Inflation dominates the mainstream media, press, and boardroom conversations. Most of the commentary focuses either on the impact of inflation on consumer spending or what “your brand should do”. The media narrative disregards a critical element from the equation – the consumer and what is driving their behaviour, and as a result, how brands can adapt, work with, or challenge these behaviours.
First, we need to look at the contributors to inflation. Is it demand-driven (consumers driving prices up through excessive demand) or supply-side-driven (constraints placed on the cost of goods and services)? Evidence would point to it being fundamentally supply-side driven. The Covid epidemic, the war in Ukraine, soaring energy costs, the rising costs of raw materials, the shortage of skills and the impact of reduced skilled migration have added pressures on the supply side of the equation. Interestingly, central banks have responded with demand-side strategies to battle inflation and increasing interest rates, but this is because they have few tools in their armoury. As a result, this isn’t about bringing consumer spending into line but is putting more pressure on already tight consumer budgets and forcing households to consider their purchase behaviour more than they have in a generation.
There has also been an increase in corporate profit during this time, exacerbates the issue. If a business’s costs increase by 50% on their product, they will increase their sell price by 50%. This means that products that would have sold for $1 with 50 cents margin now sell for $1.50 with 75 cents margin, adding to inflationary pressures. That means businesses have benefitted in the short term, but in the medium to long term, signs are that margins will be pressured as consumers feel the heat of rising energy costs, stagnated wages, and rising costs of living.
If we take a consumer lens to inflation, it fundamentally impacts brands, categories and how businesses should act. Although marketers tend to focus on their brands within a category, in inflationary times, it is also important to understand consumer behaviour, as this can help in our brand and portfolio strategy.
Essentially, we see seven ways consumers may approach the category because of inflationary pressures.
Change nothing
Consumers can choose to do nothing about inflation in a category. This can be because the inflationary pressures in the category are limited and therefore are not seen by consumers as the cause of pain. The category could be essential or much loved and seen as integral to life.
In terms of category outcomes, there are relatively stable patterns in sales data. The danger is that businesses become complacent and are, eventually, hit by consumers turning to alternative strategies that bite. If this is the case, brands should be reminding consumers of the love they hold for them and, in some cases, doing a “category” job in messaging.
Stop
Consumers can go to the other extreme and stop buying the category. This can be due to the category being non-essential with limited emotional connection. The category is also seen as a luxury that the consumer is willing to forgo.
Category sales will be trending down as we see consumers falling out of the category. Stopping is different from switching categories, as nothing replaces the category consumers have ceased to buy. Brands in this area should remind their customers of their inherent value or look to provide their customers with alternative options.
Downtrade
Consumers can choose to move down to cheaper alternatives within category. This is particularly pertinent in categories where a “good”, “better”, or “best” category structure exists. Consumers can feel they are not missing out by choosing a cheaper, competitive product. In this case, we see total category sales in terms of volume staying stable but total category value diminishing.
Depending on whether a brand is positioned as value for money or a premium product in the category will drive marketers to think differently. Ensuring you understand the value gap is crucial if you are looking to pick up share from downtrading, as price compression will likely happen at the premium end of the market. More premium products may have to think about how they either support their price premium in communication or if they can use a portfolio pricing strategy to funnel downtrading into other parts of their portfolio, retaining volume and, hopefully, margin.
Moderate
Consumers can choose to moderate their buying behaviour, buying less than usual. Experiential products and services, and luxury products and services, are the types of products that fall into this space. Consumers may opt to go out to eat two rather than three times a week or reduce their alcohol consumption, cutting the potential market instantly.
In these cases, we should see category volumes/sales falling but brand shares remaining reasonably stable. We also see a fracturing in categories, where certain brands are moderated, and consumers use other strategies for other brands in the category. Marketers need to know where their brands sit and may look to strategies that reward consumers for loyalty. The key danger is that consumers will fall into new behaviours and habits making it difficult to regain.
Switch Categories
Consumers can choose to find an alternative option in another category. Meeting a larger fundamental need, e.g. leisure. Key indicators will show fluctuations between category substitutes (e.g. international holidays vs domestic breaks). This is particularly dangerous if the alternative category delivers to and beyond expectations. Although, as we have seen with Covid, businesses have returned to these categories when they can, they are now more agile in taking advantage of these opportunities when they present.
Reminding consumers of the inherent value they have found in the experiences in this category is crucial if marketers are looking for the long term. Brands that are leaders in their category will probably be more resilient than brands trying to establish themselves or are seen as not providing anything distinctive in their products and services.
Optimisation
Consumers can choose to repertoire buy and switch between products. Here we will see categories change the volume regularly between brands based on promotional mechanics. In the case of FMCG, we expect little channel shift in volumes, but consumers are looking at the point of sale and what to buy.
Promotional mechanics will be fundamental here, but brand portfolios must be used sensibly to maximise sales and margin. It is easy for brands to panic promote and effectively drive down the long-term value and equity that they have spent many years building as consumers become used to buying on promotion.
Premiumisation/Treating
Consumers can choose to maximise their experience, and buy less often, but better. The mindset is that consumers feel that when they spend in the category, they want to feel that their spending is worth it. In this case, we should see category volumes declining, but premium and luxury products within the category increase their share.
Brands that can deliver this and ensure consistency in the product experience will find that they are rewarded in the long term, as consumers build up an emotional connection. Those who fail to live up to their premium positioning or fail on even one occasion will be quickly dropped from the consideration set of consumers. Brand owners need to ensure that they invest in reminding consumers of what makes them distinctive and, more importantly, how they make the consumer feel as a result.
Final thoughts…
Brand and portfolio custodians must understand the strategies consumers take within their categories and manage brands accordingly. Acknowledging the dynamic nature of consumer behaviour and being ready and able to switch direction will be critical. This will require scrutinising category sales data, brand shares and consumer indicators for clues, but also having ongoing intelligence on price, promotion and consumer sentiment. By taking a consumer lens to inflation, marketers can influence consumer behaviour and the success of their brands.
Written by: Lee Naylor, Head of Quant, Fiftyfive5
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