in recession. One is the trend of buying down or opting for the private-label brand over a name brand.
Mehnert also remembers there being a huge increase in organic food sales during the Great Recession.
“People were thinking, ‘Well if I don’t take care of my health, then I’m going to spend that money at the doctor,’” she said. “Now, we don’t know if that same thing is going to happen again, but it definitely was encouraging back at that time to see that people thought about what those choices of spending were.”
Another specialty grocer, Good Harvest Market in Pewaukee, is looking to bounce back from a loss in sales over the past few months as high-income customers – those who spend an average of $8,000 a year at Good Harvest – cut back as a result of inflationary pressure on other areas of the economy. Co-owner Joe Nolan calls it the “wealth effect.”
“They get their monthly investment statement and see that their $500,000 is now down to $400,000, and that scares them a little bit so they pull back,” said Nolan.
Specifically, the produce and wellness departments have taken the largest sales hit from the shift, but Nolan expects spending to return to normal as inflation softens and the economy recovers.
In the meantime, Good Harvest is bolstering its value offerings and promotions to meet shopper demand. The store recently reduced the price of its private label and low-price options throughout the store, ranging from a container of salad to three pounds of ground beef. Roughly 100 of those discounted items, all under the CADIA private label, will undergo a six-month price freeze starting later this winter, said Nolan.
The grocery supply chain has taken one blow after the next in the wake of the COVID-19 pandemic. Early panic buying gave way to labor challenges, shipping delays and raw material shortages, leaving grocers scrambling to find alternative brands or vendors for high-demand items and eating some of the cost. Environmental factors seem to be the next big hurdle and the reason behind unprecedented price increases on some grocery items that have otherwise remained “inflation resistant,” said Mehnert.
The price of eggs was up 60% in December, year-over-year, according to the Consumer Price Index – a direct result of the worst outbreak of Avian flu in U.S. history.
Outpost’s longtime egg supplier, Burlington-based Yuppie Hill Poultry, hiked prices 17%.
“We took a compromise on our margin just to keep the price under $5 a dozen,” said Mehnert, claiming the deal is one of the best in town. “We want people to continue to support that business.”
In addition to eggs, consumers should expect to see higher price tags in the produce department due to climate-related circumstances, she said. For example, a pattern of drought and floods in California has created subpar growing conditions for lettuce. The crop is in short supply, driving prices up.
“What happens going forward is really going to be based on a number of factors, not just one,” Mehnert said. “Transportation cost, supply, commodities, the war in Ukraine, all those things that are impacting prices are really going to force consumers to make different choices.”
