Despite several months of rising inflation and higher prices cropping up on grocery shelves, Albertsons hasn’t yet seen a meaningful change in consumer behavior.
During the company’s fourth-quarter earnings call on Tuesday, CEO Vivek Sankaran said its shoppers’ spending habits remain steadfast amid rising prices, highlighting the chain’s growing organic food sales to emphasize the point.
"We are still seeing the consumer [is] very strong. We’re not seeing any meaningful trade downs," he said
That same morning, however, the Bureau of Labor Statistics released its latest monthly inflation report, which showed that grocery prices had risen 10% over the past year while the overall consumer price index had risen 8.5%.
And so, even as Sankaran proclaimed the company’s vibrant performance, he sounded a note of caution: “Whether the consumer will stay that way even if we go to the second half [of the year] or past the fall and inflation continues to be at 8%, 9%, I don’t know.”
Across the country, grocers have started passing along price increases to customers while holding back those increases in certain key categories, like meat and eggs. Consumers have taken note and are cutting back on discretionary purchases, consolidating trips and looking out for sale items, according to research from IRI. As Albertsons' results indicate, they haven’t yet begun to leave grocery stores en masse in favor of more value-priced outlets.
But that could change soon. Krishnakumar Davey, president of client engagement with IRI, said that inflation has begun to cross a “threshold” for consumers — particularly low- and middle-income shoppers — as it reaches into the high single digits. IRI projects inflation for this year will be between 8% and 11%, a forecast it recently increased by nearly 50% due to the supply chain strains stemming from the war in Ukraine.
“This is the tipping point where it’s really hurting their wallet,” Davey said.
Grocery prices on the rise
Low-income consumers drove the majority of sales growth in grocery last year, fueled by federal aid dollars and at-home eating habits. According to IRI data Davey shared, these shoppers accounted for 25% of sales but 106% of growth.
As prices go up and states pull back on funding for programs like the Supplemental Nutrition Assistance Program (SNAP), low-price retailers like Aldi, Walmart and Dollar General could see a flood of spending and new customers. As if portending this very development, Aldi US CEO Jason Hart issued a letter to shoppers on Tuesday noting that the chain aims to be the low price leader in every market where its stores operate.
The shift to value retailers is already happening to a degree, said Davey. IRI’s data shows that Walmart and dollar stores saw higher sales growth and dollars spent per trip in this year’s first quarter than other channels, like grocery, drug and club stores. The amount of dollars spent per trip at grocery stores declined 0.6% during that period, IRI noted, while at dollar stores it rose 8.7%.
According to a consumer survey conducted in late March by sales and marketing firm Advantage Solutions, 49% of shoppers say they’re shopping more at mass merchandisers or superstores, while 32% say they’re shopping more at grocery stores known for having lower prices.
Matthew Pavich, a former buyer with Target and now senior director of retail innovation with Revionics, a software company that uses artificial intelligence to determine product prices for retailers, said brand loyalty is as low as he’s ever seen.
"People are trying new brands. They're trying new retailers," he said. "They're switching to competitors at a frequency we've never seen before. And this is all started with COVID but accelerated as we were in the supply chain challenges."
Deploying targeted promotions to shoppers who need them
Grocers pulled back on promotions early in the pandemic due to supply constraints and the influx of demand they were seeing, and they’ve kept promotional activity low in the ensuing months. IRI data shows that in March, retailers spent 62% of what they spent during the same month in 2019 on food and beverage promotions.
Davey expects promotional frequency will pick up as the year goes on, driven by growing price sensitivity among shoppers.
“We'll see more value messaging from retailers,” he said. “You will see more targeted promotions to not lose these low-income and middle-income consumers.”
On its website, Wegmans touts fresh prepared meals for less than $5 per serving. “We are all feeling the impact that inflation has on the items that we buy every day,” the grocer notes on its site.
Grocers are also seeing an opportunity to promote their private label selections, which feature lower price points and produce higher margins. Stew Leonard’s, which operates seven stores in the Northeast, recently featured a side-by-side comparison of a basket featuring national brands and one with store brand selections on its website, showing a savings of nearly $40.
"People are trying new brands. They're trying new retailers. They're switching to competitors at a frequency we've never seen before.
Senior director of retail innovation, Revionics
Spencer Baird, former chief merchant for Peapod and currently executive vice president and head of marketing technology with Inmar Intelligence, said retailers are taking a “scalpel-like approach” to distributing promotions. They can use their loyalty data to identify price-sensitive shoppers and then bring in ad spending from manufacturers that want to target those individuals.
“We're seeing a lot more personalized offers and to me, that's great because it'll maximize return on ad spend,” Baird said. “At the same time, [retailers] don't break the bank on supply.”
Baird said there are other ways retailers can keep shoppers spending with their stores, like offering “white glove” customer service and improving the e-commerce experience.
Sources said it’s hard to know just how long rising inflation and supply chain disruptions will persist. Sankaran said he expects inflation will moderate in the second half of the year, while Davey said he expects supply pressures will persist throughout the rest of the year.
Baird, meanwhile, declined to speculate on the duration of the current pressures retailers and consumers are facing, but did advise retailers to focus less on margins and sales growth and more on consumer-focused metrics like the number of shoppers engaging with stores as well as basket size and trip frequency.
"The retailer that's focused on shoppers, frequency and baskets, they tend to make a lot more progress because they know that every day going to work, they've got to get two of those three things right and they're good to go," he said.