As shoppers cut back, who is going to get squeezed?

As consumers grapple with all that is plaguing the Australian economy, they have started to batten down the hatches and shift their spending habits, turning to money-saving options as they find ways to pay for dramatic increases in the cost of living and the associated run-on to the other necessities of life. Economic events outside the control of the everyday family such as interest rates, the housing bubble, rents, personal debt levels, stock market volatility, the cost of energy, petrol and food all combine to mean that our “average shopper” is now starting to do some distinctly “unaverage” things to make ends meet.

For example, heavy family vehicles and the old standard Ford/ Holden as the family car are no longer the dominant force, but hybrids and small car sales are going through the roof. Car pooling and the use of public transport are becoming more prevalent as people search for ways to stretch their dollar further.

And with inflation at its highest level in over 20 years, consumers relying on supermarkets for their food also are finding higher prices in the aisles. Food and beverage prices have climbed an average of over 5% percent in the last year. The worst inflation in over two decades has now started to changed the way people shop for food.

What is starting to emerge is a new paradigm of consumerism that some experts believe will live long after this economic crisis is resolved.

“Suddenly consumers are focused on buying what they have to have as opposed to buying what they want to have” said Norrelle Goldring from Shopportunity “People won’t stop using toilet paper, but they will stop using other discretionary products and brands.”

There are three major consumers trends occurring that vary by income:

1. Those making under $40,000 a year are redefining what goes into their shopping baskets and where he shop. They’re finding ways to stretch the household dollar by going back to just the essentials, effectively trading down to different cuts and different qualities of product. Also promiscuity is growing as they hunting out bargains and low prices to stretch even further.
2. The mid-tier consumer in the $40- $100,000 income range is “selectively deselecting” They’re choosing to buy cheaper products in low emotion categories but are willing to keep the little indulgences that make life that little bit easier.
3. Those earning $100,000 and above are changing their priorities about which products they buy as well as the brand and unit price. Do I really need to spend $100 on a bottle of wine for dinner or can I get away with a $30 bottle?

Recent findings from Nielsen in the US show that:

• More than 50% are eating at home more and eating out less.
• More are entertaining at home
• More are taking lunch with them
• An overwhelming 93% worry about rising food prices, and 79% about rising personal care prices.
• 63% of American consumers are reducing their spending to compensate for rising gas prices
• More than 7 households in 10 (72%) are ready to reduce spending on household necessities if economic conditions worsen.
• One consumer in four (24%) would shop for groceries in a less expensive store if food prices continue to rise
• To compensate for rising gas prices, half of consumers (49%) are reducing their retail spend,
• 78% combine shopping trips and errands
• 39% stay home more

In response, people are buying cheaper, house brand products instead of the more expensive national brands particularly in the <$40k bracket. They’re also buying more products when they are on special. So the mix is starting to change and in retail jargon, this is called “trading down,” and it’s starting to become more prevalent particularly in those socio-economic areas that struggle when times get tough.

So how will people behave when they trade down apart from buying more specials and house brands?

• Attracted to outlets with a fuel docket offer
• Reduce their overall spend on everything, some categories to a great degree others to a small degree
• Fewer small basket quick trips as people conserve fuel. This is currently 70% of all baskets and the fastest growing profile so the effect will be strong
• Move to the internet to make purchases (>$100kpa profile) with non-food and GM lines making up most of the basket
• Cherry pick for specials across the retailers
• Pantry fill specials, particularly high SKU value non-food items such as laundry
• Just stop buying that Brand

One area that will be under pressure will be trade spend, and managing a positive return for the investment.

If shoppers continue to trade down, two levers may well be applied:

1. Applying the spend across a wider range of products with a smaller price drop – again to leverage shopper in-store perceptions and to maximise the spread of products on special
2. Focusing the discount to create stunt price points - this has already been happening for some time, but the temptation to do it may prove irresistible

Responses from a recent Unilever survey also indicated some interesting behaviours and attitudes towards the future purchase patterns in certain categories:

Now, where will people go to trade down??

Obviously Aldi will get a huge kick along as will Costco when they finally open - the press will make sure of that with all sorts of price comparisons etc. The $ stores such as Reject, Crazy Clarke’s and Go Lo will do really well. The Victorian based NQR stores will thrive in his trading environment as the people on struggle street struggle to live.

Some of the small privately held clearance shops and chains such as Cunninghams and XXX are trading their heads off and are buying large parcels of stock, better if it is branded and not too concerned about the date, as long as the price is right. And it is selling through – quickly!

P&C will struggle as the queues get longer and people want to get out of the store that is associated with extra $ spend. Impulse milk, bread and snack sales have already started to slow in response to “get me out of here” shopper reactions.

There is a definite trend to eat at home as well, which will assist Woolworths and Coles. The smaller local retailers could possibly get a double benefit, firstly from the eat at home trend but also to local/ short trips to save fuel – and add the healthy aspect of home cooking and they may just be on a winner!

Again the Unilever survey illustrates some interesting trends in channel switching as shoppers change their behaviour and their loyalties are tested.

Even though some of those channels and business models do not exist in Australia (yet), it is plain to see that people are moving to those outlets that are perceived to give the best value for their particular needs and income profile, and abandoning the more traditional middle ground offers.

The US tends to be about 3 years ahead of Australia in most retail trends. The economic impact of such events as the sub-prime melt down, house repossessions and market revaluations will hopefully not hit here with the same ferocity, however signs are evident that Australian shoppers are starting to behave in a similar fashion to their US counterparts in reaction to the local economic pressures.

We all need to be prepared to look closely at hiw shoppers are behaving in our categories, and how they are performing to stay ahead of the curve. A late reaction is not an option.

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