Photo: iStock / Khanchit Khirisutchalual
Will 2023 Become Known as the Year of Trading Down?
New research shows that consumers are trading down to less-expensive products in a wide range of categories.
The study from Adobe Analytics finds that the tier of cheaper goods in 11 product categories gained online market share at the expense of pricier items between January 2019 and February 2023. Adobe tracked purchases in apparel, appliances, books, consumer electronics, furniture, grocery, home and garden, personal care products, sporting goods, tools and toys.
CNN reports that trading down has continued even as inflation has moderated in recent months.
The effect of rising prices has been most evident in online grocery shopping, according to Adobe’s findings. The most expensive tier of grocery items has seen its share of purchases fall from 24.5 percent in 2019 to nine percent today. The lowest tier has seen its share increase by 13 percent over the same period.
New research from Circana, formerly IRI and NPD Group, finds that consumers have reduced spending on products popular during the pandemic when federal stimulus spending put more money in their pockets. Purchases of home care, liquor and technology have come down as necessities such as food at home and pet care have increased.
- Circana’s research finds that consumer tradeoffs vary depending on the market segment.
Millennials are spending more on food at home and dining out. They have cut back on home textiles, office supplies and technology. - Hispanics spend 17 percent more than average on foodservice and have increased purchases of automotive, beauty and footwear. Cutbacks have been made in alcohol, home improvement and team sports.
- High-income households continue indulging in auto care, accessories, beauty products and handbags. Health and vitamin purchases are also substantial. Cutbacks have happened in sports equipment and video games.
- Low-income SNAP (Supplemental Nutrition Assistance Program) households have significantly pulled back on discretionary purchases, cutting back on non-food purchases at over three times the rate of food and beverages.
SNAP recipient spending will likely remain depressed following the end of added payments for low-income consumers allocated during the pandemic. Benefits have been reduced by $90 monthly for the average recipient, The Guardian reports.
Poverty was reduced by 9.6 percent and childhood poverty by 14 percent in states with the added payments, according to the Urban Institute.
Discussion Questions
DISCUSSION QUESTIONS: Why is trading down activity appearing to increase at the same time that prices are moderating from the past year’s highs? How should retailers selling products in discretionary categories navigate a period where a greater percentage of consumer purchasing is concentrated in non-discretionary goods?
Poll
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Dion Kenney
COO, Mondofora
Jeff Sward
Founding Partner, Merchandising Metrics
The inflation rate may be coming down, but prices are still going up — and are doing so off of big rises last year. As such, households remain constrained and are very value conscious. This leads to trading down in brands and choice of retailer, which is why segments like off-price and dollar stores are performing well. That said, there are counter trends including people trading up to better quality and indulgences they really want.
Agreed — luxury and higher price items are up, while private label and discount stores are up as well. Thinking that consumers are just broadly trading down is not the full story. The above references just that–consumers are spending in some categories while saving in others. Is that really a “trade down”? Or just a savvy consumer making tradeoffs that work for them? And on that note–does it really have much to do with inflation? Don’t we all do that all the time?
Dollar sales are lagging the inflation rate indicating that unit volumes are down. I think what’s going on now is beyond the typical trade-offs that were taking place in 2019, using that as a point of comparison.
Fair – but this Adobe report also only looks at online sales which is only ~10% of total grocery sales. Also looking at dollar sales and unit sales by individual product or category only tells part of the story – it doesn’t show how consumer are spending across the wallet. Consumers are always evaluating options and if a “cheaper” product delivers on quality expectations, that’s not a trade down. That’s a price/value problem.
For many the trading down phenomenon is a lagging trend, as shoppers slowly come to terms with the diminished expectations of harder economies. Two helpful responses for retailers are 1.) increase the perception that “shoppers get a bonus from us” versus buying from the competition, and 2.) create the perception that “our products are an inexpensive luxury” when budgets preclude expensive luxuries.
Inflation may have moderated, but it’s not as though prices have bounced back to their previous lower levels. Many household budgets are still stressed. There’s still less room for discretionary spending than there was a year or two ago. Plus, I’m betting that many households discovered very real value in the process of trading down. In groceries, taste and quality wasn’t compromised for lower prices. In apparel, lots of lower priced non-logo garments work just fine in their everyday wear role. Retailers have to be more aware of competition than ever. And competition is both internal and external. Rates of sale and space productivity have to be re-examined and product mix adjusted accordingly.
Savvy retailers will need to adjust their product offerings and strategies to appeal to consumers who are trading down. This means focusing on value and quality, while also offering unique and memorable experiences to draw customers into their stores. Retailers should embrace data science to gain a better understanding of their customers—online and off—and to be able to adjust their product offerings and strategies accordingly.
It’s also clear that “trading down” means different strategies for different generations and ethnic groups. Even the wealthy trade down when there is economic uncertainty, for instance. Value becomes more important, and discretionary products turn into investments in these goods. The markets are volatile and, despite the lower prices, consumers of all income levels are bombarded with dire financial predictions. Again, using data and having new insights match with the retailer’s specific brand will make all the difference.
Another example: some shoppers are switching to “dupes.” In the olden days, we’d call these “knockoffs.” Whatever you call them, they’re trending on socials and showing up in user-generated content (UGC), so retailers should take notice and react. Basically, retailers have no excuse for missing this type of trend.
Consumers keep trading down as inflation and layoffs erode their cost of living. Shoppers now buy less, switch to cheaper brands and seek sales to stretch every dollar.
Retailers in discretionary categories can use ads to communicate their value, quality and unique products.
100 percent. In regard to the grocery sector, the shift to private label or house brands has been ongoing since the pandemic was in full force as CPG companies were forced to SKU rationalize their expansive assortments of products. Because private label/house brands have upped their game over the past few years, if consumers tried a house brand, there was (and is) still a large percentage of them that permanently switched to that house brand choice. I don’t see this changing anytime soon.
Am seeing the exact same thing in the grocery sector, Richard. And if it’s not a trade down to a house brand, customers are watching more closely for deals, store values – regardless of store format.
I think there are several factors at play here. First, inflation may be slowing but, as others have pointed out, prices haven’t come down and wages haven’t gone up, especially for lower-income workers. During the pandemic, we saw a boom in spending in many areas of the economy, with the notable exception of low-wage earners. Those folks were struggling and continue to do so. With inflation, especially in fuel, that pain has moved up the economic ladder to the middle class, and I think that’s reflected in these results.
I also think there is a bit of post-pandemic hangover regarding spending. During the pandemic many consumers, or maybe just me, reevaluated their consumption habits and made changes. Just yesterday, we talked about the growth of the re-sell market. I believe that’s one manifestation of this trend.
Walmart is running a smart campaign right now around Easter — highlighting many items that are the same or lower priced than in 2022. Prices are nuts – and as we all know, brands rarely bring prices down or serving sizes back up once they’ve made the change. Trading down is really the only option for a good percentage of U.S. citizens. Retailers should see this as an opportunity to up their private label strategy and implement loyalty incentives for spending more at their stores.
Inflation is still hurting everyone’s wallets. Despite attempts to rein in higher costs, many food items are 11 percent to 25 percent higher than 12 to 18 months ago, and consumers with constrained budgets are having to make difficult choices between groceries and gas. With this dynamic, we’ll see consumers trading down in categories that they never imagined they would. Retailers need to take a hard look at all items and work with CPGs to develop value offerings that are compelling and unique.
I don’t know that we can call it trading down. I think there is a big question in consumers’ minds. They are constantly asking, “do I need this right now?” Trips to grocery stores may be up, but the average sale or selection of products has slowed down. Again, for retailers it is about merchandising product well in a way that can entice purchase. When a customer walks into a store with shelves 50 percent merchandised and not faced out to look full, their mind starts the conversation about what they really need. I think that impacts purchasing.
When your dollar doesn’t go as far, trading down is a visible effort to make that dollar stretch. All consumers, regardless of economic standing, have noticed higher prices in nearly all aspects of our lives. Whether they are cutting back on your lawn service or trying a store brand, all consumers are participating in this trend.
Food prices continue to rise at a faster rate than the inflation rate in general, and grocery costs are much higher than two years ago as a result. Some of the trading down is a continuing shopper response to those prices, and some of it is the grocers’ efforts to steer customers toward private-brand goods. Consumers willing to try stores’ own labels might become converts, or they might be going through a prolonged period of belt-tightening.
While inflation rates have been more moderate in recent months, prices are still increasing. The other key point is that salary and wage increases for many companies have not been keeping up with inflation in the last year, so consumers have less discretionary spending. As many consumers have opted for private label brands or off-price products, they may continue this habit if they are happy with the quality and value of these brands.
There are a number of factors all impacting consumer activity split by different buying groups. Firstly, many people are finding that Own label products are not necessarily of less quality than the national brands and so trading down in price is acceptable, in fact in Europe it is seen as smart shopping to buy own label products where the quality is good. At the same time outside Grocery the younger generations are not buying so much “Stuff” but are spending more on experience and when they do buy they look for recognisable and aspirational brands and are more discretionary than cumulative than their parents generation. This leads to conflicting stories of trading down and trading up at the same time. In terms of inflation and trading down, prices are still rising, only the increase is slowing so people are still looking for better vale.
In grocery, our research shows four out of ten shoppers are trading down to store brands, obviously for the price savings, but they are also indicating in very large percentages that the quality compares well to national brands. So I’d expect this to continue as shoppers realize both the value and quality dimensions of store brands/private label in this environment.
Rising grocery prices may certainly motivate many shoppers to “trade down” to store brands, ingredients versus packaged foods, or more economical protein options. Slowing grocery product inflation is not equivalent to a retreat to pre-pandemic prices. Baskets are more expensive now and likely to contain fewer items, IMO, although the Circana research doesn’t seem to address this metric.
The story may be different for products that are more discretionary, however. It’s easy to postpone some apparel or home furnishings purchases when the budget is tight. “Trading down” on lifestyle choices may mean doing with less, rather than buying cheaper items.
“same time that prices are moderating from the past year’s highs?” NO!! Once again, it’s inflation that’s moderating, prices are higher than last year (George I’m signing you up for detention 🙂 ) But let’s not get too hung up on prices, it’s whether or not incomes are keeping up that matters.
But are they ?? It’s been true for a long time, for many classes of people, that real incomes have been declining. Which is why ‘trading down’ has been a long-term trend. And will continue to be: will 2023 be “The Year of Trading Down”? Only until 2024 comes along.
Trading down was part of 2008, and we are already already seeing customers look for value, taking less risk. Companies continue rounds of layoffs and credit card balances show to be increasing, interest rates are going up. Regardless of prices moderating, the economy is queasy.
Retailers need to prove they have value to offer customers, whether they are upscale or price oriented. In an uneasy economy, everyone wants a deal. And so communicating this in promotions, offers, ad vehicles is more important than ever.
Trading down is a multi-definition term, depending on the category and industry you use it in. Trading down from one cellphone model to a lower cost one keeps most things the same (usually including the carrier) including the brand. However, trading down in the grocery industry, often includes moving from national brands to house brands, for the same item, but at a lower price. Today’s consumer is more willing to do this since our quality requirements (and deliverables) are consistent between house brands and national brands. So consumers win, by paying a lower price for essentially the same item.