Retailers borrow discounting moves from digital peers to boost sales and customer experience

What’s the point: Consumers aren’t willing to sacrifice what brings them joy, and that includes what’s in their grocery cart. Consumers may look to make tradeoffs on certain items where brand or category loyalty is low, but as evidenced in the premium sector, they will go out of their way to buy things that make their lives better. Retailers and brands must pay attention to this duality of consumer behavior and optimize assortments, specialty products and food functionality at the high end while strategically pricing and promoting products on the low end. Read on for more insights, details, and what's next! RSM US LLP’s Consumer Goods Industry Outlook covers many obstacles facing retailers, including rising prices, changes in consumer spending, loyalty retention and where retailers should make technology investments. Retail Leader Pro chatted with Mike Graziano and Nick Stuart, RSM’s consumer products senior analysts and authors of the report, along with Peter Cadigan and Seth Bacon, fellow RSM consumer products senior analysts about how retailers can meet these challenges head on in 2023. Retail Leader Pro (RL Pro): What is the most dramatic change you found in consumer spending on CPG products? What of these consumer spending patterns do you expect to stick this year? Peter Cadigan: From a food and beverage perspective, one of the biggest surprises is what didn’t change. Specialty food and beverages continued strong growth despite consumers pulling back on overall grocery purchases, with purchasing power constrained by the impact of inflation and a return to restaurants and service spending in general. The strength the category showed during 2022 can be attributed to the stickiness of premiumization of at-home eating developed during the pandemic, with consumers more likely to put off durable goods purchases like apparel, home furnishings and electronics than trade down from the premium brands they were consuming during the lockdowns. The accumulation of excess savings among middle to high income earners and these brands’ ability to absorb continued inflationary disruptions on the supply side should support continued growth into 2023. Mike Graziano: Further, the shift in spending patterns by consumers from services to goods through most of the pandemic, driven by lockdowns, behavioral adjustments and additional dollars in the hands of consumers, has been slowly transitioning back to pre-COVID-19 spending habits, as pent-up demand for goods has been replaced by pent-up demand for services, i.e., travel, dining out, etc. One of the big winners through the pandemic was the apparel space, which significantly outperformed the pre-COVID-19 trendline. How consumers spend on apparel going forward will shift. A higher demand will be placed on sustainability measures, and unique and seamless shopping experiences from order to potential return will be critical for companies to drive spending in a period that will likely experience consumer pullback. Second-hand selling is also continuing to grow, and within the apparel space. I expect this will be a big driver of activity in 2023 and beyond. Additionally, I expect luxury and premium brand products will still perform well as they have tailwinds to support 2023 growth, including higher excess savings at upper income levels and the potential reopening of international travel from China. RL Pro: What are the top ways consumers are searching for value? Cadigan: Even with the lingering interest in premium brands, consumers are seeking value in a variety of ways: Channel shifts: Consumers are looking for value where they shop as much as what they are shopping for. Shoppers have turned to clubs that offer familiar brands at better price points. This could be a potential headwind for smaller, regional brands as these stores tend to favor national brands. On the other hand, grocery delivery, which saw widespread adoption during the pandemic, hasn’t seen the benefit of continued growth as delivery fees have turned off budget-conscious consumers. Killing two birds with one stone: Consumers continue to show interest in functional food and beverages that offer some benefit beyond standard taste and nutrition. Innovative brands have brought immune and energy boosting products to the table, giving consumers food and beverage options that do more than just fill them up. Trading down: Private label has seen moderate market share growth, with much of the uptick likely coming from consumers who were already buying private label brands buying more of it. While private label brands provide attractive options for consumers looking to get more out of their budgets, in many cases their thinner margins have forced them to raise prices quicker and more frequently than conventional alternatives. Nick Stuart: Secondhand selling gained prominence during the pandemic and is showing no signs of slowing down. Additionally, inventory discounting is returning and consumers are not shy about spending when they feel those discounts are meaningful enough. The most concrete evidence of this was Black Friday and Cyber Week shopping. Most holiday spending in November was weaker than expectations; however, as retailers and consumer goods companies more deeply discounted around this period, consumer spending spiked. RL Pro: What ways are grocery, drug and convenience retailers driving consumer engagement through targeted discounts? Cadigan: Retailers are borrowing discounting playbooks from digitally native peers to drive sales and customer experience. Savvy retailers are using public, syndicated and proprietary data to better understand how discounting drives demand both at the macro level and with in-store shopping. Having a better sense of what a discount will do to demand improves decision making, demand planning and overall profitability by not giving away margin for free. Likewise, understanding correlations between products can help retailers drive sales of higher margin products by incentivizing shoppers to increase purchases of lower margin products through discounts. Take the classic tuna and mayo example, where grocers would run promotions on low-margin tuna and position it next to mayonnaise, which commands a higher margin. The ability to analyze multiple sets of data is allowing retailers to see product correlations that are less obvious. In this regard, local and regional retailers are somewhat at a disadvantage compared to national chains that have broader access to first hand consumer data. This will be one of many factors that drives consolidation in the industry. RL Pro: How can retailers build customer loyalty in these challenging times? Cadigan: Relevancy is the name of the game. What keeps your customer coming back to your store? The retailers that know the answer to that question and how it evolves as their customers evolve will stand even as they face economic headwinds. Again the key here is understanding your customer through data. Are they coming to your store because of the lowest price, unique product offerings, customer experience? Digital tools are becoming more accessible for retail leaders to hone their strategies around those answers and adapt with their customers. Graziano: Loyalty programs have to be a two-way street. Consumers are willingly providing retailers with critical data to make better business decisions, and retailers need to engage consumers and provide something in return, so a loyalty program is a relationship. Further, loyalty programs should tailor offers and strategies to different customers to make the customer experience as wholesome and impactful as possible. RL Pro: How can grocery, drug and convenience retailers lean into technological investments to promote efficient and strategically targeted operations that will spur growth? Seth Bacon: Technology investments should have measurable and clearly defined benefits that align with future company plans. Investments into technology should go through four stages for evaluation, including clearly stating the business goal, determining the observable actions, establishing measurements for success and determining the solutions to support the tactics. Many companies have been reactionary with their investment in technology over the last few years, which has caused dissonance between future goals as well as between internal systems. While investment into the ‘next big technology’ such as mixed reality or computer vision is often appealing, it must be balanced against the anticipated benefits against company goals. One area of technical investment often overlooked is making deeper investments into existing systems and user adoption. Technical debt that has accrued during the last few years may be causing unnecessary friction internally. Making better use of existing systems and data will achieve similar benefits at a potentially lower cost point. What's next: Expect this behavior to continue into 2023, especially for consumers facing higher financial hurdles. With consumers focusing on trading down where it makes sense, private label may continue to be the beneficiary of those shifts as well as strategically promoted items. Consumers will make tradeoffs in regard to retailers themselves in essential categories as they look to maximize their total retail spend.

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