Photo: Getty Images/jetcityimage
Kroger CEO says customers are ‘rethinking their shopping’ habits
Kroger is finding that grocery shoppers are trading down and shifting to store brands as U.S. inflation hits a four-decade high, and seeing a particular shift from lower-income households.
“Rising inflation has consumers rethinking their shopping and eating habits,” said Rodney McMullen, chairman and CEO, last Thursday on Kroger’s first quarter conference call.
He added, “While customers continue to cook more, we are seeing different shopping behaviors based on how individual customers are experiencing the current inflationary environment. Many customers continue to shop premium products throughout the store, including Private Selection, Murray’s cheese and Deluxe Meal Solutions. For other customers, whose budgets are more directly impacted by food and fuel inflation, they are actively looking for ways to save. We’re doing everything we can to help this customer stretch their budgets.”
For instance, customers “aggressively moved” to pork amid rising beef prices during the quarter and more cautious spending drove smaller basket sizes.
“What we’re finding is customers were coming in more frequently before, but they’re not buying as many items on each shop and that’s what we’re seeing,” said Mr. McMullen. “We’re also seeing customers, especially customers that aren’t as sensitive to their budget, upscaling with, or buying bigger packs, especially earlier in the month depending on when people are getting money.”
Kroger is further reporting that its owned brands are outpacing national brands as consumers seek value. Said Mr. McMullen, “When the economy is tight, our brands always gain share.”
The Bureau of Labor Statistics reported that food-at-home prices in May rose 11.9 percent over the last 12 months, the largest increase since April 1979. Among the categories seeing the biggest spikes were eggs, up 32.2 percent; chicken, up 17.4 percent; milk, up 15.9 percent; coffee, up 15.3 percent; and ground beef, up 13.6 percent.
CNBC noted that while consumers may be trading down for food, demand for concerts, movies and travel remains healthy due to pent-up demand as pandemic restrictions ease. Luxury spending is also holding up well.
Marshal Cohen, NPD’s chief retail industry advisor, told CNBC, “There is a tug-of-war between the consumer’s desire to buy what they want and the need to make concessions based on the higher prices hitting their wallets.”
- Kroger Reports First Quarter 2022 Results and Raises Full-Year Guidance – Kroger
- Kroger (KR) Q1 2022 Earnings Call Transcript – Seeking Alpha
- Inflation and recession fears are squeezing some industries more than others – CNBC
- Inflation-Weary Consumers Shift Shopping Habits, Kroger Says – CNN
- Inflation is changing the grocery shopping habits of 95% of Americans as they turn toward discount stores, cheaper private labels, and frozen foods – Business Insider
- Food prices are going up, up, up. Inflation is tough, tough, tough. – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: How have you been seeing inflationary pressures altering grocery shopping habits? How may grocery behavior be different from past similar inflationary periods?
Poll
Loading …BrainTrust
Jenn McMillen
Chief Accelerant at Incendio & Forbes Contributing Writer
Lisa Goller
B2B Content Strategist
In many ways what we’re seeing in grocery has played out many times in the past when inflation has gotten out of control. When costs go up, people change their spending habits and that’s clearly, and perhaps most immediately seen in grocery spending. It’s hard to say if today’s inflationary spending trends will be similar or different from the past, but part of it will depend on how long the inflationary period lasts – at this stage it looks like we’re in for a long summer.
Good quality private label will be the winners as well as Costco overall and their private label brands. Go to Costco on a weekend or even on a Tuesday to see for yourself how inflation has impacted shoppers.
During the pandemic, house brand/private label brand item sales increased double digits across many retailers. I don’t think this will go away anytime soon as customers are finding a lot of quality and value in those items. With SKU rationalization still in place for many manufacturers and inflation still heading up, the migration to private label product will keep increasing.
Watch for consumers to more actively play “grocery games,” such as buying gift cards to get money off gas or groceries and really leveraging the store’s loyalty program as the inflation squeeze continues through the year.
It is a great opportunity for retailers to build own brand share of sales. I hope more frequent visits results in less wasted foods. Waste is the biggest enemy as it is a waste of precious food, supply chain resources and money.
Although looking at past similar inflationary periods could be instructive, I personally believe we are navigating new waters. Never before in most people’s lifetimes has there been such a perfect storm of a health crisis, supply chain woes, record inflation, and raging global unrest.
Consumers are genuinely — and rightly so — concerned and adjusting their spending accordingly. Here are a few things I am observing:
Prices for food at home — a category which includes groceries — rose 11.9 percent during May year-over-year, according to the Consumer Price Index. This is untenable for the majority of today’s shoppers.
Excellent assessment Dave. I agree with you. There is a lot more going on than typical inflation, and so it becomes even more difficult to try to predict the outcomes.
Thanks, Mark. I hate to be the bearer of bad news, however I anticipate things getting worse as we head into the back half of the year and expect a very challenging holiday season for retailers and suppliers.
In a word, yes. Our own panel data shows a number of shifts from trading down to own-label, buying different brands to secure better deals, and changing retailers/channels to access cheaper prices. However all of this is very uneven. In some categories, like beer and soda, people’s behaviors have not changed all that much because they are brand loyal. However in categories like pasta, there have been a lot of shifts. There are also some counter-cyclical trends such as trading up in some categories as compensation for eating out less. I expect behaviors to evolve further as inflation continues to eat into household budgets.
The speed with which prices increased results in a bright flash of sticker shock. It’s shocking and obvious when you see the typically 99 cent yogurt or soft drink suddenly at $1.29. That makes people (me) sensitive to what else has jumped up in cost. And now it’s time to look around at other yogurt brands and soft drink options. And while I may not be as knowledgeable about all the grocery categories as a shopper, I suspect prices in every category are higher. This motivates me to scan each category in depth and deliberate what will keep my overall grocery costs as low as possible. Ultimately, it may change my choice of brands and introduce me to alternatives I may not have considered in the past. Furthermore, it’s hard to imagine reverting back to the old shopping behavior.
Inflation changed grocery shopping habits, as more shoppers now buy less or only essentials. Consumers make fewer impulse buys, buy in bulk and shop around more for the best deals. Grocery shoppers increasingly switch to private labels and discount and dollar stores for affordable food options.
This inflationary period is different due to higher demand for value and premium (vs. mid-tier) goods, mirroring socioeconomic shifts.
Inflated grocery prices are accelerating consumers’ move to value-priced product and private label brands. The inflated prices are hitting low income and fixed income consumers hard and grocers that can offer special prices on staple products will go a long way to help them stretch their budgets.
Look no further than the grocery sector for a good indication of our overall economy and inflation rates. With inflationary pressures in full swing, customers are rethinking their shopping habits, reducing their discretionary spending, and being far more conscious and purpose-driven with their grocery shopping trips.
With the emergence of high-quality and value-centered private label grocery options, Kroger, Target, Walmart, and others are well-positioned to capitalize on the price-conscious consumer. We also should expect grocers to provide more incentives in the form of loyalty programs, points, and cross-promotions with gas purchases. There is also an opportunity for grocers to address the growing health and wellness trends with the products and services consumers are willing to invest in.
If the major retailers are still using the Big Four meatpackers for their sourcing, any margin gains are likely to be minimal – it will take time to build a broader and more resilient supply ecosystem (see also the Lego thread today) but it is necessary to prevent rent-seeking behavior and unchecked price gouging. Diversification is also necessary for food safety (the current baby formula meltdown, etc.).
Everything that Mr. McMullen has cited aligns with how I would expect consumers to behave, given the pressures on the household budgets at the moment. I don’t think we’ll see drastic changes in shopping behaviors this time. When consumers feel stressed about money, they make changes to mitigate that pain. I believe they have many more options this time to stretch their budgets. There are more low-price grocers like Aldi, who seem to be able to bridge quality and price. I also think, as is pointed out here, that private label has exploded. There are more and better options and consumers are more comfortable trusting these brands. I think this pattern will allow grocers to grow market share for their owned brands, which ultimately helps drive loyalty and support the bottom line.
The Kroger comments could have been made in the early ’80s. At the beginning of 1980, inflation was just under 14 percent. In the following months, inflation exceeded 14 percent and stayed there for more than six months. Although it dropped by about one percent in July 1980, inflation stayed firmly in double-digit territory throughout 1980 and much of 1981. Do you still think we are experiencing a historical challenge?
Other than the changes technology has brought us, the outline of shopper behavior was exactly what we were reading back in the day.
Nobody wanted it to happen this way, but this is a huge opportunity for grocers to gain traction with their proprietary labels. They can pleasantly surprise with quality, taste and value, or possibly disappoint. We shall see how sticky and long term this shift to proprietary labels will be.
It’s pretty simple, really. When there is less money to spend, or things cost more, consumers cut back. We need to ride this out, so cooking at home instead of dining out, and trading more expensive national brands for store brands, just makes sense.
Grocery shoppers seek to save every day. There is nothing new in terms of where, when and what they shop for. Private label is always an option, and it’s no surprise Kroger touts those brands because the margins are in their favor vs. name brand goods. Share of spend to the big box stores – Costco, Sam’s Club, BJ’s will continue. Kroger needs to innovate with respect to their store experience and do more/better in coordination with CPG, HBA and F&B partners. Prices have skyrocketed over the past nine months with no end in sight. If you want to observe a sharp grocery company, spend time at Giant Eagle – they get it.
If we want to understand the impact of inflation on grocery shopping habits we should watch sales reports from Aldi, Lidl, and Costco. As more shoppers seek out value pricing for their groceries, these are the primary places they will jump to from other grocers. Consumer willingness to shop at different grocery stores may increase along with the shift to more private labels. Whether or not we see similar trends to past inflationary periods is difficult to say, we are seeing a much larger divide between lower income and higher income families than in past decades so we may be looking at a tale of two extremes.
During inflation and uncertain times, store brands and other less expensive options always sell more. I don’t think there’s any surprise there. In addition to inflation, supply chain issues are also forcing people to try other brands. I’ve personally switched hair products and many food items due to either increased costs or lack of availability. Finally, I think the pandemic caused a huge rise in agoraphobia. Agoraphobia is a fear of being in places that make you feel anxious or unsafe. The Cleveland Clinic has reported an explosion of these cases since the pandemic. I’ve witnessed it in my own friends and family who in the past had no issues with shopping at a retail outlet or traveling. It will be interesting to see the long term impacts of all these things. No doubt, this is new territory.
As expected, repeating patterns from 2008 show consumers reducing their dining out spend towards grocery and cooking at home. And within the grocery store experience, shoppers are cooking for more value, trading down, keeping spend in check. As Stew Leonard says, “They are buying what they need, not what they want.”
What’s different today are the supply chain challenges and continued labor shortages in grocery. Many independent grocers are experiencing challenges in meat/poultry availability, and cost swings. While also finding it hard to fully staff up, even with improvement after the pandemic.
Inflation is a pain for some of us, but it is close to an existential threat for many wage-earners who have seen their recent economic gains wiped away by rising fuel, rent, and food prices.
When we examine inflation’s impact and the imperatives it presents to food retailers, it is important to frame the conversation around the consumer segments they serve. Where well-heeled shoppers may switch to bulk packs of meat or poultry to save on the unit price, less advantaged shoppers may switch from gallons to half gallons of milk to manage their budgets (as Walmart reported recently).
I don’t know if these behavioral changes qualify as “changes in habit” so much as they reflect short term tactical responses by consumers. Mr. McMullen is accurate in pointing out that shoppers across the spectrum are being far more mindful of their purchase decisions, and therefore much more flexible in their choices.
Inflation is inequitable. Retailers and brands need to demonstrate their commitment to all shoppers they serve. That likely means multiple, concurrent merchandising and pricing responses.
I’m not worried as much about inflationary pressures on consumers. Their habits will inevitably change. What I am worried about is if those habits cause the customer to change stores, not just buying patterns. Eventually the economy will stabilize. Until that time, we must do what we can to keep the customer we have.
Affluent customers are still not that bothered with the rising prices of food. They look for value products. On the other hand customers with comparatively lesser income have reduced their purchasing cycle. So, how people spend their money is certainly shifting with the surging inflation. It is true that customers are more inclined to spend on experiences. There can be two possible reasons behind this — the easing of pandemic restrictions and the summer break. This is why the desire to go out and socialize is still holding up quite well despite the tight economy.
From today’s Food Industry Association statistics … apparently private label is being gobbled up!
While value and lower cost continue to attract shoppers to private brands, factors such as quality and taste are also encouraging customers to purchase them, FMI said.