Inflation Is Driving Grocery Shoppers to Trade Down (or Out)

Back in November, market researcher IRI predicted that inflation on consumer packaged goods could run at 8% for the first half of 2022—well past the 5% threshold at which, historically, sales of affected goods have started to fall. 

Since then, the situation has only become more tenuous, according to IRI President of Client Engagement Krishnakumar "KK" Davey. First, of course, there has been the omicron-driven surge in COVID-19 cases leading to a fresh wave of worker absences—due not just to illness but also mandatory quarantines and school/daycare closings. There's also the issue that manufacturers and retailers alike continue to face challenges finding and keeping the workers they need—manufacturing employment, for example, remains down 219,000 jobs from February 2020, according to the Bureau of Labor Statistics' December jobs report. 

It's all leading many grocers to find renewed challenges in keeping shelves stocked, and that's frustrating shoppers, who are acutely aware of inventory issues on top of higher prices for grocery go-tos such as meat and produce.

And now, with all of those factors in play, IRI is seeing some of its predictions from fall bear out in reality: "In the most recent data, we did see close to the 8% price mix change that we anticipated," Davey said in a recent conversation with WGB. Following from that, "The volumes are negative, quite negative," he added. 

Davey spoke with WGB about the updated outlook for 2022, the worsening challenge for lower-income shoppers and what's keeping grocery executives up at night right now.

Christine LaFave Grace: You said in November that you expected inflation to continue to run hot and consumers to become significantly more price sensitive in 2022. What has IRI seen since then? 

KK Davey: The price mix has really come to perishables and nonperishables—price per volume is 9%—and volumes are negative. Of the 25 categories (IRI tracks), only three categories—soup, bottled water and sports drinks—are positive. Everything else is negative, with most in the high single digits and some in the low double digits.

We are finding there is downshifting going on. It’s still subtle, but sales in meat categories [for example] are coming back to the pre-COVID norms. We are seeing people shifting among the categories—from red meat to some less-expensive meat, for instance.

Looking at our latest 12-week data, dinners and frozen entrees are down 2%; breakfast meat is down 12%; seafood is down 14%; refrigerated [meat] is down 4%. These are the four big meat categories where you’re seeing negatives. So people are changing to other types of meat—cheaper meat, cheaper alternatives—and also I notice there is probably a little bit of eating out happening. I suspect that despite omicron, people are continuing to move about and consume a little bit more outside the home.

We’re [also] seeing some evidence in the baskets in terms of people dropping a few discretionary items. We did a little survey some time ago [about shoppers' top ways to control their grocery spend]. ... Cutting back on nonessentials was 33% among low- and middle-income households. Switching to a store brand or lower-cost brand was 24%, and switching to lower-cost retailers was about 13%.

What do you see as the impact of the expiration of the expanded child tax credit?

We think it’s substantial. A lot of the growth in CPG, especially in edibles, was driven by low-income consumers. From 2020 to 2021, they contributed 52% of the growth [in CPG sales], which is a 216 index for low-income shoppers. We believe the financial pressure is going to increase on them. Federal benefit cuts, including the child tax credit—you look at all of that, and yes, they’re getting paid a little bit more; there are more jobs available; but inflation’s 7%. Nobody’s paying you 7% more, even if you switch jobs.

They say omicron will be gone in a month or so, but still, I think the inflation’s not going to go away like that (snaps fingers).

Do you think the 8% CPG inflation you forecast in November now is going to extend into the second half of the year before moderating back down?

It’s going to be interesting. We don’t have a strong point of view there, and the reason is that, as we are evidencing already, as these prices go into the 8%, 9% range—the mix shift will come down, and the price/promotion will contribute to a decline in demand. As that happens, manufacturers will start promoting more, retailers will start promoting, so the promotion will increase, and that may bring down the price-mix shift. But it may not be as dramatic. We had said an average of 8% (first-half 2022) and 4% (second half); it may be an average of 8% and 6%. It depends on how fast these variants and variant-related absences go. There are a lot of unknowns.

What are the biggest concerns you’re hearing from retailers?

The supply challenges issue—we thought it would kind of decelerate, but it’s actually accelerated. A bunch of clients are bringing in additional capacity to meet elevated demand, and I’m always thinking in the back of my mind, “What if COVID goes off ... ?” Then all of that is going to result in more price competition, which is another factor to consider. But supply somehow has gotten a little bit more complicated in the past three or four months. Some of it is in production—people calling out sick, etc.

Supply is the one main thing that’s occupying a bunch of executives’ minds. Variation in supply across markets is going to be increased. If you look at it from a past-four-weeks period, a two-week period—more recent time periods—there’s less available, and there’s more variation across markets. That is something that I think is the No. 1 priority. No. 2, related, is assortment has shrunk. It was doing better last summer, but now it’s shrinking again across many retailers. Supply, assortment, pricing are all core issues for manufacturers and retailers right now.

The long-term impact will be more and more automation. You’re removing the variability due to people—people refusing to come to work, or finding other attractive jobs or quitting, or calling out sick, etc.