No More Steak? American Consumers Try to Beat Inflation
(Bloomberg Opinion) -- Glance through recent earnings reports, and it looks like Americans are breezing through the barrage of price increases coming their way.
Companies including Procter & Gamble Co., Hershey Co. and PepsiCo Inc. have all seen little impact on sales from the inflation they’ve passed onto consumers to cover their own soaring costs.
But companies shouldn’t pat themselves on the back just yet. There are signs that people are starting to change their habits to deal with stretched budgets. With more price hikes expected over the coming months, this could be the beginning of shoppers pulling in their purse strings, with far-reaching consequences for manufacturers and food retailers alike.
When prices go up, consumers adapt their spending. This is known in the trade as “dialing out” inflation. So even though food prices rose by almost 7% in January, according to Labor Department data released Thursday, a bit of savvy shopping might mean grocery bills increase by only half that rate.
This dialing out is playing out in several ways. For one thing, Americans are buying less. According to data provider IRI, the dollar value of the average shopping basket has risen slightly over the past year. But the number of items in each basket has contracted.
While consumers are spending more on their groceries, they are cutting back on what they regard as non-essential. That’s different for each family — for some, it could be snacks; for others, it’s fresh flowers or items such as bottled water that can easily be substituted.
What this means for retailers and manufacturers is that the amount of goods they are selling will come under pressure, although this should, in theory, be compensated for by higher prices. On Thursday, British consumer goods group Unilever Plc said that while it raised prices by almost 5% in the final quarter of 2021, the amount of Ben & Jerry’s ice cream and Vaseline moisturizer it sold was flat. This could be a harbinger of demand getting worse across the consumer sector.
What’s more, shoppers don’t just buy less — they trade down too.
When people were forced to stay home, they indulged in pricier products from fancy coffee to indulgent desserts. Now they face the twin pressures of more opportunities to spend and rampant inflation. The trend toward bougie items is losing steam. Cheaper, mainstream products are gaining ground, according to IRI.
Many Americans are even switching out of big brands and into supermarkets’ cheaper private-label products. This is a direct response to rising prices. The categories seeing the most dramatic inflation — such as oils and bacon — are also those where private-label ranges are picking up share.
Consumers also tend to cut back where prices ratchet up. For instance, whenever meat becomes costlier, as it did around a decade ago, families substitute with cheaper proteins or go even cheaper with potatoes and pasta. Today, meat is one of the food categories seeing the highest price increases as well as a decline in the volume of sales, according to IRI. Some shoppers are switching out of the priciest cuts — beef and pork — and into chicken, where prices are rising more slowly, as well as processed meat.
Unfortunately for the fake-meat makers, people aren’t reaching for meat substitutes. Plant-based alternatives tend to be more expensive after all.
Another consumer reaction to inflation is to shop around. People will visit more stores to find the best deals, and they’ll turn to dollar shops and the so-called hard discounters.
Some Americans avoided the German no-frills supermarkets, Aldi and Lidl, and their U.S. cousin Trader Joe’s, during the pandemic, because of their smaller stores and limited ranges. Many preferred to make a trip to a larger retailer, such as Walmart Inc., where they could do a big shop once a week.
But customers are returning to the budget-friendly options, according to Placer.ai, a foot-traffic analysis company. Some of the recent gains at Aldi and Lidl are due to the fact that they are expanding across the U.S. But the uptick in foot traffic towards the end of last year coincides with inflation kicking in.
Mainstream food retailers such as Walmart, Target Corp. and Kroger Co. will need to watch the discounters carefully. Aldi and Lidl also primarily sell private-label products, so an acceleration in their sales could hurt the big branded manufacturers too.
These are just the first indications of consumers cutting back, trading down and shopping around. If they turn into a headlong rush into frugality, companies’ future earnings reports won’t be as positive.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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