Grocery 2053: A Data-Driven Gaze into The Future
Fiscal Conservatism
Table of Contents
SECTION 1
Executive Summary
- Fiscal Conservatism (concern about the economy as well as personal day-to-day and long-term finances) is the biggest source of stress for Customers. Only when income exceeds 150k do finances even out with health and the environment as sources of stress. And the younger the Customers the more they tend to be stressed with finances, both long-term and day-to-day.
- In the short term, retailers can continue helping customers save money where it matters most to them (base price accounting for largest share), developing a protocol with suppliers for accepting price increases, reassuring customers that they care (e.g., inflation) and communicating the actions they are taking to mitigate impact.
- Between now and 2053, we see retailers doing much more: offering a grocery-helper budgeting AI, becoming their Customer’s trusted financial partner, and launching their very own private-brand-only, money-saving format of the future.
Fiscal conservatism is as much a truth -- a law of grocery behavior physics -- as it is a trend. We noted earlier how customers’ constant pursuit of savings has shaped the grocery industry from the early 1900s through to today. Looking forward, this pursuit will continue to determine which retailers and formats will win and lose. Additionally, other trends, like Data 3.0 or Channel proliferation, will be limited if they get in the way of the pursuit of savings.
SECTION 2
Current Market Forces Driving the Trend (secondary research)
Savings on Groceries as a Permanent Pull for Americans (see our 2023 RPI)
In 2022, “Price, Promotions, and Rewards” gained even more importance, and “Speed and Convenience” dropped, as consumer confidence in the economic future hit record lows and people demonstrated a willingness to drive the extra mile or hunt the extra minutes for a good deal. 2022 was all about finding the right products at the right prices and less about saving time. “Price, Promotions, and Rewards” has always been the most important need in our model, and it likely has been the most important customer need for much of the past 100+ years. The story of who has won and lost is also a story of the consumer’s insatiable appetite for a better deal.
Absent a RPI dataset prior to 2017, we can simply trace the rise and fall of formats over the decades to identify the staying power of “Price, Promotions, and Rewards.” Throughout modern grocery history, formats and retailers who steadily brought ever lower prices gained share, reshaping the grocery landscape. They carved chunks of share away from those that were not as competitive on price. They did so even as real disposable consumer income steadily grew, and food as a percentage of household budgets fell. In other words, while people grew richer in real dollars, and food became less critical to balancing the budget, people still shifted their business to retailers that saved them money. People love saving money on groceries, even those who are wealthier. With the prominence of “Price, Promotions, and Rewards” as immutable as a law of physics, this implies that that the rise of other needs are limited by the trade-off they require on prices.
Stagflation
The pandemic combined with continuing zero-policy lockdowns in China and the ongoing war in Ukraine have rocked the world in ways the world thought unimaginable. In the US, 62% of basket items have experienced a >4% inflation (ref) affecting not only food but also energy, transportation, and labor, impacting every area of life. And low unemployment rates and rising wages will keep fueling inflation. Food-at-home Inflation came in at 8% YOY in March 2023 and is predicted to ease back between 5 and 4% for all of 2023 (ref). In terms of real GDP, the US economy is projected to grow 0.5% in 2023, and we expect a recession with consumer spending contracting. Millennials are feeling the hit, as they are the most likely to cut into retirement savings (18% of them). Thirty percent of Americans are not confident about having enough money for retirement (ref).
Waning Consumer Sentiment
Global instability is being felt locally. Consumer sentiment will be impacted by global risks ranging from the war in the Ukraine, cyber-attacks, political crises in emerging markets, competition with China, the North Korea conflict, tension in the Gulf, climate policy, and EU fragmentation. All this combined with access to information, shoppers now have a better understanding that global events can have a direct impact on their lives from rising prices, shortage in supply of products, and sanitary lockdowns. Negative consumer sentiment can also be attributed to the perceived rate of food-at-home inflation. In our third wave of the Consumer Trends Tracker (October/November 2022) U.S. respondents said inflation was 24.3% or more than twice the real rate of inflation. During this period, the actual Consumer Price Index (CPI) for food-at-home inflation fell by 1.1 percent to 12.0% in November.
Food-at-home Inflation (%)
SECTION 3
Customer Motivations Driving the Trend (dh proprietary research)
Fiscal conservatism as a driving force will trump all other needs only when Customers are satisfied with their finances and can then address more aspirational needs. The fact that finances are the biggest source of stress suggests it is the biggest unmet need.
In fact, all Customers try to save money regularly when shopping. It is not a shock that in our RPI research we see that base price alone accounts for up to 50% of price perception.
As we have noted, only when household income exceeds $150k + do other sources of stress start to draw even with finances. But finances are still as likely to be as much of a stressor as health, sustainability, and others. Overall, households making under $25k are more likely to feel a variety of stressors and are also more likely to say day-to-day finances are more important than long-term; that flips as income level goes up. The point is that Fiscal Conservatism is a trend driving behavior for most of the population, regardless of income.
More telling for the future are differences in stress levels felt by age groups. The younger the Customer the more likely finances are to be a source of stress. Much like the housing crisis and the Great Recession, value seeking behavior is hard-wired into Customers for the long-term. Pandemic uncertainty and once-in-a-generation levels of inflation are likely to leave an imprint on this next generation of grocery shoppers. And so, pricing will remain top of mind for Customers in decades to come.
SECTION 4
What Customers Have to Say
“Inflation has made grocery shopping hard. I now have to plan very carefully what we buy or spend to make sure we can make it through. What I could get with $600 in 2020 has been cut in half almost. Now $600 doesn't even get enough to make it even half the month. If I didn't have to worry about cost or how much inflation has risen the prices, I would just buy whatever we wanted whenever we wanted but we have to plan every meal for every night of the month and budget it out to fit the amount of money we have to spend.”
- 35-44, 25-50k, Suburban, 1 kid
“The biggest challenge is cost. Which is why we shop at Walmart. Another big challenge is the amount of food we purchase. To feed our family for a week, we spend $350 a week. It used to be $250 a week prior to inflation. I can’t shop in store because it would take two buggies. So, I order online for grocery pickup. The pickup takes a long time waiting on groceries.”
- 35-44, 100-150k, Suburban, 5 kids
SECTION 5
What Can Retailers Do?
All retailers should align their organizations to optimize performance amid the backdrop of fiscal conservatism. That said, there are certain retailers who are better positioned to capitalize on this trend than others.
Retailer 2053 Ranking Methodology
To determine which retailers those were, we looked at:
- Which retailers have more of the “customer of the future” currently in their stores? In other words, which retailers skewed higher on a shopper base that was younger than 44?
- How much do the needs of their shoppers align with the given trend? In other words, do their behaviors and desires indicate the trend is highly relevant to them?
- How much work does the retailer need to do to better align their value proposition with this trend, so they can ride its currents over the next 30 years?
Given how distant we are gazing into the future, we’re choosing to focus on our 1st and 2nd quartile retailers from the overall RPI ranking, as well as other household names in grocery.
The future market potential for discounters and wholesalers that don’t ignore fresh -- like Lidl, Food 4 Less, Aldi and Costco -- is buoyed by this strongest trend. This doesn’t mean that specialty and premium grocers are doomed to see their share slowly decline the next few decades. It just means they need to carefully select their store locations, keep their eye on value whenever possible, and differentiate their assortment and experience enough from other premium retailers.
Over the next 30 years, all retailers can benefit from some or all the following actions:
Visionary structural moves
1. Offer grocery-budgeting AI.
Most customers mention budgeting and fluctuating prices in their verbatims as a stressor. Solve this for them. Imagine a world where I can log in, set up my maximum grocery budget for the week, my dietary preferences, profiles for each member of the household, the ratio of fresh meat and produce, brands that are a must, and products I’m willing to substitute for, and the AI automatically generates a grocery list. I can approve the list, and it could then decide whether it makes more sense to deliver or have me pick up based on my scheduling preferences. That solves a job for Customers, and they’ll love you for it. It not only solves for money, but time too. Customers could even give you access to all their online activity to automatically generate this experience.
2. Become your Customer’s Trusted Financial Partner.
Groceries are the biggest line item in the household budget in that Customers can immediately act on and take some control over their finances. If staying afloat is a worry for many Customers, why not become their trusted financial partner? Your Customers need help with budgeting their food, gas and other day-to-day or lifelong expenses. Food is the most high-up expense Customers can cut down on when they feel the pressure. But maybe they don’t need to feel that pressure if you’re helping them manage their expenses outside your store. Launch your own financial branch or partner with a financial institution if that makes sense for your business.
3. Launch the private-brand-only/money-saving format of the future.
We could tell you to launch a discount format if you don’t have one. Discounters and Dollar Stores grew at almost double-digit growth rates (link to Dollar General article) last year as Customers felt the impact of growing inflation. So, it’s not a bad idea to make this part of your multi-banner strategy. But why stop there? We know Customers are switching to private brands as one way to save money. Why not create an entire store with only your private brands. You could offer Customers a variety of mainstream, value, premium, and what we call icing brands (those brands that satisfy trends of the moment) to cater to their needs across all categories. In a Data 3.0 future, you could even rely on generative product design to drive consumer-led private brand product development. “I love this product, but I’d love a keto version even more”.
Good consistent hygiene moves
- Keep helping customers save money where it matters most to them, both in terms of savings activity (base price accounting for largest share) but also department/category/product.
- Develop a protocol with suppliers for accepting price increases or not.
- Find ways to become an agile organization to create efficiencies and minimize costs where possible to pass on savings.
- Reassure customers that you care (e.g., inflation) and communicate the actions you are taking to mitigate impact.
- Model risk with Customer model to understand the impact of risk on your business.
- Use Customer data science to help Customers manage their budget and get more units.