Menu Inflation and Packaged Goods Inflation will Stifle Sales?

 

Don’t be to eager raise prices.  Consumers are aware that food, is going up!  Gas is going up, every time they go to a grocery store, restaurant, or convenience store they are aware prices are going up.  If your year over year customer counts are not positive, you might have something to worry about according to Steven Johnson, Grocerant Guru® at Tacoma, WA based Foodservice Solutions®.  

According to the Bureau of Labor Statistics, inflation for consumer goods is running hotter than it has in years—5.4% in September, and 6.2% in October. Wholesale food prices were up 6.7% on a year to date basis.

Most notably, the gap between producer price increases and consumer price inflation has widened throughout 2021, and retailers and grocery shoppers alike are likely to face a reckoning next year, according to IRI and RBC Capital Markets.  

Regular readers of this blog know, Nielsen’s IRI is forecasting CPG inflation in the grocery space to run at 8% for the first half of 2022 and then moderate to a historically still-elevated 4% in the second half of the year.

IRI President of Strategic Analytics KK Davey noted, Eight percent would represent a significant acceleration over the 5.3% CPG inflation seen currently—and it's well beyond the 5% threshold past which unit/volume sales of affected goods began to decline in 2007, 2008 and 2011, according to IRI.

Davey continued, "We expect people to become much more price-sensitive" in 2022, … Consumers mostly have been willing to swallow price increases in the past year-and-a-half both because they needed certain grocery and household essentials for all of the extra time they were spending at home and because federal stimulus payments helped boost household finances, he noted. But the end of pandemic assistance programs; a return to higher spending on healthcare, education, transportation and other non-CPG areas; and inflation's offsetting effect on rising wages means consumers are likely to be more attuned to their grocery spending next year and more focused on keeping it in check, Davey suggested.  

So, what does this mean for CPG companies and retailers? "People are going to begin to trade down as prices increase," Davey said. Already, according to Davey and RBC's Nik Modi, the premiumization trend has begun to decelerate: Consumers are pulling back on their purchases of pricier bacon and premium pet food, for instance. Now do you understand that means there is going to be price resistance at the high end, but the team at Foodservice Solutions® believes restaurants may take a bigger hit than grocery stores due to increase prices.

Consider where consumers buy their essentials may shift somewhat, too. Dollar stores, warehouse clubs and discounters will be sought-after channels in 2022 as consumers home in on value pricing, said Davey. Come on folks Dollar General now has 18,000 stores open.  The largest grocery chain has less than 4,500.

Consumers appetite for premium products and services won't disappear in 2022, to be sure, Modi pointed out. But their definition of a truly "premium" offering—one they're willing to pay more for—will continue to evolve. 

Brand messaging will drive companies forward as "Premiumization will still work when you provide something others can’t provide," Modi said, adding that he hopes to see heightened investment in research and development from CPG makers in 2022. The CPG industry, he said, needs a renewed focus on innovation and using "real science...to create breakthrough products."

The team at Foodservice Solutions® suggest that restaurants need to look ‘Outside the Box’ for innovation products and services that they can bundle with legacy items. Ultimately, whatever price hikes they find themselves contending with in 2022, consumers will be seeking out offerings that fit into their once-again busy lifestyles—whether in the form of portioned, portable kids snacks or 30-minute delivery of pizza, milk and beer. "We're at a time when consumers are willing to pay for real innovation," said Modi.

Invite Foodservice Solutions® to complete a Grocerant ScoreCard, or for product positioning or placement assistance, or call our Grocerant Guru®.  Since 1991 Foodservice Solutions® of Tacoma, WA has been the global leader in the Grocerant niche. Contact: Steve@FoodserviceSolutions.us or 253-759-7869