How price rises could force an evolution in consumer behaviour

Household budgets are under more strain than at any time over the last 10 years. In fact, Richard Hughes, chairman at the Office for Budget Responsibility, has said this is “the biggest single financial year fall in living standards since records began 66 years ago”. Inflation isn’t new information – but we need to dig deeper to realise the full impact on the UK grocery sector.

We can see millions of shoppers are continuing to manage household budgets by making significant changes to what they usually buy, as products are impacted by price inflation across food and drink categories – the average of which sat at 4.6% in the latest four weeks.

However, as we reported last month, shoppers are downtrading across a selection of categories, not just those where inflation has hit the hardest. On the latter point, it’s a mixed bag. Dry pasta at a category level is still passing the highest price increases at 20.6%, compared with a category like pastes & savoury spreads, where price increases have been comparatively modest at 0.9%.

However, looking more closely, we see that whilst direct price increases have been lower in pastes & savoury spreads, a reduction in some of the cheaper SKUs and the addition of larger more expensive packs has resulted in the overall category being more expensive. The shopper response has been to find cheaper pastes & savoury spreads in order to manage their budgets, with the net impact being deflation within the category (see below).

Top 10 categories with the highest price increases in the latest four weeks

IRI inflationary tracking source: all outlets (market sample) 4 w/e March 2022 vs yr ago

• Impact of trade down (mix change): the weighted impact of shopper choice on the average price of consistently available products due to changing needs in reaction to price changes
• Inflation (price change): the weighted inflationary or deflationary impact of price across all consistently available products, removing year-on-year volume mix change 

Top 10 categories with the highest level of mix change (trade down) in the latest four weeks

A smaller price increase in a specific category still doesn’t deter shoppers from seeking out lower-priced alternatives, and we are seeing lots of examples of these behaviour buying changes. In the table above, this can be seen clearly within the premix spirits and smoothies categories.

It’s clear as the months roll on, and when you look at forward projections for commodity costs, fuel prices and the impact of the invasion of Ukraine on areas such as agriculture, as well as supply chain issues, that this trend of rising prices isn’t going to change anytime soon. Therefore, changes in consumer purchasing behaviours across the medium term is something brands, retailers and wholesalers alike are going to need to face into. Now is the time to adapt their thinking and strategies accordingly.

In the meantime, as we continue to look beneath the headlines, there are a number of areas that stand out to help retailers and manufacturers do just that.

Firstly, a look at price increases across branded ranges versus private label. While these have accelerated at a similar pace so far in 2022 – up 4.6% in the latest four weeks for branded products compared to 4.9% for private label – we know shoppers are managing rising costs by trading down within their basket. The opportunity to do this within private label is much smaller, and the value premium between brand and private label is narrowing. We know in a number of categories this could see a reverse impact, with brands appearing to offer increasingly strong value and therefore encouraging the shopper to change their behaviour and trade up.

For those shoppers who already buy the lowest-priced private label or value products available, what do they do now? It’s perhaps unsurprising discounters have increased their market share in recent weeks, with shoppers believing they need to move retailer in order to realise savings. Asda has already reacted to this. We’ve seen it introduce a new 300-strong Just Essentials line across its stores. We expect the same to happen across more retailers as the year goes on, effectively helping them compete with the discounters and cope with new shopper behaviours.

Countering this trend could be rising fuel prices, with the impact being a reduction in the number of trips shoppers are prepared to make to save money. The data may not be there just yet to qualify this, but with working from home more often a viable option for an increased number of households versus previous recessionary periods, driving less often may well become a way to save money. At the height of the pandemic, delivery or click & collect services increased significantly and these services can help people pre-plan a complete grocery shop in one go. We’ll continue to watch this space.

Amidst it all, there are potential opportunities for the retail market as consumers re-evaluate their spend elsewhere. Research from commerce software business Braze states that inflation is motivating 82% of UK consumers to cut back on non-essentials. Three in five of the 2,000 Brits surveyed said they would be reducing spend on takeaways, and 34% were cutting back on alcohol.

Much like during the pandemic and periods of lockdown, we may well see people increase spend in retail as they decrease this in other channels. We can expect to see households looking to eat in or prepare more meals at home once again as inflation continues, bringing increased volume into a number of categories within grocery – a possible silver lining on the horizon for the sector, but perhaps another blow for foodservice. We’ll be keeping an eye on both over the coming weeks.