Breaking the Back of Food Inflation

Sometimes I catch up with the news; sometimes the news catches up with me. Today the trend involves consumer resistance to higher food pricing at supermarkets and fast food outlets.

Consumers Buying Less Food

Vote with Your Wallet, Inflation, Shrinkflation, food prices, greedIn at least one of the posts I have written about inflation and shrinkflation, I recommended people stop buying overpriced groceries that are not staples or an important part of their diet. According to current news, consumers are indeed turning away from high-priced brands in favor of supermarket labels or generic food. And voting with our wallets is having an impact on prices.

Changes in Consumer Behavior

Here are some of the many headlines addressing this major shift in consumer behavior:

AP News: Consumers are increasingly pushing back against price increases—and winning

“Fed up with prices that remain about 19%, on average, above where they were before the pandemic, consumers are fighting back. In grocery stores, they’re shifting away from name brands to store-brand items, switching to discount stores or simply buying fewer items like snacks or gourmet foods.”

NBC News: Long-predicted consumer pullback finally hits restaurants like Starbucks, KFC and McDonald’s

“But it’s taken a while for fast-food chains to see their sales actually shrink, despite several quarters of warnings to investors that low-income consumers were weakening and other diners were trading down from pricier options.”

CNN Business: Retailers jacked up prices and squeezed consumers. They might have just blinked.

“Retailers are feeling jittery. Consumers aren’t shopping like they used to. In a game of chicken between stores and shoppers, it’s the stores that appear to be yielding first, by dropping prices on thousands of products.”

Statista: In the last six months, have you switched to a cheaper brand/own brand in any of the following categories?

“When surveyed in July 2022, almost 43 percent of consumers in the United States stated that they had switched to a cheaper or own brand of bread in the last six months. Toilet roll, potato chips, and snacks were other categories where a larger share of respondents had switched brands to save money.”

The Wall Street Journal:Consumers Fed Up with Food Costs are Ditching Big Brands

“Consumers are voting with their wallets—and some of America’s best-known food brands are losing.”

Spending Less at All Levels

The result is that folks are spending less at the supermarket and cutting back on visits to fast-food outlets. Declines in sales have been reported by Starbucks, McDonald’s, Pizza Hut, and KFC.  And it’s not just low-income shoppers who are changing their buying habits.

Parija Kavilanz reports in the CNN article that the biggest increase in “intent to spend” is coming from higher-income groups. These include people who were previously unconcerned about economic downturns. They are the cream of a company’s customer base simply because they keep spending, regardless of price.

The Corporate Response

In The Wall Street Journal article, reporters Heather Haddon and Jesse Newman detail how cookie sales are feeling the crunch. Mondelez International admits that premium brands like Chips Ahoy are losing market share to cheaper sandwich cookies and this is taking a bite out of their profits.

Chips Ahoy, Mondelez, food pricing, inflation, Van de PutI got a kick out of the explanation from Mondelez Chief Executive Dirk Van de Put, who said, “We have surpassed certain price points, and that is having a big effect.”

Translating the business jargon into real English, he means that they counted on brand loyalty to overcome the exorbitant new prices but it has stopped working. Mr. Van de Put admits that “lower-income shoppers” favor Chips Ahoy but are finally abandoning their loyalty for better prices. His solution? To offer “pricing specials and smaller pack sizes.”

Somehow, I don’t think he’s getting the message. Lowering prices by offering less won’t solve his problem.

Keep Raising Prices

Quicksand, food prices, inflation, consumersAnother tactic is to keep raising prices—just not so much. Sure, you’ve got one foot in the quicksand and you plan to go in with both feet but this time you won’t put that second foot in all the way. Let’s see how that works out.

This idea reverses the old story about the company that loses money on every sale but plans to make it up in volume. Here they make more money with every sale but are losing overall volume. In other words, they are eroding their customer base faster than Diet Coke can dissolve a tooth.

Companies can’t make the big profits they have become addicted to by selling to a smaller customer base. Especially when your competitors are going after the same shrinking pool of customers. Sooner or later, someone will drop prices to gain market share and start a price war. Yum.

Driving Your Customers Away

Mr. Moneybags, Monopoly, greedflation, shrinkflation, supermarket, inflationWhile these food manufacturers are driving their loyal customers away, they are also introducing them to the competition. That may be a cheaper brand, an alternative kind of food, or nothing at all. No one needs Doritos, Chips Ahoy or a Big Mac after all. Consumers can pack a lunch, make a pot of popcorn, bake their own cookies, or eat an apple.

Once they have made the switch and found that the alternatives are not bad — and may even be better — do the companies really think they will come flocking back for smaller packages or slightly higher prices? I doubt it.

A Rude Awakening

As food manufacturers and market chains have gobbled up higher profits, they seem to have adopted the idea that the good times will always keep on rolling. I see a rude awakening on the horizon. It can’t come too soon.