What it means: Lifestyle changes created by inflationary pressures may actually benefit retailers in essential categories if they can adapt to consumers' changing needs. As consumers cut restaurant budgets and focus more on cooking at home, grocery providers and supermarket chains can market value and convenience to shoppers and provide alternatives to eating out. Consumers are more elastic in their spending on healthcare and grocery items, even in the face of inflation, paving the way for grocery and drug chains to remain a staple in consumers’ retail rolodex. The consumer pullback on car travel and gasoline expenses will no doubt impact the convenience channel, but delivery options coupled with consumers spending more time at home presents an option to circumvent those challenges.
Last year was a year of high inflation, and millions of consumers were forced to adjust how they shopped. Retailers and brands had to find new methods to cut costs. As prices start cooling, consumers’ spending habits on large purchases are still conservative this year.
While whole purchase habits have not shifted drastically, consumers have made lifestyle changes, research from Fuel Cycle found. For example, two out of three respondents are cooking at home more and going to restaurants less, while two in five are traveling by car less.
“Consumers are spending less on quicker alternatives to daily necessities, such as making restaurant or fast food purchases and spending money on gas,” Rick Kelly, Fuel Cycle’s chief strategy officer, told Retail Leader Pro. “Gas was the most impacted from inflation with one-in-10 consumers opting out of gas entirely because of how prices at the pump have hurt their wallets.”
Fresh foods and gas were the biggest indicators of inflation for consumers in Fuel Cycle’s research. For example, a quarter of respondents decreased their budget to adjust to rising costs of produce and gasoline. For necessary industries like healthcare, insurance and grocery/food services, consumers seemed more unphased by inflation.
Additionally, maintaining price and decreasing quantity is the preferred approach when adjusting products due to inflation, Fuel Cycle found. Most consumers — of all income levels — also appreciate retailers’ transparency in informing them of inflation price increases. Two in five respondents also were willing to settle for “shrinkflation” or a smaller product if the price remained the same in light of inflation.
“Cost is at the top of consumers’ minds,” Kelly said. “The items they regularly purchase are taking more from their pockets. Most consumers want more reasoning to draw a complete picture of where the cost is coming from in their everyday goods, especially for food at grocery stores and gas at the pump.”
Response to inflation price increases
Unsurprisingly, consumers have searched for value in the retail channels they shop. About a third of those surveyed said they increased use of gas station loyalty programs, retailer-sponsored loyalty programs and credit cards. Only 22% of respondents said they used buy now, pay later (BNPL) services more, with 52% of consumers saying they never used BNPL.
Unlike higher income groups, consumers with incomes of $50,000 or less were significantly less likely to increase their use of credit card cashback rewards, retailer loyalty programs or retailer credit cards, Fuel Cycle reported.
“Consumers have looked at financial services to help find more value for their dollar,” Kelly said.
Consumers' current spending patterns are expected to stick beyond this inflationary period.
“Recent academic research shows that changes in consumer spending patterns during economic downturns tend to persist as economic conditions improve,” Kelly said. “For instance, migrations to private label brands often do not reverse as consumers have more to spend.”
Consumers will be searching for value this year, too. “They'll be migrating to private label brands, making less frequent purchases and seeking to stretch their dollar,” Kelly said. “High-value purchases, including cars, computers and phones will be postponed as much as possible.”
This year, retailers will need to be agile and willing to adapt to consumer sentiment. Brands and retailers should address consumer habits by adopting careful pricing strategies, staying ahead of competitor intelligence and reassessing advertising effectiveness.
“Retailers should avoid broad price increases and look at customer willingness to pay and margin performance with other product lines,” Kelly said. “Inflation adjustments can be made by customer and product segments rather than affecting the purchase cost of all of a brand’s products.”
Most segments of retail are experiencing some form of inflation, which means retailer’s competitors are also navigating the same volatile market.
“Retailers need to be quick in gathering competitor intelligence and watch competitors more carefully than they’ve done in the past,” Kelly explained. “Competitors can serve as an early warning signal to market shifts. However, a consumer’s value perception of a brand is not only based on comparison to similar stores. Depending on brand positioning, psychological changes to perception can harm a business more than economically. Businesses need to decide what benefits to re-emphasize and which claims have become stronger.”
Additionally, advertising research and testing have never been more important. “With consumers showcasing price sensitivity under record inflation, testing ads can keep campaigns from falling flat or generating negative sentiment,” Kelly said.
What’s next: Between pandemic behavioral changes and inflationary pressures, consumers may continue to prefer eating at home as opposed to dining out. Essential sectors must shift focus toward attracting and maintaining these types of consumers, as they are likely to be more loyal to the grocery channel over time, even after rising prices ease. As consumers turn their attention away from large-ticket items and experiences, they may have more disposable income to spend on grocery trips or health and beauty aids as they look for small luxuries to add to their shopping carts.