Why it matters

During inflationary times it is harder than ever for FMCG companies to deliver everyday low pricing (EDLP) because of higher input costs. FMCG brands must look at opportunities to make their products more relevant, driven by new shopper behaviours and occasions.

Takeaways

  • We are in a period of inflation with an unprecedented convergence of demand and supply factors.
  • Consumer demand is not driven by marginal price increases but by sticker shock (those big price rises that hit us where it hurts).
  • High performance brands have successfully mitigated past inflationary periods, seeing it as an opportunity to grow and having the courage to take agile counter-intuitive decisions.
  • FMCG brands must tap into a range of strategic options, such as using the full marketing toolbox beyond well-established price and revenue management principles.

Inflation is growing across all of the major economies. As we emerged from the pandemic – a period of contraction in the Fast Moving Consumer Goods (FMCG) market – we did see growth in spending and also in consumer confidence. But this has started to taper off across all of the macro economic indicators.

This is not the first inflation we have experienced, and it certainly won’t the last. But in many ways this is ‘an imperfect inflation’.

Typically in an inflationary period, we expect consumer demand to struggle. But right now we’re also seeing huge hikes in commodity prices and shipping costs, together with gaps in labour and unseasonable weather, which is impacting the availability of quality ingredients. Add to this, continued uncertainty over the pandemic, as well as regional issues, such as HFSS (High Fat Salt Sugar) regulations in the UK, and you can begin to see just how imperfect it is.

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The result of all of this is that it is harder than ever for FMCG companies to deliver everyday low pricing (EDLP) because of higher input costs. Many of these inflationary trends are intensified by supply side challenges, so in a highly globalised supply chain environment, we’re seeing inflation spread across economies far more quickly than in the past.

The question we are being asked right now is whether this inflation is a temporary blip or is it here for the long term? On the balance of probabilities, we believe it’s going to be here for while.

The reality is that if we take all of the indicators above this is not going to be resolved in the next 9 to 12 months. Shipping capacity, for example, is not going to increase immediately, anti-immigration laws that affect labour shortages do not change overnight, and some of the ingredient shortages are due to weather or affected by spot prices in the market.

Looking at the commercial reality of negotiation between suppliers and retailers in this situation, this usually arrives at a lower negotiated price increase, but also a notice period and the drawn down of stocks at the older prices. So you often see a six-month gap between the need to increase prices to prices actually rising in-store.

Sticker shock and the impact on consumer demand

For our recently published report, Beyond the Headlines: A different mindset for a different inflation, IRI surveyed 3,000 respondents in 12 countries to reveal the gap between consumer optimism and reality in the face of inflationary pressures. Over two-thirds feel they will be “significantly or somewhat better off” over the next six months, yet 91% of respondents expect the price of goods and services to go up. Just 7% expect prices to go down.

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So what’s happening here? Consumers don’t tend to react to marginal price increases as much as they do to so-called ‘sticker shock’. If the price of butter goes up by 10p (10%) most of us wouldn’t notice, even when the weekly shop increases by 1% a month, an annual rise of 12%.

But sticker shock is something we all recognize – those big price rises that hit us where it hurts. In the UK right now, we’re seeing petrol and diesel prices hitting record highs with some forecourts charging as much as £2 per litre for petrol. The same applies to gas and electricity bills with reports that the average energy bill will increase by £693 from April.

This reflects the gap between headline inflation rates and forecasts and actual changes in consumer behaviour. It can take three to six months before price increases change purchasing and consumption behaviours. This is shorter among low-income households and amplified by price elasticity in certain product categories.

It’s crucial for FMCG brands and retailers to understand sticker shock because it directly influences where, how and what consumers buy as prices increase.

In our survey, those shoppers that get to the checkout and find they have spent over their budget, say they would be too embarrassed to return items there and then. But next time they visit a store, they are much more price-aware, looking for deals and offers, buying less, or even switching to another retailer.

With more of us shopping online and using scanning devices in-store, it’s much easier to manage spending and make adjustments in order to stay within budget without embarrassment. Supermarkets mitigate this online by offering lower priced private label substitutes and price comparisons against other retailers.

Two-thirds of consumers told us that when they go online they would always or more often buy a national brand. This is likely because of better equity, past experience, taste and quality. But these brands have also managed over a period of time to maintain certainty and availability.

Less than half (48%) would buy private label, while 55% would never try a new brand. One interesting trend that we saw was among mid to high income earners, with just over half (56%) saying they would always or more often buy a trusted local brand, largely down to trust and the desire to contribute to the local economy.

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Consumption trends during sustained periods of inflation

We analysed some of the big trends from 2021 and found that consumers are also willing to spend more on plant-based foods, ‘better for you’ functional food and drinks, flavoured water drinks, and also to pay a premium for fresh fruit and vegetables for cooking from fresh. So despite a difficult inflationary context, some key categories are likely to remain more resilient.

As mobility increases to pre-pandemic levels with more people returning to work, eating out and travelling, especially in Europe and Asia, nearly half (43%) of consumers expect to continue to cook more at-home and from fresh. A proportion will turn to ambient meals – frozen or packed foods – and eat at hospitality venues out of home.

Another interesting trend that we are seeing emerge post-pandemic and into this inflationary period is cooking fresh at home for out of home occasions. This will have a positive influence on food categories that are now relevant even out of home.

Past periods of sustained inflation also show the choices that consumers make based on income and illustrate the products that will be more resilient even as inflation starts to bite.

Among low to medium consumers, for example, we see more trading down, buying on deal, as well as substituting items. Typically, there is more consumption of frozen meals, discounter private label, value ranges and impulse and indulgence buys like frozen desserts, confectionery and chocolate.

Mid to high income consumers are looking for smart deals and to premiumise where this is justified. Within this income group, we see more at home indulgence with fresh food and sauces, self-care, better for you and plant-based food and drink, local artisanal brands, private labels especially premium ranges, and impulse purchases like fresh confectionery and premium chocolate.

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Identifying new shopping behaviours during inflation

We have also looked at how shopper behaviours have changed. There are well-recognised behaviours around inflation, such as consumers buying a smaller portion or pack, buying a larger value pack, and buying on deals.

IRI has also identified 12 other shopping behaviours, which show that thinking about inflationary shopping behaviour as just downtrading is an over-simplification.

We know that consumers compare prices, added benefits, quality and upgrades. They also compare quantity needed, helped by manufacturers’ propositions – use less, recycle, lasts longer, etc. Lower and mid-age consumers are also looking at equity, so fair trade, sustainability and so on; and this so not something they will easily compromise on during inflationary periods.

Consumers also purchase in different channels, so not just online, but also club and discounter, which has implications for brand choices. They change the frequency of shopping, so rather than the regular weekly shop, they recognise that little and often can lead to better deals. They may schedule a purchase to when new stock comes in to take advantage of reduced prices the day before.

They also reduce the quantity of consumption, so not just being led by manufacturers, but by the realisation that less is more. Then there are consumers who uptrade, defer a purchase or even leave a category altogether, which is where retention strategies come into play.

This equips brands with 15 shopper behaviours to engage consumers in new moments and occasions and create products propositions, innovations and very effective promotions.

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Characteristics of inflation-busting brands

As part of our Beyond the Headlines: A different mindset for a different inflation report, IRI also analyzed 40 FMCG brands that have successfully mitigated past inflations to reveal key characteristics and to show FMCG manufacturers how they can be more resilient within their categories. We have summarized these into three key areas:

1. They target consumers with greater precision

High performing brands think of inflation as an opportunity because consumers are actively re-evaluating their consumption habits and relationship with brands. They invest in understanding changing needs and behaviors that are likely to shift demand and offer growth opportunities. They also re-align their marketing portfolio, pricing, distribution, revenue management, and brand mix to ensure they are in the right markets with the right product at the right price.

2. They behave counter-intuitively

They ‘invest in the trough’ by adapting in the short term but being consistent in the long term. This includes counter-intuitive behaviour like reducing innovations and investing that marketing budget in trade promotions (while phasing in innovation for recovery) and partnering with other businesses or rivals on transportation and distribution to cut costs. In addition, they never compromise on brand promise – quality, trust, ethics and sustainability are not replaceable.

3. They understand that all brands are equally vulnerable

High performing brands recognise that premium, mainstream and private label are equally vulnerable to the effects of inflation. This includes price increases due to unpredictable factors, threat of price wars, consumer up- or down-trading, and lack of availability in the right stores.

What next for brands?

The outlook for the year ahead is going to create huge challenges – and opportunities – for FMCG brands. Right now, they need to be asking five big questions that can help them mitigate the impact of inflation.

  1. What is driving inflation in the market and within our category?
  2. How is this affecting consumer demand for our brands?
  3. How do promotions shift elasticities and thresholds and what will minimise volume impact?
  4. How can we adjust shopper segmentation to target shifting consumer demand effectively?
  5. How can we optimise our brand and creative messaging, media and promotions?

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We recommend that brands begin to address these questions now.

In answer to the first question, it’s important to deconstruct price, going beyond the headlines, and track those changes. There is also a role for price elasticity models, but these need to be scaled up cross-category and cross-channels, as well as applying global benchmarks. Any model can then be customised for a deep dive into shifting price elasticities by both base range and promo range, giving a sense of price gaps and thresholds.

Brands must also evolve their shopper segmentation models to account for everything that is going on in the market right now – if not, this is a missed opportunity – to help track shifting consumer demand. Finally, sharpen your message and media optimization to ensure effectiveness to help boost trial, conversion and loyalty.

IRI’s Beyond the Headlines. An Imperfect Inflation webinar and interactive deck: https://www.iriworldwide.com/en-gb/insights/webinars/beyond-the-headlines-an-imperfect-inflation

About the author

Ananda supports senior corporate executives in FTSE-100 organisations to identify and capitalise on growth opportunities, sharpen marketing effectiveness and optimisation, and use the power of analytics and data to make smart commercial decisions. His career spans over 25 years of leading strategy teams at large companies, and in consulting and agency roles.

Ananda focuses on IRI’s clients in FMCG, Retail and Media and is often invited to industry events to share insights and foresights on what may shape these categories in the future.

An important part of his work is in building and mentoring high-performance strategy and insights teams; and creating a thriving community of subject matter experts, contributors and communicators across IRI’s country footprint and practices.

He is also expanding the depth of IRI’s strategic partnerships as part of its commitment to bring evidence-based, holistic strategic growth options to clients.