August 1, 2007
Consumers Trading Down to Save
The high cost of energy and food is driving many consumers into discount stores as they seek ways to make their dollars go farther.
Operators, including Aldi, Save-a-Lot, Target, Wal-Mart and other chains and independents that emphasize low prices, are seeing new customers shopping in their stores as the middle-class deals with much higher prices in the current market.
According to the U.S. Department of Labor, food prices jumped roughly four percent for the 12-months ending June 2007. Staples such as eggs (+10.5 percent) and orange juice (+33.2 percent) have seen some of the biggest increases.
Mike Abernathy, owner of Mike’s Discount Foods, told the Minneapolis Star Tribune that his business is up 25 percent in recent months. Mr. Abernathy’s customers save at his stores because he specializes in selling national brand items that are close to the expiration date.
Tuesdays are very busy at Mike’s because seniors get to take an extra 10 percent off their shopping bill.
“Older customers tell their middle-aged kids where they got a great deal on blueberries,” said Mr. Abernathy, “and pretty soon they’re shopping here, too.”
Discussion Question: What economic factors do you see as weighing the heaviest on consumers? Do you see consumers migrating to discount price retailers to save money? What does this mean for the retailers attracting these new customers and the stores where these consumers previously shopped? What do you expect to happen after prices eventually moderate again?
BrainTrust
Recent Discussions
Discussion Questions
Poll
There are many factors affecting the consumer budget today. One major factor is gas prices. Consumers are more aware of the cost to travel 20 miles for a better deal to save $5. Electricity, food and other staples have increased, putting a bind on the average middle market budget. Also, many consumers had Adjustable Rate Mortgages which have increased their monthly payment to a point where financially they are counting pennies. The lower cost brands will see an increase.
Companies like Dollar General, Family Dollar and Fred’s are inflation proof.
Discount supermarkets grow market share quickly when they build a lot of new locations. New store growth isn’t popular now, because investors and financially-driven managements see that new stores hurt comp sales and often garner lower return on investment. It’s likely that Wal-Mart will continue its recent policy of modest domestic new store growth, and that dollar store chains will also keep new location growth conservative. This will help conventional supermarkets preserve their market share.
Consumer confidence is everything and there are 3 significant factors putting a damper on consumer confidence: housing prices, gas, and health care. Each of these in their own way are forcing consumers to make spending decisions. We’ve already seen a downturn in the casual dining sector due to these factors and it is spilling over into traditional shopping habits. The end will not come when gas returns to $1.50 a gallon, it will end when consumers finally are able to come to terms with the new costs which will not be until after the 2008 election. I say this because everyone running for office at all levels in 2008 are going to make each of these consumer factors a campaign issue, thus keeping it in the mind of the consumer.
The escalating costs of health care and gas prices are the two largest factors for consumers who are squeezed in discretionary spending. Families on a relatively fixed income have to make compensations to offset these much higher expenses, and are doing so by watching where and what the purchase in consumables.
The retail formats that can demonstrate consistent savings for shoppers will have advantages, and dollar formats as well as big box retailers have demonstrated the EDLP positioning resonates with this growing shopper segment. This shopper segment will continue to expand with the advent of baby boom retirement and continued escalation of immigration, driving more people into becoming lower middle class Americans in dollars available to spend.
Consumers today have more choices than ever. Everyone wants to buy their stuff for practically nothing, and they want top notch customer service too. Look at the mess the airlines are in, and many other companies as well are cutting back on services. The price/service combo is a real juggling act in the competitive environment of retail, and with “new” SKUs being introduced each week, a store owner must be able to justify the space.
I try to run an EDLP discount format throughout the store, and most of my customers appreciate it. A high/low format is a death sentence because consumers will swipe up the giveaways, and leave the high priced goods on the shelves. Niche items definitely work, but the prices must still be reasonable, unless you’re in Newport Beach, or Las Vegas. Balance on all prices will, in the long run, keep the consumers happier, and when things get better, you’ll be the winner.
The heaviest economic factor weighing on consumers is, well, money. Right? What other economic factor is there? History has revealed the following truism regarding food sales during times of economic belt-tightening: A family’s food expenditures are the first part of their budget to be decreased because it’s the most flexible and discretionary part. But, inevitably, as adjustments are made in other areas of their budget, the family’s food expenditures always return to their previous level. Always.
I believe customers are trending towards purpose driven food…”Why am I buying this and why do I eat it?”
I believe that as money gets tight, customers will have to question food spending habits. And as more people become obese in our sedentary job markets, they will question the overall purpose of food in their lives.
I also believe that vitamins and functional nutrients in soda pop make little sense but whole grains, fiber, anti aging, and heart health supplements will find their way into good tasting food. This is where Own Brands can lead a whole new era by offering quality, taste, better for you ingredients at less cost.
If 70 percent of choice is made at the shelf, the retailer’s shelf will have the last word.
More Discussions
Has Same-Day Delivery Become an Expectation Across Retail?
Are expectations around retail delivery speed in flux?OpenAI Names the Infrastructure Standard for Agentic Commerce
Will OpenAI or Google (or another entity) set the gold standard for agentic commerce?Is Five Below Poised For Even Greater Growth?
Five Below is hitting serious growth numbers. Can this trend continue?
There are many factors affecting the consumer budget today. One major factor is gas prices. Consumers are more aware of the cost to travel 20 miles for a better deal to save $5. Electricity, food and other staples have increased, putting a bind on the average middle market budget. Also, many consumers had Adjustable Rate Mortgages which have increased their monthly payment to a point where financially they are counting pennies. The lower cost brands will see an increase.
Companies like Dollar General, Family Dollar and Fred’s are inflation proof.
Discount supermarkets grow market share quickly when they build a lot of new locations. New store growth isn’t popular now, because investors and financially-driven managements see that new stores hurt comp sales and often garner lower return on investment. It’s likely that Wal-Mart will continue its recent policy of modest domestic new store growth, and that dollar store chains will also keep new location growth conservative. This will help conventional supermarkets preserve their market share.
Consumer confidence is everything and there are 3 significant factors putting a damper on consumer confidence: housing prices, gas, and health care. Each of these in their own way are forcing consumers to make spending decisions. We’ve already seen a downturn in the casual dining sector due to these factors and it is spilling over into traditional shopping habits. The end will not come when gas returns to $1.50 a gallon, it will end when consumers finally are able to come to terms with the new costs which will not be until after the 2008 election. I say this because everyone running for office at all levels in 2008 are going to make each of these consumer factors a campaign issue, thus keeping it in the mind of the consumer.
The escalating costs of health care and gas prices are the two largest factors for consumers who are squeezed in discretionary spending. Families on a relatively fixed income have to make compensations to offset these much higher expenses, and are doing so by watching where and what the purchase in consumables.
The retail formats that can demonstrate consistent savings for shoppers will have advantages, and dollar formats as well as big box retailers have demonstrated the EDLP positioning resonates with this growing shopper segment. This shopper segment will continue to expand with the advent of baby boom retirement and continued escalation of immigration, driving more people into becoming lower middle class Americans in dollars available to spend.
Consumers today have more choices than ever. Everyone wants to buy their stuff for practically nothing, and they want top notch customer service too. Look at the mess the airlines are in, and many other companies as well are cutting back on services. The price/service combo is a real juggling act in the competitive environment of retail, and with “new” SKUs being introduced each week, a store owner must be able to justify the space.
I try to run an EDLP discount format throughout the store, and most of my customers appreciate it. A high/low format is a death sentence because consumers will swipe up the giveaways, and leave the high priced goods on the shelves. Niche items definitely work, but the prices must still be reasonable, unless you’re in Newport Beach, or Las Vegas. Balance on all prices will, in the long run, keep the consumers happier, and when things get better, you’ll be the winner.
The heaviest economic factor weighing on consumers is, well, money. Right? What other economic factor is there? History has revealed the following truism regarding food sales during times of economic belt-tightening: A family’s food expenditures are the first part of their budget to be decreased because it’s the most flexible and discretionary part. But, inevitably, as adjustments are made in other areas of their budget, the family’s food expenditures always return to their previous level. Always.
I believe customers are trending towards purpose driven food…”Why am I buying this and why do I eat it?”
I believe that as money gets tight, customers will have to question food spending habits. And as more people become obese in our sedentary job markets, they will question the overall purpose of food in their lives.
I also believe that vitamins and functional nutrients in soda pop make little sense but whole grains, fiber, anti aging, and heart health supplements will find their way into good tasting food. This is where Own Brands can lead a whole new era by offering quality, taste, better for you ingredients at less cost.
If 70 percent of choice is made at the shelf, the retailer’s shelf will have the last word.