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Will Lower Volume Purchases Come Back to Bite Grocery Stores?
Price increases, not sales volume, are driving recent increased profit growth in grocery, according to CNN Business. In fact, the amount of groceries customers are buying in some categories has dropped.
The unit volume of staples dropped year-over-year in late May, with sales of eggs down 4.7 percent, milk down 3.9 percent, packaged bread down 3.8 percent and fresh root vegetables down 3.5 percent.
Dollar sales in these categories increased with eggs rising 41.2 percent, milk 0.9 percent, bread 8.5 percent and root vegetables 10.7 percent.
Categories showing higher dollar sales were all subject to price inflation, with egg prices up 48.2 percent, milk five percent, bread 12.7 percent and root vegetables 14.7 percent.
Grocery volume sales are still up from where they were in 2019, but Alastair Steel, executive, client engagement for market research firm Circana, attributes that to customers eating more food at home.
The outsize increase in gross egg profits may not be surprising given the highly publicized problem of skyrocketing egg prices that hit the U.S. earlier this year. Prices of a dozen grade A eggs reached an average of $4.82 per dozen in January, more than double the previous year-over-year price of $1.93.
The reduction in purchase volume comes after customers have already been trading down to lower-priced items to cope with inflation. Research released in March found that purchases made in the most expensive tier of groceries dropped from 24.5 percent in 2019 to nine percent. Purchases of the lowest tier increased 13 percent.
Customers spending more while purchasing less does not paint a rosy economic picture.
Some economists, however, anticipate a “soft landing” in which inflation and other economic indicators normalize without high-interest rates pushing the economy fully into a recession.
Jack Kleinheiz, chief economist at the National Retail Federation (NRF), said in a June economic review that the economy has been holding up better than many projected. He argues that a strong job market and rising wages have countered the effect of increased prices and higher borrowing costs. Consumer sentiment, however, is still “weak and stuck in recessionary territory.”
Discussion Questions
DISCUSSION QUESTIONS: Do you see grocery inflation continuing to abate? Will consumers return to buying more items if prices drop or has purchasing less become an ingrained behavior?
Poll
Loading …BrainTrust
Some grocery shoppers are very price sensitive and shift they purchasing between categories as needed to manage their grocery budget. When prices stay at a high level for a long period of time, some shoppers may have made the shift a habit. This is a serious risk for some product categories like eggs.
Even if inflation abates, it will still squeeze our budgets and reinforce our grocery habits this year.
Prices are unlikely to drop dramatically. Consumers will stick to value-tier goods, private labels, discounters, dollar stores and deals.
Other than commodities fluctuating with the tides, prices are not going down. If inflation recedes to 3% from 7%, prices still go up 3%. It is no secret that manufacturers and retailers love inflation. Inflation produces profits that don’t go away over time.
Wages have increased. Employment has increased, and as more disposable income becomes available, shoppers will “get used to the new prices.”
“Companies are not just maintaining margins, not just passing on cost increases, they have used it as a cover to expand margins,” said Albert Edwards, a global strategist at Société Générale. This behavior is no secret. It comes with your MBA.
We have to be careful not to confuse Price increases with profit increases, if costs are also rising profit may not be increasing the retailers are passing on cost inflation to the customers. Yes customers are trading down from brands to own label or cheaper brands and if this is a lengthy period of price inflation that may become a habit and damage the brands. The underlying trend is still that people are eating more at home and thus buying more from supermarkets than they did back in 2019, as inflations falls and price increases slow down then consumers will start to buy more of the items they want rather than just the ones they need. To demonise Supermarkets who offer great value, particularly in very competitive markets like US and UK, is not a good thing, they will work to control prices because it is so competitive and that has not changed.
If we check out the profits of retailers and CPG manufacturers, we will see most are breaking records. Inflation is a cover for raising prices and therefore absolute margins.
Just the other day, I was in my local gym and overheard a mom complaining about her recent grocery visit where she said she bought several things, and the price tag was shocking. I do think consumers are very conscious of paying more and avoiding certain items that send their bill even higher.
Customers will not naturally trade up if they have found acceptable lower priced options. Grocers/CPG brands will need to figure out how to enhance the value of items. Over the last two years they have tried every trick in the book to protect sales volume: shrink packaging, shink size of goods inside packaging, eliminating costly ingredients, changing promotional strategies and shifting to private label options. Customers are getting hit on every front from interest rates to gas prices. They will not return to normal behaviors.
I fear grocery stores have shown customers how to be “smart” and perhaps frugal in purchases. This may not be exactly what the grocers desire.
Grocery inflation is moderating, but there is still inflation and the price of groceries is way, way up compared to 2020. That puts enormous pressure on households, especially those in the lower income bracket. Indeed, the average lower income household now spends 47% of their retail budget on groceries, compared to 43% in 2019. This necessitates changes: trading down, cutting volumes where possible, restricting purchases of more expensive items like steak, and so forth. Such behaviors will remain until the price of groceries comes down or wages catch up.
Grocery inflation will continue to flatten out as conditions that drove inflation in the first place are being pushed aside- the strong jobs numbers from last month are testament to that. However there is some greedflation in the market, where the retailers are slow to reduce prices to recover lost dollars from previous cycles. This practice will also slowly wither away as smart competitive retailers will trade volume for price and begin charging less. However, this is a gradual process and can’t have any new issues that can rebuild the inflationary pressures. Even at the fed level, the target remains 2%, so there will be gradual increase of interest rates, biting down on the availability of capital. We’ll see some retailers impacted by this- but those who are managing their stores won’t be driven by interest rates. Consumer sentiment is also rising slowly (~.4% in April) so we should see some easing and renewed interest in purchasing going forward. Disclaimer: This overview was not written by any AI GPT.
There is no down……only up. Maybe we’ll see more promotional values, but once an MSRP always an MSRP.
I see food inflation continuing for the next year. Shoppers will buy more lower-priced store brands and select higher-priced national brands they just can’t do without. Overall, the size of the shopping basket will remain the same.
I agree with this. I don’t see an end for a while on this.
What is happening now is that retailers are beginning to realize that they moved too far up -they exceeded the tipping point of what a customers will pay for their products and we see that in a decrease in unit movement. Now senior leadership will have to determine next steps- you have to retreat but how much ? That takes deeper analysis and I hope all the stakeholders are involved in the process.
When you couple the number of households that live paycheck to paycheck with high inflation, something has to give. Those households have very little elasticity in their budgets. Net result = lower volume purchases. So it’s not shocking that grocers are seeing declining unit unit sales. It’s when they see declining customer visits that they will regret the aggressive price increases.
At this point in time, we continue to see inflation across different categories and locations. May showed a markedly small increase in grocery prices nationwide. However, according to Datasembly’s Grocery Price Index, a category like candy saw inflation with prices climbing an average of 4% in May. That being said, while lower prices can incentivize some consumers to purchase more items, the impact may not be universal, and purchasing habits may change over time, yet again.