Food Inflation, Part Two: Consumers React to High Food Prices

In a February interview on CBS’ “60 Minutes,” Federal Reserve Chairman Jerome Powell acknowledged, “People are experiencing high prices. If you think about the basic necessities, things like, you know, bread and milk and eggs and meats of various kinds, if you look back, prices are substantially higher than they were before the pandemic. And so, we think that’s a big reason why people are, have been relatively dissatisfied with what is otherwise a pretty good economy.”[1] And Chairman Powell had some bad news for people looking for prices to fall. He said, “Some food prices that incorporate the price of commodities, grains and things like that, those can come down. But the overall price level doesn’t come down. It will fluctuate. … In aggregate, the price level doesn’t tend to go down except in fairly extreme circumstances.” Underscoring the point that the economy is good but prices are high, markets correspondent Emily Peck reports, “The inflation rate for ‘food at home,’ basically the stuff you buy at the supermarket, is really low these days, with prices rising just 1.1% over the last year. But since January 2021, when President Biden took office, prices are up nearly 21%. … Every time Americans go food shopping they feel the sting of higher prices, making the grocery store the place where consumers are most regularly reminded about inflation.”[2] In Part One of this article, I discussed how high food prices could affect national elections. In Part Two of this article, I want to discuss how consumers are reacting to high food prices and, in Part Three, I will discuss what brands and grocers are trying to do win back customer loyalty.

Consumers Say Goodbye to Loyalty

Tim Bridges, an Executive Vice President at Capgemini, insists cost is now king in the retail sector. He observes, “In the consumer products and retail markets, convenience has been the king for some time, and during its long reign, businesses shaped their offer accordingly. Times have changed, as have consumer preferences. Nowadays, convenience is still a factor, but it’s tempered by cost. Domestic budgets are being squeezed, and buying behavior has been affected.”[3] How is consumer behavior changing? According to Bridges, brand loyalty is being abandoned. He explains, “We’re seeing significant moves towards white-label purchases. Is the shift to white label the new normal? For the time being, it would seem so. It’s been a trend for perhaps two years now, and it’s likely to continue until inflation and cost-of-living pressures diminish, or until traditional brands can overcome the challenge white labels pose. It’s partly a reflection of the weight of price relative to brand loyalty, but it’s also perhaps an organizational wake-up call: consumers are indirectly telling consumer packaged goods (CPG) companies that they are not cost-efficient. For CPG companies and retailers, it means they need to transform their strategies.”

One strategy CPG manufacturers have tried is shrinkflation. As I wrote in a previous article, “Consumers are not so dumb that they fail to see when they are getting less product for their money. It’s called ‘shrinkflation.’ The Merriam-Webster Dictionary notes, ‘Shrinkflation is the practice of reducing a product’s amount or volume per unit while continuing to offer it at the same price.’ … Consumer packaged goods manufacturers are well aware of public’s attitude towards shrinkflation. They also know they are caught between the proverbial rock and a hard place during inflationary times. They must respond to rising costs while at the same time try to maintain market share by keeping consumers buying their products. Shrinkflation is often the solution they use.”[4] The fact is, many consumers have rebelled against shrinkflation and have looked for other, cheaper brands.

Danielle Commisso, Content Marketing at CivicScience, notes, “A growing number of manufacturers and retailers are responding with practices such as package downsizing (‘shrinkflation’) and using dynamic pricing. Yet, CivicScience data show consumers are growing more aware of these practices. … How shoppers are choosing to respond to shrinking item quantities has also changed in the last two years. Interestingly, shoppers appear to be more open to certain ‘shrinkflated’ items now — 20% say they would prefer to pay the same amount for a reduced quantity of an item versus pay more for the same quantity, which has risen four points since 2022. However, the majority of consumers report they would abandon the purchase altogether when faced with this scenario, with some opting to switch brands.”[5] This holds true both in-store and online. Journalist Tatiana Walk-Morris reports, “An Adobe Analytics report [looking at] e-commerce sales within the first half of the year … [found] the share of cheap goods [bought] increased ‘significantly,’ … with consumers ‘trading down to cheaper goods online,’ due in part to continued inflation.”[6]

Lack of loyalty is not just a brand problem. It’s a problem for grocers as well — and for good reason. Philip A Loring, an Adjunct Associate Professor at University of Guelph, and Ryan M. Katz-Rosene, an Associate Professor at the University of Ottawa, report, “In the United States, there is strong evidence that the private sector has been profiteering on supply chain issues and inflation. The U.S. Federal Trade Commission likewise recently found that big grocers used the pandemic as a smokescreen to pad their profits at the public’s expense.”[7] Beefed-up loyalty programs could help restore trust. The staff at Upside notes, “Increasing customer loyalty is a top priority for grocers. … A survey of 1,900 consumers showed that today’s shoppers ARE hungry for value, and retailers are right to invest in loyalty. But just because a customer belongs to a given program doesn’t mean they’ll actually behave loyally.”[8] The Upside staff believes, with some justification, that loyalty programs work. They note, “As prices increase across the board, consumers want better bang for their buck, and they often turn to loyalty programs to find it. This makes sense — when consumers hear ‘loyalty,’ they think ‘discount,’ so these programs are likely to appeal.” Research from Dunnhumby agrees with that conclusion. Loyalty programs generate data and that data can be analyzed by artificial intelligence (AI) for the benefit of consumers — a benefit that most consumers desire.

Grocery journalist Sam Silverstein reports, “Consumers are especially interested in the ability of artificial intelligence to help them save money when shopping for groceries, manage their budgets, and enable retailers to provide personalized rewards and suggestions, according to data from the latest wave of Dunnhumby’s Consumer Trends Tracker. … Shoppers under 45 are more likely than older consumers to trust AI and to want to use the technology to engage with retailers, Dunnhumby found. AI holds particular promise as a way for grocers to connect with shoppers as many consumers struggle financially and deal with food insecurity, the research suggests.”[9] Loyalty programs are a great way to bring grocers, consumers, and AI together to reestablish the trust that was broken over the past several years.

Concluding Thoughts

Silverstein reports, “For the first time since the [Dunnhumby] Consumer Trends Tracker began, more than a third (33.7%) of participants said they have cut or skipped meals because they didn’t have enough money to buy food. Among people with children at home, the figure was 42%. People also highly correlate grocery shopping with a sense that food prices are rising rapidly and believe that inflation is much higher than government statistics show it actually is, continuing a trend that has persisted even as inflation has rapidly come down. Respondents to the latest iteration of Dunnhumby’s tracker said they thought grocery inflation was 22.1% even though the actual rate was only 3% when the survey took place.” Commisso observes, “Attitudes change before behaviors do.” The Dunnhumby figures are pretty clear about how consumer attitudes have changed. As a result, brands and grocers must react to subsequent consumer behavior if they are to reestablish trust and profit in the years ahead. How they are responding to changing consumer behavior is the subject of the concluding part of this article.

Footnotes [1] Scott Pelley, “Jerome Powell: Full 2024 60 Minutes interview transcript,” CBS 60 Minutes, 4 February 2024. [2] Emily Peck, “Why grocery bills feel so high, even though food inflation is technically low,” Axios, 28 May 2024. [3] Tim Bridges, “Cost Is The New King For Consumer Products And Retail Organizations,” Forbes, 8 May 2024. [4] Stephen DeAngelis, “Shrinkflation Risks Consumer Blowback,” Enterra Insights, 7 March 2024. [5] Danielle Commisso, “As Shrinkflation Becomes More Prevalent, Consumers Grow Less Brand Loyal,” CivicScience, 13 March 2024. [6] Tatiana Walk-Morris, “Consumers ‘trading down’ to cheaper goods online: report,” Retail Dive, 14 May 2024. [7] Philip A Loring and Ryan M. Katz-Rosene, “Why are grocery bills so high? A new study looks at the science behind food price reporting,” The Conversation, 26 May 2024. [8] Sommer Stockton, “Loyalty Membership Does Not Spell Loyal Behavior For Shoppers,” The Shelby Report, 3 May 2024. [9] Sam Silverstein, “Consumers want grocers to use AI to help them save money, Dunnhumby finds,” Grocery Dive, 2 November 2023.