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When times get tougher, everyone reevaluates spending.
With a bout of 40-year-high inflation and a war in Ukraine driving prices higher and pushing costs up, now is one of those times.
Predictions about the economy’s near future are growing increasingly cloudy. JP Morgan Chase CEO Jamie Dimon even went so far as to predict a “hurricane” on the horizon last week. While he is unsure if it will be “a minor one or Superstorm Sandy,” continuing elevated inflation in the short-term is nevertheless leading plans to be reworked now.
It’s already on view as tech companies make layoffs, and venture capitalists pull back. There are signs that consumers could be the next group to draw down spending, bringing risks to the health of brands and retailers.
Gas prices are at record highs, and expected to stay that way. In turn, CPG brands that make name-brand products like Unilever and Nestle raised prices in recent months, and are warning of more hikes ahead. For the moment, retailers report shoppers are continuing to spend, especially as they return to pre-pandemic habits. But as the months of high prices wear on and shoppers continue to find high prices as they make repeat visits to gas stations and grocery sites, the accumulation only makes it more likely that they will make changes in their overall purchase patterns over time. Budgets will tighten.
They won't stop shopping. After all, we all need groceries and other essential items. But they are likely to change criteria when they do. When shoppers must pick an item, numbers will become more important than names. Discounts and promotions will be sought. It also comes down to choice. Even those who have long opted for a particular brand get more likely to reconsider as the price pressure continues to build.
In a recently-released report on pricing and promotion for CPG marketers, shopper intelligence firm Catalina calls this “The Great Loyalty Rebellion.”
“This perfect storm of raw goods price hikes and supply chain disruptions – on the heels of forced trial during the pandemic – has thrown the concept of loyalty up in the air and is redistributing it," said Sean Murphy, Catalina's chief data & analytics officer.
It’s a time when private label products can become more appealing. Sold under a retailer's name, these products are often displayed as less flashy, yet cheaper options. When shoppers are trying to save money, the latter becomes more important.
The nation’s largest retailer offers early evidence. During its first quarter earnings call, Walmart pointed to an increase in store brand purchases as a leading indicator of how inflation filters down to the individual level.
“Consumers are feeling inflation pressures as evidenced by an increase in grocery private brand penetration,” CFO Brett Biggs said on the call.
While Walmart leaders maintained that there was a variety of observed consumer behavior and overall demand remained strong, the “switching” to private label is emerging as a trend. A recent survey from McKinsey found that more consumers are changing brands now than at any time during the last two years of pandemic economic swings. With this, 33% of consumers who said they changed shopping behavior chose private-label brands.
When customers open up the possibility to select options beyond the usual, what was once the off-price alternative could become a compelling primary choice.
Given the increased ecommerce adoption of the last two years, these decisions aren't only being made in the grocery aisle.
Consumers are more comfortable shopping online, and moving between in-store purchases, pickup and delivery. And as they've grown, ecommerce platforms are offering private label products themselves. They’re capitalizing on an opportunity identified in 2019 by Steven Howell of Solutions for Retail Brands Inc.
"Projections suggest that the ecommerce private label market will quadruple in the next five years as a result of the widespread use of smartphones, improved online interfaces and mobile apps, as well as an expansion of crowd-sourced business models to meet growing shopping and delivery demand,” Howell told Progressive Grocer in 2019.
Amazon has more than 400 private brands that offer options to shoppers alongside name brands on its platform, according to Marketplace Pulse.
Private label is also becoming a compelling business line for companies in quick commerce, which describes companies that offer rapid delivery of items that would typically be available at a bodega or drug store.
In January, convenience-focused delivery service Gopuff launched a private label line called Basically, offering bottled water, snacks, batteries, paper products and other household essentials. The same month, ultrafast grocery delivery service Buyk introduced private label goods including coffee, artisan bread, ice cream and sweets. The company set the bold goal of making private label brands 40% of its product mix by the end of 2022.
The private label proposition for these brands cuts to the core of their business model. Instant delivery is expensive. And, as shown by Gopuff’s billions raised in venture capital, it’s difficult to break even running many short trips to deliver a wide assortment of individual products, all while racing to acquire customers against a growing number of competitors. But private label can be a step to unlocking a more self-sustaining flywheel.
As 2PM noted, launching private label is typically a sign that a retailer has achieved critical mass. One result of reaching that milestone is that companies have the data to determine what customers want.
“After over eight years of delivering instant needs, we truly understand what our loyal customers look for in everyday essentials — insights that have enabled us to create product lines designed specifically for them,” Gopuff Senior Vice President of Business Daniel Folkman said in a statement in January.
In turn, offering private label products that are met with strong satisfaction can lead to repeat purchases, building loyalty among customers. This keeps shoppers not only seeking out the brands, but also returning to the delivery service where the products are found. In turn, drawing on brands developed in-house can help the instant delivery platforms to increase margins, and move closer to making their economics work.
This could be an especially appealing option as the instant delivery companies face tighter times. Just like consumers, they must make their own choices during a drawdown.
Last month, the Berlin-based startup Gorillas was among a group of instant delivery companies announcing layoffs, alongside Getir and Jokr. Amid a pullback across the venture capital markets, the company said it would cut 300 jobs, and close four markets in Europe. The company said it was seeking to shift from “hyper growth” to “a clear path to profitability.”
On Monday, however, it returned to a more optimistic launch mode. Gorillas announced that it is set to debut four private label brands this week, offering products from cheese to coffee to pasta in Germany, France, the UK and the Netherlands.
The connection to the shift the company said it intended to make during layoffs was clear. In a statement, CEO Kağan Sümer said the private label products are a "key component of our profitability strategy and will enable us to develop new revenue streams across our core markets.”
Building on a strategy that was already being implemented by instant delivery companies before the downturn, private labels now arrive at a time when customers will be increasingly seeking them out.
As Stanford economist Paul Romer put it, “A crisis is a terrible thing to waste.” A reconfigured roadmap offers a chance to try options that might have originally been considered further down the line. In turn, what works in tough times can be a springboard for the future. That's doubly true for a space that was seeing demand fall with reopening following the pandemic, and facing questions about whether it could find a sustainable model.
Gopuff was planning to go public. But the path to profit-led growth might lie in private.
For instant delivery companies, reevaluating in a downturn may provide answers for the long-term.
Trending in Shopper Experience
Campbell Soup Company CEO Mark Clouse offered thoughts on messaging amid inflationary shifts in consumer behavior.
After months of elevated inflation and interest rate hikes that have the potential to cool demand, consumers are showing more signs of shifting behavior.
It’s showing up in retail sales data, but there’s also evidence in the observations of the brands responsible for grocery store staples.
The latest example came this week from Campbell Soup Company. CEO Mark Clouse told analysts that the consumer continues to be “resilient” despite continued price increases on food, but found that “consumers are beginning to feel that pressure” as time goes on.
This shows up in the categories they are buying. Overall, Clouse said Campbell sees a shift toward shelf-stable items, and away from more expensive prepared foods.
There is also change in when they make purchases. People are buying more at the beginning of the month. That’s because they are stretching paychecks as long as possible.
These shifts change how the company is communicating with consumers.
Clouse said the changes in behavior are an opportunity to “focus on value within our messaging without necessarily having to chase pricing all the way down.”
“No question that it's important that we protect affordability and that we make that relevant in the categories that we're in," Clouse said. "But I also think there's a lot of ways to frame value in different ways, right?”
A meal cooked with condensed soup may be cheaper than picking up a frozen item or ordering out. Consumers just need a reminder. Even within Campbell’s own portfolio, the company can elevate brands that have more value now, even if they may not always get the limelight.
The open question is whether the shift in behavior will begin to show up in the results of the companies that have raised prices. Campbell’s overall net sales grew 5% for the quarter ended April 30, while gross profit margins held steady around 30%. But the category-level results were more uneven. U.S. soup sales declined 11%, though the company said that was owed to comparisons with the quarter when supply chains reopened a year ago and expressed confidence that the category is seeing a longer-term resurgence as more people cook at home following the pandemic. Snacks, which includes Goldfish and Pepperidge Farm, were up 12% And while net sales increased overall, the amount of products people are buying is declining. Volumes were down 7%.
These are trends happening across the grocery store. Campbell is continuing to compete. It is leading with iconic brands, and a host of different ways to consume them. It is following that up with innovation that makes the products stand out. Then, it is driving home messaging that shows consumers how to fit the products into their lives, and even their tightening spending plans.
Campbell Soup is more than 150 years old, and has seen plenty of difficult economic environments. It is also a different business today, and will continue to evolve. At the end of the day, continued execution is what’s required.
“If it's good food, people are going to buy it, especially if it's a great value,” Clouse said.