Grocery shoppers unlikely to revert back to old habits

Posted by Daniel Palmer on 18th June 2009

American consumers, who like Australians have been increasing private label consumption and spending more on eating at home, are going to continue to place their premium on value rather than quality once the recessionary tide recedes, according to Rabobank.

“An economic recovery would help loosen up consumer purse strings, and improve some of the consumer confidence levels,” said Rabobank’s Food & Agribusiness Research and Advisory (FAR) Executive Director Stephen Rannekleiv. “But many of the pre-recession spending trends were somewhat unsustainable. I think consumers have changed.”

In a podcast, Rannekleiv discussed how the economy has altered buying habits – creating more price sensitive consumers, who are looking for less expensive alternatives, reducing spending, and increasingly using coupons. However, the key is to determine whether these trends are secular or merely cyclical.

“This increased price sensitivity of consumers comes on the heels of an unprecedented trend of trading up. Where you saw consumers willing to spend more for small luxuries
and premium products,” Mr Rannekleiv noted. “The problem comes in the investments that were made to take advantage of these trading up trends.”

As an example, for retail sales of wine between 2002 and 2008, the average growth of wine priced at more than US$15 a bottle, was 15 per cent. However, in the same time period, wine priced under $3 a bottle saw negative growth. In April 2009, wines under $3 experienced more than 8 per cent growth, while growth for wine more than $15 a bottle, slowed to slightly less than 2 per cent.

While consumers were trading up, companies were able to profit from investments in acquisitions, as well as brand positioning and image. However, with consumers migrating to less expensive options, returns on those investments are now not meeting expectations. How companies respond – whether waiting out the down turn or making changes to their products and brand position to become more value oriented – depends on whether they believe the recessionary impact is cyclical or secular.

“(However) those views can be somewhat fluid as more information becomes available, as the recession drags on, and as we see these trends continue,” Mr Rannekleiv advised.

For example, one food retailer invested in improving the consumer shopping experience and expanded their premium product mix – taking advantage of the premiumisation trends in order to differentiate themselves from low-cost retailers. Because this investment had proven so successful, their initial response was to wait out the downturn. However, as the recession lingered, they have become more aggressive in their pricing in order to maintain their customer base.

“Food and beverage companies need to be prepared for more frugality from consumers,” Mr Rannekleiv suggested, who estimates that frugality could be an important consumer trend for the next five years.

“Moving forward, consumers are starting to replace some of that lost wealth by increasing their savings, and some of this increase in savings is often cited in one of the causes in the dip in consumer spending,” he added.

As the economy turns around, consumer confidence may increase further and the level of spending may also increase. However, we may not return to past levels of spending.
“Even an improvement in the economy may bring back consumer confidence, but I don’t think … a strong level of consumer confidence (will) bring back some of those spending patterns prior to this recession,” Mr Rannekleiv concluded. “I think consumers have changed.”

The full podcast is available online at rabobankamerica.com/rabocast.