Inflation has been a major topic in the UK over the past six months, but what we are now seeing unfold in stores up and down the country is very much new news. The latest sales across UK Grocery Retail indicate that we’re at the beginning of a seismic shift in consumer behaviour.
The figures make interesting reading. Retail inflation is up +0.8% in the last 52 weeks, driven by Alcohol and Tobacco and average prices are even higher in the latest quarter, showing the accelerated speed of inflation. While Foodservice inflation is up +13%, with Nuts & Seeds, Alcohol and Fruit Produce driving wholesale pricing up over the last year. The largest deflation is coming from Beauty & Health. Admittedly, this data is predominantly supermarket related, but the learnings are certainly applicable to wholesale too.
So how is this impacting shopper behaviour?
We all know that typically when manufacturers, retailers and wholesalers are faced with inflated costs, prices are increased to mitigate this. The shopper is then faced with the bill, pays it, and their cost-of-living increases. But that’s not what’s happening now.
Faced with inflated costs, manufacturers, retailers and wholesalers have indeed raised their prices. Categories, such as Dry Pasta have seen direct price increases of 20% in the latest 4 weeks and overall, we’re seeing inflationary price increases of 3.9% across the board (IRI Inflationary Tracking Source: All Outlets (Market Sample) 4we Feb 12th, 2022). Crucially, however, significant numbers of shoppers are changing what they buy rather than paying the increases.
Looking at an example weekly grocery budget of £100, if inflation goes up as we expect to 8% and a shopper continues to buy the same items, they would be spending £108. By and large, this is what the headlines suggested would happen. Yes, some people will trade down, but the majority will stick to their old habits and preferences.
Not this time. This time the data – for context, IRI look at 400,000 products across 30 UK retailers every week – is saying that for the moment, most are managing to maintain their budget at around £102 i.e. half the current rate of Grocery price inflation.
Moving categories
Interestingly, whilst the downtrading is happening in some categories where we are seeing high levels of inflation, that’s not the whole picture. We’re also seeing a move to cheaper products in categories with much lower levels of price increase. This suggests that shoppers are perhaps proactively choosing cheaper products as a way of managing their overall shop, meaning that increases in category A are impacting what is bought in category B, regardless of how prices are changing.
The table below illustrates this point. You’ll see categories in which shoppers are choosing to buy cheaper products alongside the respective price inflation. Categories seeing the highest levels of downtrading aren’t always seeing high levels of inflation.
(IRI Inflationary Tracking Source: All Outlets (Market Sample) 4we Feb 12th, 2022)
The initial changes in demand we are seeing at a category level, will result in both winners and losers at a brand level. What happens next is crucial, and we are glued to these weekly sales updates as they come through.
Expecting the unexpected
But there is clearly a more significant mid-term implication if we continue to see this level of change taking place in shopper behaviours; price increases will not flow through in the way anticipated and therefore not help offset the increased cost bases so many are experiencing.
Beyond this, we are seeing millions of shoppers adding and dropping brands from their baskets as they’ve been forced to re-evaluate their brand affinities. These choices aren’t just taking place within categories in the way brands usually model the impact of price changes on shopper demand, but also at a wider level which will likely result in unexpected and much broader changes to demand.
Now is the time to look beyond the headlines
Right now, we’re not seeing this news in the media because the narrative focuses exclusively on inflation and like-for-like prices increasing. The question ‘how will customers cope?’ is what’s being asked, whereas what should really be in focus is ‘how are shoppers coping?’ It’s crucial that manufacturers, brands, retailers and wholesalers understand that this is the year to look beyond the headlines.
Beyond understanding the implications on 2022 P&Ls, we expect to see the ‘winners’ use this as an opportunity to create personalised and targeted campaigns to connect with shoppers – either new ones that are engaging with their brands for the first time, or lapsed loyalists in a bid to win them back before any change becomes a habit.
A global perspective
This all pales into insignificance when we look at what’s happening in Ukraine. But it would be remiss of me not to mention how these events will likely influence what will happen in UK supermarkets.
As the world’s biggest producer of organic produce and the largest, or one of the top three, global exporters of sunflower oil, barley, rye, corn, potatoes and wheat, Ukraine is an important player in the global food supply chain. Without Ukraine’s exports, we will see further price hikes and shoppers continuing to make tough decisions to manage household finances over the next 12-24 months.
Our Wholesale Inflation Tool
We’ll continue to stay close to the detail to bring the insights that sit beyond the headlines. You can stay ahead of the curve too with our new Wholesale Inflation Tool. This is an interactive tool that enables you to visualise, contrast and compare inflation across retail and foodservice, categories and brands.
You’ll be able to see the areas being hit hardest by inflation as well as spot where unexpected opportunities might exist. With the information provided, you can diagnose the cause of inflation in your area. Ultimately, the enhanced insight will enable you to make better decisions.
Find out more about the Wholesale Inflation Tool by getting in touch with us today.
