Choppier Waters Ahead for Grocers?

The calmer seas that retailers hoped to see in 2022 have not yet materialized, to say the least. 

New reports from Chicago-based market researcher IRI and foot-traffic analytics firm Placer.ai find that although the grocery industry has been remarkably resilient in the two years-plus since the COVID-19 pandemic started—thanks in no small part to robust, sustained consumer demand—rising prices are indeed beginning to take a toll on consumers. Inflation is creating cracks in consumers' buying habits, influencing where they shop and what they buy, and with CPG prices likely to continue to climb, retailers need to stay nimble in their pricing strategies to avoid losing wallet share, the firms warn.

At a certain level, inflation can drive up traffic to superstores and warehouse clubs as consumers seek to stock up on go-to goods and take advantage of bulk pricing, Placer.ai notes in its May 2022 Grocery Deep Dive. But there's a limit to consumers' bulk-buying ability, and consumers in some markets may be reaching it, the foot-traffic firm suggests. 

"In areas particularly hard-hit by inflation, bigger baskets are not always an option," the report's authors note. Earlier this spring, "in areas where the local inflation was below the national inflation rate, superstore visits increased while grocery visits decreased," Placer.ai notes. "But when the local inflation rate was at or above the national rate, superstore visits fell and grocery visits rose." 

For example, in the Riverside-San Bernardino-Ontario, Calif., area, outsized local inflation of 10% in March—when the national rate stood at 8.5%—yielded a foot-traffic bump of more than 7% for conventional grocery stores vs. the same month in 2019. Superstore foot traffic, by contrast, declined nearly 5%. The opposite pattern played out in the New York-Newark-Jersey City area, where inflation stood at a lower-than-average 6.1% in March.

Placer.ai's traffic data also suggested strong interest in budget grocers Aldi and Lidl as those German-born discounters expand their U.S. presence. "With shoppers increasingly looking to save on their grocery bill, it looks like these brands’ larger physical footprint is already having an impact on several regional grocery markets," including New York City and Philadelphia for Lidl and Houston and Baltimore for Aldi, according to the firm.

Meanwhile, retailers warily eyeing margins and watching for consumers' delayed response to price increases need to consider how their value proposition will look to customers beyond the turmoil of the given moment, IRI suggests.

"While the pandemic has led some brands to believe that price elasticity no longer exists, consumer behavior will shift as CPG prices keep rising and consumer dollars get stretched further," IRI executive Lance Goodridge writes in the firm's recently released Managing Price in Turbulent Times report. "The storm hasn’t hit yet, but the dark clouds are looming and we can forecast with high levels of confidence that CPG prices will continue to rise."

Once inflation cools, retailers may find that customers' perceptions of how well their offering stacks up against the competition has shifted, Goodridge notes—and some inflation-prompted shifts in shopping behaviors may stick, just as some pandemic-driven behaviors have proved stickier than expected. "When the dust settles a year from now, if you’ve raised your prices 20% over that period, you’ll be left with a higher-priced brand that needs to be supported with some sort of value proposition," writes Goodridge. "Whether it’s a special benefit, package or ingredient, consumers will seek a justification for the higher prices and good reasons not to switch to a less-expensive brand."