Food inflation, which has continued at a persistent trickle over the past several months, has become a full-blown torrent.
Food-at-home prices leaped nearly 12% over the past 12 months, according to the U.S. Bureau of Labor Statistics Consumer Price Index (CPI) data for May, marking the largest 12-month increase in 43 years.
Manufacturers, meanwhile, are pushing through their second or third round of price increases in the past year, and weighing at what point consumers will balk.
“We monitor two things that are critical to understand what's going on from the consumer side,” said Dirk Van de Put, CEO of Mondelēz International during the recent 2022 Bernstein Strategic Decisions Conference. “One is the penetration of our brands, meaning how many households are buying our brands. And second was the average quantity that household buys. Those are two key indicators that know if there is an effect from pricing.
Van de Put said the price increases have had “no effect so far” on volumes, but acknowledged it was “kind of weird.”
“And so that is on one hand good news. On the other hand, it makes us a little bit suspicious,” he said, noting there was “a lot more pricing to come, because we already know that the cost increases we've seen this year will be as high next year.”
On a more granular level, however, there are signs consumers are reacting to higher food prices overall in small but significant ways. In an email interview, Josh McCann, head of HQ client delivery and analytics at Symphony RetailAI, shared highlights from his firm’s recent analysis of shopper transaction data. The crux: Price-sensitive consumers are shifting where they shop and what they’re buying, with implications for both food manufacturers and the retailers that stock their products.
What follows is McCann’s responses edited for brevity and clarity.
FOOD DIVE: Overall, how has consumer purchasing behavior shifted in the wake of higher food prices?
JOSH McCANN: During this inflationary period, consumers’ loyalty to the products they buy and to the grocery channel is changing. Symphony RetailAI’s Q1 2022 survey of 550 million transactions across 57 million households in North America and Europe found that the divide between customers focused on price versus those focused on quality is larger than ever before. Price-sensitive consumers specifically faced a $13 price increase for every $100 spent compared to Q1 2020.
The most price-sensitive consumers — approximately one-third of all shoppers — are turning their back on the products they have been loyal to and have traditionally purchased. As a result, if price-sensitive shoppers can find a cost-effective alternative to a brand they typically buy, they will switch to that more affordable product. This could mean a smaller size, a less expensive brand, a private-label alternative, but it appears to be occurring as customers turn to other retailers (i.e., a discount retailer) to manage their budget. This declining shopper loyalty for retail grocery comes with a reduced share of wallet, and this same risk exists for CPGs of losing market share to competing brands and private label.
How does price sensitivity vary by category? What factors are influencing this?
Price sensitivity varies tremendously by category and even among products within individual categories. The type of category impacts price sensitivity — is it a household staple, like milk, eggs or bananas, or something more discretionary that could be purchased less frequently or skipped altogether when the budget is tight, like high-end olive oil? What are the other items in the category — is there a heavy presence of a private label or other low-priced branded items?
Even the type of advertising and promotions typically featured in specific categories can be directed at shoppers that are more likely to be managing budgets. You will likely see a focus on always having items at value-driven opening price points in these categories.
How would you define a price-sensitive consumer, and how has their share of shoppers changed over the past year?
The price-sensitive consumer is someone whose buying decisions are driven primarily by price. They will alter their shopping habits as the cost of a product changes, showing more willingness to switch across brands and sizes. Price-sensitive consumers won’t pay more for an item if a more cost-effective option is available.
We have seen a decline in price-sensitive consumers in mainstream grocery for well over a year now. But this is hardly surprising, and it doesn’t mean that they are changing their overall behavior or disappearing altogether. We have found that the cost of key-value items (KVIs) [items that drive consumers’ value/price perception of a retailer] for price-sensitive shoppers has risen faster than for non-key-value items. With the above-average increase in the items most important to price-sensitive consumers, this group is leaving mainstream grocery for alternative options.
What has surprised you, if anything, about how consumers have been responding to the increases in food prices?
We had expected to see consumer preference for smaller product package sizes to increase, as well as a shift toward more affordable items. Both of these tactics are ways to respond to rising food prices. However, there is little evidence that shows price-sensitive shoppers are doing either within a given retailer. We do see a significant churn of price-sensitive shoppers, so mainstream grocery is losing these consumers faster than they can replace them. These shoppers manage their budgets by finding alternative places to buy their groceries. For CPGs, this is a significant trend to pay attention to as many of the top-performing discount retailers help keep prices low by leveraging their private-label brands.
For food and beverage manufacturers weighing their next round of price increases, what words of advice or warning do you have?
While there is a heated debate about all the triggers of the inflationary environment and how long it could last, we know that some forces are here to stay. Technology has shifted dramatically in the last few years, allowing consumers to easily comparison shop, with the resulting price transparency increasing competition across brands and curtailing retailers' pricing power. As prices rise, consumer acceptance will decrease, but at differing rates for shoppers focused upon price compared to those more focused on brand and quality.
Where inflation cannot be absorbed, retailers and CPGs need to work together to identify where investment will garner the most significant return and where it may be less effective. This will be different for specific categories, brands, and packs that drive the highest loyalty within customer groups. Consumer retention has to be managed differently for each of these customer groups.