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Grocery Prices: How High Will They Go?

June 27, 2022

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The U.S. Department of Agriculture (USDA) has raised its 2022 food inflation forecasts again reports Jim Wiesemeyer (@Jim_Wiesemeyer).[1] This means today’s grocery food price hikes are the highest in 42 Years. According to Wiesemeyer, “[The] USDA raised its estimated range of 6.5%-7.5% y/y increase from a range of 5%-6%, according to the May Food Price Outlook report, the highest forecast for all food prices and restaurant prices since 1981, and the highest grocery store price boosts since 1980. The biggest increase is eggs for the second month in a row, hiked to a 19.5%-20.5% range from a 6%-7% range. Just two months ago, USDA had egg inflation at 2.5%-3.5% y/y. Other categories with big increases: pork, poultry, fats and oils.” If that news isn’t grim enough, the staff at Fetch Rewards insists, “Food inflation [is actually] higher than government data.”[2] Their research found, “Consumer prices for food, personal care, and household items are up 13.9% compared to a year ago, and inflation in these categories is rising at a higher rate than previously reported by officials.”

 

Rising prices are changing consumer behavior

 

Correspondents from the New York Times observe, “Global forces such as supply chain disruptions, severe weather, energy costs and Russia’s invasion of Ukraine have contributed to rising inflation rates that have spooked stock market investors and put President Biden’s administration on the defensive.”[3] They add, “But the pressure is felt most directly by shoppers doing their weekly runs to grocery stores, where some items that used to be plentiful have been missing for months and where prices for produce, meat and eggs remain stubbornly high.” Economic writer Carmen Reinicke (@csreinicke) reports, “About 90% of Americans are concerned about food prices, according to a survey conducted by The Harris Poll on behalf of Alpha Foods.”[4]

 

Consumer concern has turned to consumer action as they adjust to these new conditions. On the supply side, it can be difficult for grocers and consumer packaged goods (CPG) manufacturers to keep up with these changes. Journalist Emily Peck (@EmilyRPeck) explains, “Rising food prices are slowly changing our grocery store shopping habits, already kind of weird after the pandemic pushed more Americans to eat at home.”[5] Below are some of the changes experts are seeing.

 

• Bargain shopping. The New York Times‘ reporters note that some shoppers, despite rising gas prices, are making trips to multiple stores looking for bargains. Store loyalty takes second place when it comes to bargain hunting. Peck adds, “About half of shoppers who’ve noticed the rising prices are looking for more deals, according to a May survey from FMI, the food industry trade group.”[6] Reinicke adds, “More than half of those surveyed [in the Harris poll] said that rising meat prices made them more curious about trying plant-based food and dairy options.”

 

• Buying less. Peck reports, “21% [of consumers] are buying less fresh meat and seafood.” She also reports that “the most recent Beige Book — where the 12 regional Federal Reserve banks report on economic conditions in their area [notes], ‘Customers have recently taken aggressive steps to save,’ [and] shoppers are buying half gallons of milk instead of full gallons.”

 

• Eating less. People are not only eating differently and buying less to cope with inflation, they are eating less. While in some cases that is probably a good thing, some families are skipping meals — and that’s a bad thing. The Beige Book reported there has been “a considerable increase in demand” at many food banks. Of course, food banks also have to cope with inflationary prices, which means less food is available for them to distribute.

 

• Abandoning brand loyalty. According to the Beige Book, reports Peck, “[Consumers are] switching to cheaper store brands to save money on food.”

 

Despite all the bad news, consumers are remarkably resilient. Abbey Lunney, managing director at The Harris Poll, told Reinicke, “We’re seeing Americans get creative.” Peck reports, “So far, our spending on food isn’t increasing at the same rate as inflation. Household spending on groceries was up 4% on average in April, according to an April market report from FMI, the food industry association. It’s a sign that shoppers are figuring out ways to keep costs under control. ‘Consumers are really adept and they’re nimble when it comes to their spending habits,’ said Heather Garlich, senior vice president of communications at FMI.” As I noted above, retailers and CPG manufacturers can struggle to keep abreast of the latest changes in consumer behavior, including ways they are trying to keep costs in tow. Cognitive solutions, like the Enterra Shopper Marketing and Consumer Insights Intelligence System™, can help. The System can leverage all types of consumer data to provide high-dimensional consumer, retailer, and marketing insights.

 

Retailer and manufacturer responses

 

Retailers and CPG manufacturers understand clearly how inflation can adversely affect their bottom line. Unfortunately, as noted at the beginning of this article, many of the causes of inflation are out of their control. Below are some of the recommended actions that can be taken by retailers and manufacturers.

 

• Share data. Vasudevan Sundarababu (@SundarababuV), Senior Vice President and Head of Digital Engineering at Pactera EDGE, notes, “Retailers are sitting on a mountain of first-party data — especially chains such as Target and Walmart that can track every aspect of the shopping journey through native apps. They’re getting better at sharing that data with CPG firms to understand where consumer behavior is headed.”[7] He adds, “Sharing first-party data is helpful, but not the complete answer. Consumers do not shop in a vacuum. Their behavior is affected by factors outside a retailer’s control, such as weather conditions. So, retailers need to tap into third-party data to read signals that could change purchasing behavior dramatically.” To get a fuller picture of the retail environment, retailers and manufacturers can take advantage of cognitive solutions, like the Enterra Global Insights and Decision Superiority System™.

 

• Hold prices steady, reduce product size. Since price point seems to be the most important consideration for consumers during inflationary periods, some manufacturers are holding prices steady but reducing the amount of product being sold at that price. As Peck notes, “Food manufacturers continue to ‘shrinkflate’ — putting less potato chips or cereal in the bags and boxes that we buy.”

 

• Promote private label and store brands. Analysts from McKinsey & Company note, “In today’s environment, consumers are becoming less brand-loyal and turning to private-brand goods to cope with inflation. To turn this to their advantage, retailers should regularly re-examine their category strategies. Winning retailers will balance rapidly shifting consumer preferences (perhaps in value categories) with product-specific inflation pressures.”[8]

 

• Employ price optimization. McKinsey analysts suggest, “Instead of implementing broad price increases that may erode customer trust, retailers can tailor their inflationary price response by customer and product segment, considering both margin performance and consumers’ willingness to pay. Raising prices is unpleasant for both consumers and retailers. Retailers that take a surgical approach are more likely to emerge with profitability and consumer relationships intact.”

 

• Adjust planograms. “For branded goods,” McKinsey analysts note, “retailers can investigate options for enhancing margins across their portfolio. First, they can increase transparency to understand ‘all-in’ margins with vendors, incorporating all costs, funding, and value-add services to ensure that merchants fully understand the trade-offs between brands within their portfolio. Then they can deploy advanced analytics to better inform commercial decisions on things like shelf-space transferability and PLU investment rather than relying on intuition.”

 

Concluding Thoughts

 

McKinsey analysts conclude, “The environment for retailers is likely to remain challenging for some time, but the situation also presents an opportunity for those that move decisively and quickly to develop a response. Most retail organizations have the capabilities required to weather the storm and emerge as a winner. Recognizing that inflation is likely to persist can give retailers a solid incentive to act holistically across the organization and value chain. The future will belong to those willing to reshape their capabilities and grow their organizational resilience.” At the same time, they must keep in mind the plight of consumers, especially those in lower-income brackets who spend a disproportionate amount of their budget on food and other staples. Consumer loyalty can be enhanced during inflationary times if consumers perceive brands and stores are doing the best they can to keep prices down. As Peck notes, “Consumers have a lot of flexibility to adapt to rising food prices.” And part of that flexibility is shopping where prices are lowest.

 

Footnotes
[1] Jim Wiesemeyer, “USDA Raises 2022 Food Inflation Forecasts Again, Highest Grocery Food Price Hikes in 42 Years,” AgWeb, 25 May 2022.
[2] Staff, “Report shows food inflation higher than government data,” Blue Book Services, 9 June 2022.
[3] Maria Cramer, Christine Hauser and Livia Albeck-Ripka, “Facing Higher Grocery Prices, Shoppers Change Habits,” The New York Times, 15 May 2022.
[4] Carmen Reinicke, “Consumers changing eating, shopping habits as inflation pushes up prices,” CNBC, 9 June 2022.
[5] Emily Peck, “Food buying habits are evolving in the face of inflation,” Axios, 25 April 2022.
[6] Emily Peck, “Rising food prices are changing the way we eat and shop,” Axios, 13 June 2022.
[7] Vasudevan Sundarababu, “How Retailers Can Succeed as Consumer Demand Changes,” Consumer Goods Technology, 1 June 2022.
[8] Kari Alldredge, Becca Coggins, Ryan Drassinower, and Jesse Nading, “Navigating inflation in retail: Six actions for retailers,” McKinsey & Company, 2 June 2022.

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