Economic slowdown forces trade down in food spend

Posted by Daniel Palmer on 12th August 2008

The retail industry has been bruised by sagging consumer sentiment and increased costs and, while this has heralded a 6-year low in quarterly retail turnover, the implications on food have so far been mixed – according to new research by Freshlogic.

Martin Kneebone, a director of consultancy firm Freshlogic, says that slimming household budgets are prompting a noticeable move toward cheaper meal options. The eating-out food market may lose as much as $3b in annual consumer spending, part of which may transfer to the take-home food retailers, who include supermarkets and specialists.

Freshlogic’s Mealpulse panel, which collects 14,000 responses per annum, showed a 4% decline in household spend on eating out in the 2nd quarter of 2008, on top of a 2% decline in the first quarter. “Conservatively, we are looking at about a 10% loss in spending over a full year for some eating out channels,” Kneebone advised.

While supermarkets may appear to be benefiting from the drop in out of home food spend, they are also affected by consumers trading down inside the store. The effect of this mixed result is yet to present itself in supermarket performance data.

“Our tracking of the supermarket promotional activity shows that the two major chains have increased the emphasis on “value” in recent weeks in response to this tighter situation,” Kneebone added.

Mr Kneebone does, however, caution against food suppliers and marketers making simplistic assumptions about the effects of a slowdown, as the data highlights that consumer’s reactions and changes tend to be complex and varied. “Households are trading down in their spending on food which is showing up in a variety of ways,” he said. “Consumers are certainly looking for cheaper products, and we’ve observed grocers’ private label products increasing their share. Discount retailers such as Aldi are boasting a greater share of sales – all at the expense of higher-priced supplier brands.”

“Our findings prove that Aldi is enjoying a market share disproportionate to their expanding 170-odd store footprint in Australia,” said Kneebone. “Our panel shows healthy percentages of cost-conscious families and retirees choosing Aldi where it’s available. What’s more surprising is that an unexpectedly large proportion of higher income families also frequent the discount supermarket chain. This is further eroding into the sales of supplier branded grocery lines and therefore the retail sales of the major supermarkets.”

Latest results from Mealpulse indicate that the patterns are not uniform across different household segments tracked in the consumer panel.

The decision to eat out is driven by lifestyle habits but also influenced by available time and discretionary dollars. “For lower income households, you would expect convenience to lose priority against more pressing demands,” Kneebone suggested. “At the moment, lifestyle choices and habits seem to prevail. Our analysis is showing that low income segments continue to eat out, but as with grocery shopping, they are trading down. Where people are eating out, they are increasingly choosing the less expensive option, such as fast food restaurants.”

The research also established that there is likely to be a fall in the number of people eating-out for breakfast as last year’s growth rate drops. “Last year breakfast was the leading growth occasion in eating-out,” Kneebone reported. “The latest trends show that more than a third of respondents intend to reduce the number of breakfasts they have out of the home, but again this varies across segments of the consuming households. There will be an opportunity for some players to pick up this market share, but whether this drifts to drive-thru fast food or to cereal and toast at home remains to be seen.”

Mr Kneebone believes that the specialist sector will still pose a threat to supermarkets while supermarkets. Specialists such as butchers, greengrocers, bakeries and delis, which have slowed in the last quarter, continue to enjoy strong customer loyalty, he advised.

The rate of ‘cross shopping’ – where people with a preferred supermarket for their food needs are also buying parts of their weekly shop elsewhere – remains significant according to Freshlogic’s analysis. Those choices outline that price is not the only factor that consumers are taking into account when they go shopping.