Shopper trade-downs and channel shifting are becoming commonplace as people react to inflation."
Pandemic, Inflation and Supply Chain walked into a bar . . .
Sounds like the makings of a very bad joke. Unfortunately, in today’s world, it’s not a joke at all.
In my day job, I’m president of Advantage Unified Commerce, an agency that drives commerce through retail and e-commerce platforms. Or, said more simply, we help brands sell more stuff, more often. When the threat or reality of inflation sets in, it significantly impacts our clients and their position in the marketplace.
During a typical fall without economic uncertainty, a pandemic, war and global supply chain challenges, brands would be assessing how successful their back-to-school programs were, finalizing their fall retail resets, making last-minute adjustments to their holiday plans and planning for the next year. This tried-and-true process has pretty much gone uninterrupted for decades. But as we all know, in life and in business, when you get too comfortable . . . stuff happens.
Reacting and Adapting
Now, I’m not an economist, nor do I play one on TV. I consider myself a “common sense-ist.” And, in these times, most shoppers are.
Here’s why that matters. My son Ethan is 22 months old. My wife and I had this notion the best milk for him would be the brand that offers the best-perceived benefits for his age and growth needs. Our pediatrician told us the brand of milk doesn’t make a material difference in his growth or health. But he’s our first born and we wanted the best for him, so we’ve been buying the Cadillac of whole milk. (I sacrificed my sour cream and onion chips to justify the spending increase.) Then inflation hit. A gallon of this milk was recently priced $7.69 per gallon, about 20%-25% higher than its price a year ago. Ethan can go through 2 gallons a week. What used to cost about $12 per week is now slightly over $15, which over the course of a year is a $156 difference.
This is just milk. That $156 per year on one item becomes significant when you consider all items on our grocery list cost more now. We have to adapt. At our local club store, a gallon of whole milk is $3.99, almost 50% less than our premium choice. So, I quickly subscribed to the “whole milk is whole milk; there’s no difference” storyline.
Shopper trade-downs and channel shifting are becoming commonplace as people react to inflation. The change in the way I buy milk happened easily and became a catalyst for changing the way I buy other items. All the hard work that milk brand did to differentiate itself to be better, more valuable and more beneficial was instantly forgotten when I made the change to adapt to inflation’s hit on my wallet. The $3.99 current club price is still lower than the non-inflated price we were paying for the premium product in 2021.
So, what’s a brand to do? My three-pronged advice is:
- Get smarter about your consumer. Consumers are becoming less brand- and retailer-loyal as they search for value. But you don’t need much data analysis to see that people are still buying branded items at inflated price points. The key is finding these people and converting them to your brand.
- Realize consumer packaged goods are a velocity game now. Most brands that took price this year are also seeing increases in revenue, but decreases in volume, which is expected when prices increase. But the false positive of increased dollar sales can lead to downstream challenges, including overproduction, bad inventory and not replacing sales to consumers lost to private label, lower-priced products or channel shifting. Discover where your highest velocities are coming from — and why — and key in on ways to replicate that success elsewhere.
- Take a left turn. To offset higher costs, most brands are taking price and lowering marketing budgets, chasing promotions and points of distribution and playing defense with brand loyalists. If everyone does this, who really wins? There’s no playbook, but the winner will be the one that writes a new course of action. Easier said than done. But not impossible. (You’ll have to be a client to get the “how” from me.)
Now let’s look forward to a new reality when inflation and supply chain aren’t part of our day-to-day. What happens then? Do prices roll back? Will shoppers open the floodgates on purchases of items that were sacrificed during inflation? Or will there be permanent shopper behavior change?
The common sense-ist in me believes the future will hold a mix of all the above. Some consumers who switched brands due to pricing may realize they didn’t notice much difference in the products and will continue buying the lower-priced items — a win for the brands and retailers who benefited by the switch. In other cases, brands that roll back prices may see some of their consumers return. But the bigger opportunity may be capturing new consumers who switched to private labels to save money but now may have a little more disposable income to buy a more premium brand.
Still, if the past predicts the present, we’re likely to see little or slow change in shopper behavior as inflation eases. Consider the seismic shift during the first months of COVID, when e-commerce and delivery became king and queen of the prom. Two years later, as the pandemic becomes endemic, many have predicted a significant pullback in e-grocery sales. While U.S. e-commerce grocery sales are softening, though still higher year-over-year, according to some reports, they are expected to approach 10% of total grocery sales this year and continue their upward trajectory, according to eMarketer. Outside the sudden onset of a deadly pandemic and lockdown, it seems, shopper behavior is sticky.
This isn’t an easy time to live in or conduct business in, but when has it ever been? I don’t have magic beans to solve inflation or its impact on brands. But I won’t look at strategies that are a rinse and repeat of the past or, as they say in the world of crypto, “HODL-ing” until this passes.
For now, I’ll keep applying common sense, advise our clients to take more left turns and not settle for “this is what we did last time.” Now, I have to get my son some milk.