Inflation may be down, but consumers remain singularly focused on price
Grocery Dive·(Industry Dive)
Sam Silverstein
6 min read
This story is part of a series on key trends that will affect grocers in 2024.
A year ago, the COVID-19 crisis remained top of mind, grocery inflation was soaring and consumers were scrambling to keep up with their supermarket bills. Today, the pandemic’s impact has faded and food costs are no longer galloping ahead — but grocery prices remain an overriding concern for shoppers as they navigate an economic landscape still pockmarked with uncertainty.
Bowed by an ugly mix of high interest rates, rising debt and growing costs for necessities like housing, consumers feel boxed in by their expenses and are in a mood to stretch their money however they can, according to industry analysts. Add in the pressures imposed last year by factors such as the resumption of student loan repayments and reductions in SNAP benefits, and many people have essentially run out of financial breathing space, said Ross Steinman, a professor at Widener University who focuses on consumer psychology.
“People will still spend, but they’re going to do what they can to spend less in any way that’s possible,” said Steinman.
Steinman added that many people are coming to terms with skyrocketing prices for items like insurance that they typically spend little time worrying about until a bill arrives. “That has put a magnifying glass on everything else that they purchase,” Steinman said. “And what do they purchase most frequently? Groceries.”
Michael Snipes, an associate professor of instruction of economics at the University of South Florida’s Sarasota-Manatee campus, said the conditions that are pushing consumers to watch their spending have been decades in the making.
“It’s really coming to a head because it’s now gotten to the point where people can’t afford — or really have to make tough decisions on — necessities,” Snipes said, adding that as consumers have faced sharply elevated costs for essential goods for an extended period, they have become acutely aware that their buying power has diminished.
Retailers have accelerated their efforts to show that they recognize that people are facing financial stress and looking for relief at the grocery store. For example, grocers have decked out their stores with signage emphasizing their focus on value and are using their rewards programs to offer people personalized savings.
Southeastern Grocers, which runs the Winn-Dixie, Harveys Supermarket and Fresco y Más banners, recently announced a public relations campaign emphasizing that it wants to help people “achieve their savings resolutions” despite the headwinds facing the economy. E-grocer Hungryroot, meanwhile, is promising to refund the difference if shoppers notice an item in its “Best Price” program for less elsewhere.
But while grocery inflation has fallen significantly over the past year — from over 11% at the start of 2023 to just above 1% in December — shoppers are so attuned to dealing with rising prices at the supermarket that it will take time to convince them that conditions have actually improved, said Ernest Baskin, an associate professor at Saint Joseph’s University.
“Consumer sentiment is very hard to shift and so given that we’ve had a very long time of inflation in a macro sense, I think that consumers’ perceptions will keep being status quo until they see a long period of disinflation, or potentially deflation,” Baskin said.
While official statistics show that price increases have moderated, people still tend to sense that inflation is higher than it is — in part because the inflation figures the federal government compiles represent averages across a representative basket of goods and services, not necessarily what individual consumers actually buy themselves, Snipes said.
“You just have to be aware of what inflation actually measures. And maybe more importantly, what it doesn't measure,” he said.
Debt is catching up with shoppers
People managed to keep up with inflation in recent years to an extent by tapping savings accounts and credit lines, but many are now feeling squeezed as they exhaust financial resources and grapple with debt payments, said Cassandra Happe, an analyst at consumer finance website WalletHub.
“Especially in the past year, people have really looked to credit cards to make ends meet,” Happe said, noting that some shoppers have also turned to buy now, pay later services. “So with all this debt, people are really looking at price more now than they might have in the past.”
Credit card balances were up by almost 5% during the third quarter of 2023, passing the $1 trillion mark, according to a November 2023 report from the Federal Reserve Bank of New York’s Center for Microeconomic Data. Total household debt rose by $228 billion during the quarter, to $17.3 trillion, the bank reported.
In addition to taking on more debt, consumers have been dealing with higher borrowing costs. The average retail credit card imposed an interest rate of almost 29% in 2023, up 2 percentage points from 2022, according to data published in October by Bankrate.
People’s heightened sensitivity to grocery prices is playing out in how retailers deal with suppliers, according to data Deloitte released earlier in January.
Forty percent of consumer product company executives who participated in a survey conducted by the consulting firm believe retailers will no longer be willing to accept meaningful price increases in 2024, and few thought they could continue to raise prices without depressing demand for their goods. The majority of CPG officials who participated in the Deloitte survey indicated they plan instead to boost volumes, change package sizes or shift to products with higher profit margins.
While supply-side issues have pushed grocery prices up in recent years, rising consumer demand for supermarket goods has also played a role, said David Ortega, an associate professor and food economist at Michigan State University.
“Consumer spending on food over the past year and a half has been significantly higher than pre-COVID, and that’s even after we account for inflation,” Ortega said. “So that tells us that consumers are spending more on food and that puts upward pressure on prices because there’s an increase in the demand for food.”
Baskin pointed out that while people might be on the hunt for value when they shop for groceries, their definition of what constitutes a good deal depends on their individual circumstances. People don’t always equate value with price and instead focus on finding retailers that help them feel they’re getting a good deal across multiple factors, he added.
“Value is getting something positive for your money. [The] definition of value can be squarely on price or it can be squarely on experience, or it can be squarely on quality, or it can be some mix of those,” Baskin said. “What you may see as prices stop increasing as fast as they were is that you may see the different components of value start to change, and you may see that consumers will shift the categories that they’re willing to trade off on.”
Researchers at 84.51?, Kroger’s data science unit, have found that as people have reached the breaking point on price, cost has emerged as the top criteria they use in deciding whether to try new products when shopping for groceries.
“If you are a CPG brand or even the Kroger brand [and] you’re trying to get some new innovation out on the market, it better be priced right or there can be huge barrier to entry,” said Alex Trott, director of insights for 84.51?.
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