Inflation impact on grocery sales and consumer behaviour

With inflation in the US at its highest rate since the 1980’s, the upward trend poses risks to spending as it puts a dent in real earnings. Unsurprisingly, how inflation will impact consumer spending relates to which income bracket they belong.

The outlook for grocery sales overall remains strong: as consumers focus on purchasing essentials, on-premise restaurant dining will take more of a hit. With consumers eating out less frequently, mid- and high-income households are expected to still purchase “affordable indulgences” as they continue to seek premium foodie experiences at home. As a result categories like confections, desserts, quality cuts of meat, alcohol and snacks are expected to maintain momentum.

Of course, food manufacturers are also feeling the inflationary pressures as input costs continue to rise. The key watchout for manufacturers will be to assess to what extent price increases can be passed along to the consumer versus compressing margins, as consumer confidence in the near term is filled with uncertainty. This will depend on the brand and their consumers’ price sensitivity, likely correlated with their income bracket. Manufacturers should seek to provide increased value where possible, either in the form of larger value-pack sizes or price discounts to ease the consumer burden and maintain topline sales during a difficult economic climate.

What impact will this inflationary trend have on consumer behaviour?

In general, consumers will tighten their purse strings and be more choiceful when it comes to expenses, as their real wages continue to fall. For many regularly purchased items such as household staples, personal care and beauty, consumers will seek value by either trading down to private label substitutes or seeking to purchase these items on deal. For lower income brackets, they will feel an increased strain as some essential items such as groceries are difficult to substitute – and with the prices of even cheaper substitutes going up, consumers will need to cut in other areas. Rising nominal value of purchases will weigh on personal savings and stretch credit card debt, according to Deloitte.

Early in the post-pandemic recovery, consumer spending was strong across the board, up 12.1% in 2021 driven by a boost in consumer savings due to stimulus checks, rising stock markets and limited spending choices with much of the country on lockdowns. However, with inflation heating up through this summer up to a 40-year high of 9.1% in June and 8.5% in July, consumer sentiment is beginning to wane as the threat of a recession looms.