Looming recession or not, consumer perception is the reality
What it means: The retail industry tends to think of consumers and sales in absolute terms; prices are up or down, the consumer is healthy or unhealthy. There is usually more nuance to the situation, and consumers’ perception of situations don’t always match what retailers believe to be factual. Consumer reactions to economic uncertainty this year are due not only to actual higher prices and layoffs, but also from media coverage, word of mouth and certain baselines created by consumers to help contextualize changes at retail. For example, gas prices are a baseline indicator that consumers use to guide their judgment around discretionary spending. The retail industry has to combat actual economic and consumer headwinds, but it also needs to adapt to changing sentiments created by the noise around these topics.
Even though the U.S. is not currently in an economic recession, 78% of consumers think that the country is either already in one or heading toward one. According to Acosta’s 2022 shopper insights survey, 61% of consumers claim they are eating out less, and 52% are spending less on entertainment.
“Consumers are changing their shopping behaviors due to inflationary impact and the perception that we’re in or nearing a recession, so we’ve seen a number of habits start to take shape,” Kathy Risch, Acosta’s senior vice president of consumer insights and trends, told Retail Leader Pro. ”Besides simply eating less, consumers are first turning to their pantries to use up what they have on hand before taking another trip to the grocery store. And where they shop is changing too, as we see more consumers visiting discount stores to get the best price.”
While these trade-down/trade-out behaviors may have negative implications, some categories may actually benefit. For example, more consumers are likely to cook a restaurant-quality meal at home using premium products. Additionally, 47% of shoppers are spending more time looking for deals, so focusing on value through opening price points, assortment and promotions will be critical for brands this year.
Another trend Acosta is watching closely is trading down to less expensive brands.
“This is particularly important for both brands and retailers to keep in mind, as shoppers tell Acosta that they may stick with cheaper brands and store brands more permanently,” Risch said.
In Kearney Consumer Institute (KCI) research, 70% of consumers said they were giving up spending in one category to spend in another. Additionally, 64% of consumers told KCI they’ve noticed increased prices, but they’re still spending on their typical products; the other third of consumers said they've actually changed what they're buying — more store brands, for example.
“Consumers switching brands and making other product trade-offs feeds into what we call ‘the death of the middle,’” Katie Thomas, KCI’s lead, told Retail Leader Pro. “Consumers are having to spread out their spend a little, but they're making these decisions and different trade offs across the wallet.”
Thomas said consumers seem to be feeling a bit better than they were toward the end of last year, when gas prices were higher and inflation was top of mind. During the 2022 holiday season, for instance, consumers softened their spending on gifts.
“Gas tends to be a literal visual indicator for consumers, because they see the gas prices when they're out; as they start to tick down,” Thomas said. “This can actually be a meaningful indicator of how consumers feel.”
Showing value
As consumers continue to seek deals on goods and purchase less expensive items, retailers can still be successful during this challenging economic period.
“By focusing on product value through price promotions and recession-proofing strategies, brands can encourage spending during an inflationary period while counteracting its impact on the consumer,” Risch said. “By highlighting cost-saving features in unique ways, brands can drive sales of their products, e.g., showcasing a fewer ingredient recipe that still feeds a family for less money.”
While 42% of consumers are postponing or canceling a major purchase, shoppers sometimes cope in tough times with affordable indulgences like beauty products or sweet snacks. For example, a quarter of shoppers say they’re snacking more than usual, seeking comfort foods.
“Times of economic downturn are usually associated with increased spending on ‘morale-boosting’ products,” Risch said.
Risch believes that recessionary behaviors and dining-out challenges will improve as economic pressures subside, but showing value will remain imperative for retailers and brands to keep consumers engaged moving forward.
What’s next: If retailers and brands intend to challenge lower consumer sentiment to spur discretionary spending this year, it begins with changing the narrative and messaging to shoppers. Multiple retailers have made recent announcements about creating value-based pricing models for key categories and everyday values for consumers who are more price sensitive. If shoppers feel like they are getting value for their money, they are unlikely to shy away from making essential purchases and small indulgences that help them feel good. Retailers, especially during vulnerable cycles, need to meet consumers where they are today, instead of where they might have been last year or in the future. Remaining agile in pricing and merchandising are key as consumers struggle to justify purchases at retail.