‘Path of least resistance’: How consumer spending behaviour is adapting to inflation

As the UK teeters on the precipice of another recession, consumer shopping behaviour is shaping up to be similar to that seen during the 2008 financial crash.

While 47% of consumers have made or are expecting to make cut backs in their general expenditure due to inflation this year, shoppers are also keen to avoid any drastic alteration to their current lifestyles, according to data shared exclusively with Marketing Week by Kantar.

In fact, shoppers will absorb 75% of price increases in grocery or fashion rather than avoid the purchase altogether, Kantar says.

Looking back at the UK’s last major recession in 2008, the data shows consumers chose not to buy less, instead adopting “less disruptive” ways to decrease their overall spend. Shoppers saved 1.6% on their grocery bills by buying cheaper products compared to the prior year, reducing the total FMCG market value by the same amount. They saved 1.2% by buying more promotions.

In comparison, they saved just 0.5% by shopping at cheaper stores and actually added 0.8% to their grocery bills by buying more products rather than less.

As the UK teeters on the precipice of another recession, the pattern is shaping up to be similar, Kantar says, although figures are somewhat skewed year on year as a result of lockdown restrictions ending. Consumers are buying less post-pandemic, saving 5.2% on their grocery bills, but are only saving 0.3% by shopping at cheaper stores.

Buying cheaper products is resulting in a 4.9% saving this year, but shoppers are having to spend 2.5% more as a result of fewer available promotions.

“People follow the path of least resistance and that is the one that causes the least disruption to our lives,” says Kantar’s managing director of UK insights, Dom Boyd.  “The media overestimate people doing things less and buying less. Actually, we believe from our data that’s a little bit alarmist.”

However, levels of negativity in the UK are high right now, higher than the world average. While 34% of consumers feel negative globally, 43% feel so in the UK, driven primarily by the ongoing economic situation and its impact on finances.

Right now the single most important thing for brand owners is to identify how you can add value to people’s lives.

Dom Boyd, Kantar

The vast majority of people (78%) aren’t expecting a pay rise in line with inflation, with 43% expecting no pay rise at all. Among women, only 17% are expecting a pay rise in line with or above inflation.

As such, the number of households feeling comfortable in their finances is rapidly falling, with many more facing difficulties. In November, 41% of households felt comfortable, 41% were managing and 17% were struggling. Now 34% are comfortable, 44% are managing and 22% are struggling.

But headline behaviour remains similar across all groups, Kantar’s data shows. Comfortable households are spending 2.8% less, shopping 1.7% less frequently, buying 8.3% less packs per trip, while paying 5.8% more in price per pack.

Similarly, struggling consumers are spending 0.9% less, shopping 1.1% less often, buying 7.2% less packs per trip and paying 5.2% more in price per pack.

Divergences do emerge at a category level, however. Looking at the ambient cakes and pastries category, for example, comfortable consumers are spending 7% more, while struggling consumers are spending 1.5% less. In comparison, comfortable consumers are spending 3.3% more on chilled fruit juice, while struggling consumers spend 7.6% less.

Overall, consumers say they are looking to cut back on a range of discretionary categories, from eating out (57%) and holidays (54%) to clothes (50%), entertainment subscriptions (48%), and fuel and electricity usage (40%).

Luxury is the category consumers most plan to cut back on (73%), although with luxury brands already capturing only a small segment of more affluent customers, this is unlikely to represent any significant cause for concern.

Source: Kantar Barometer

“The real trend we’re seeing is consumers are being more considered in their purchases more often and that is impacting discretionary spend categories relatively more. In particular white goods and higher value items,” Boyd explains.

However, there are “interesting blips” when looking at actual consumer behaviour, he adds, with Kantar recording “slight” upticks in spend on holidays and certain kinds of clothes as consumers opt to enjoy the summer and some “light relief” from the last few years.

“We expect to see those categories ultimately to come back down again,” Boyd warns. “What we’re seeing is what believe to be a temporary bit of relief… The overall mindset that is shaping consumer behaviour is one of prudence and more consideration.”

Advice for brands

Like the pandemic, the current inflationary environment poses a considerable challenge for any brand. Some key “truths” remain the same, Boyd says, including the importance of maintaining marketing spend through volatile times to avoid losing share of voice.

However, the way marketers apply that spend needs to shift from where it has been spent over the past few years. During Covid, convenience was the primary consumer need that had to be met, but now the opportunity is to showcase “better value”, Boyd argues.

Brands need to position themselves as a saving, not a cost, highlighting the value of their product and why consumers shouldn’t cut it or trade down, he says.

“Right now the single most important thing for brand owners is to identify how you can add value to people’s lives, how you can be valuable and therefore how you can sustain or increase your price power in a way that increases your margin and offsets any drop in volume,” Boyd explains.

“That will allow you to grow as an overall business. And when you grow as an overall business you can reinvest in marketing and double down on the things that are working.”

Behaviour between consumer groups diverges at a category level. Source: Kantar FMCG Panel, 12 weeks to 12 June 2022 compared to last year.

Businesses such as Diageo, Unilever and P&G have provided examples of this over the last half year. All three have raised prices without a negative impact on overall sales, with Diageo’s investment in premiumisation continuing to provide additional value to customers. P&G, meanwhile, has focused on increasing the value of its brands by “close coupling” price increases with product innovation.

Coca-Cola has also been increasing marketing spend to create “more value” for its brands and therefore “earn” its price rises.

Discounting brands to maintain or increase sales, instead of maintaining or raising prices during a recession can cause a “doom loop”, Boyd warns, where brands are forced into a cycle of constant price cuts.Diageo attributes soaring profits to marketing spend boost and premiumisation strategy

But to maintain or increase price points, brands need to be seen as “different”, he argues.

“All our data shows the important of being different has been underrepresented over the last decade or so and actually, when brands are seen as being different emotionally and functionally, people are willing to maintain or increase their spend on them,” Boyd suggests.

“So building those strong brand cues and applying brutal consistency in the way a brand shows up in order to create that sense of difference and justify a price point.”

Category norms

Brands must also make sure they understand the norms of their category and where their price sits in the category range, Kantar advises. It is “far safer” to move prices if category norms are moving with you.

Butter brand Lurpak came under fire last month for increasing the price of its 1kg spreadable pack to £9, while also increasing the cost of a 500g pack from £2.75 to more than £4.00. The price increase of 45% was far above the category inflation of 20%.

Category norms are “vital” when setting prices, Kantar says. Yet, less than 68% of packs are sold at less than a 10% price premium

Understanding category norms can also help brands differentiate in a “meaningful way”, Boyd adds.

Kantar also advises brands not to focus too hard on loyalty and retaining existing customers at the expense of new customers, with data indicating the five best performing brands in the 12 weeks to 12 June were those which continue to seek new shoppers.

The brands which grow the most successfully are the brands which continue to attract new customers, because growth comes from the combination of penetration growth and pricing power.

Dom Boyd, Kantar

Spirits brand Smirnoff, for example, created more reasons for new customers to buy it by releasing new flavours over the last year, contributing to its 31% increase in value of sales. Energy drink Monster’s sales value grew by 42% when it created more opportunities for new customers to buy by increasing its presence in Asda.

“Loyalty is not only a slippery concept, but also a false concept. We would agree with Ehrenberg-Bass that time and again the data shows that the brands which grow the most successfully are the brands which continue to attract new customers, because growth comes from the combination of penetration growth and pricing power,” Boyd explains.

He adds it is “false logic” to assume all consumers will trade down to cheaper options as they adopt a more prudent mindset, although some will.Currys to focus on loyalty over customer acquisition amid pressures of inflation

“But people still need good things, valuable things and emotional release in their life. Brands provide all of these things and therefore you should always as a brand owner be looking to position your brand consistently to provide that value,” he says.

“You should therefore be hunting for penetration growth at the same time as driving pricing power as well. It’s the combination of those things that will get you through these challenging times.”