Cost of living shopping receipt

Results season has shone a light on how consumers, retailers and manufacturers are dealing with record inflation. Average manufacturer pricing is up by nearly 15%, and the message from fmcg management teams is more pricing action will be necessary, as cost pressures are not abating quickly.

A recurring question from investors is whether we are on the precipice of the consumer cracking from higher pricing. So far, volumes have held up better than most expected. But looking into winter  – with the triple whammy of higher taxes, mortgage costs and energy – it is hard not to see fmcg volume trends worsening. 

Already, a number of companies have highlighted consumer baskets are noticeably smaller. There are increasingly clear signs that consumers are eating and drinking out less often. For lower-income consumers, eating and heating are the real priorities, with discretionary spend being reined in. In a recent IGD survey, one key finding was that half of UK shoppers plan to spend less on groceries.

Profit warnings from C&C and Royal Unibrew both flagged slowing consumer demand. That was also confirmed by Heineken, which is seeing beer volumes in the UK and Italy close to 10% below 2019 levels. Consumers seem to be spending about the same amount of money when they are out, but there is just less footfall in pubs on Mondays, Tuesdays and Fridays, which is not being made up by the rest of the week. More at-home consumption is good news for the food companies because typically their channel mix is more skewed to in-home rather than out-of-home, but at somewhat lower margins.

What is becoming clear is that consumers are bifurcating along socioeconomic lines, with value-tier consumers increasingly buying lower count packs and trading down as price sensitivity increases, while higher-income consumers have exhibited more consistent purchasing patterns. But even here cracks are beginning to appear.

We are also seeing e-commerce growth slowing as consumers return to stores where they see more value for money. However, retailers are under increasing pressure from discounters such as Aldi and Lidl as more consumers change where they shop rather than simply trading down in their existing retailer.

The big multiple retailers are responding by reducing ranges, in part because supply challenges remain, but also because in a cost of living crisis, more choice is not a consumer priority. For manufacturers this means more delistings, especially in undifferentiated areas of the grocery aisle such as frozen and ambient. This trend has particularly hit smaller suppliers, who have found it more difficult to be heard. In many categories we are seeing private label and the leading brand in a category taking share, with secondary and tertiary brands really losing out.

From the manufacturer perspective, there is more scrutiny on the number of SKUs. Nestlé and Danone are saying numbers will be scaled back.

In a very complex consumer backdrop, data analytics comes into its own, with companies making more informed choices about which brands to push and where to cut back. Shrinkflation continues to be a popular option for many. The other interesting debate is the return of promotional spend, which has been muted during Covid and supply chain challenges.

There are also wider issues around food hunger, the unprecedented demand for food banks and a general deterioration in health. A recent Tesco survey with Diabetes UK found that almost 60% of shoppers aged under 40 had deprioritised their health because of the cost of living crisis.

With behaviour changing so rapidly, the winners will be those companies that can try and get ahead of this worsening consumer backdrop and offer real solutions and help, but this is far from an easy task.