Consumers Continue to Feel Gloomy

Despite the welcome uptick in consumer confidence reported in January many people remain worried about their finances.
Institute of Grocery Distribution data shows that over40% of the population feel that they will be worse off this year than last. It would seem that a slowing of the inflation rate combined with modest decreases in the price of gas and electricity are not enough to offset rising fuel prices, and a lurking fear that redundancy may be just around the corner. The gloom is confirmed by Bord Bia, the Irish Food Board people who regularly monitor consumer sentiment in Britain, Ireland’s largest export market. Their latest survey in the “Feeling the Pinch” series indicated that when asked the question “How well do you think things are going in the British economy these days?” 86% of people answer badly or very badly.

Little surprise therefore that when asked “What one thing will become more important over the next six months?”, 58% of people answered “saving money”. (Source IGD).

Out in the market place we see supermarkets continuing to burnish their value credentials, with offers ranging from money off promotions to vouchers for petrol. The generally quoted figure for goods sold on promotion is close to 50%. Even the more premium grocers have had to jump on the promotional band wagon with Waitrose recently saying that their percentage of goods on promotion had increased in the past year from 17% to 28%.

That said, consumers are not always hell bent on buying the cheapest possible items. When asked which  products were worth paying extra for,  54% said they were prepared to spend more for high quality ingredients, 47% for high welfare/ free range, and 41% for locally produced. The percentages dropped to 26% for Fair Trade and well known brands, and 20% for organic products. (Source: IGD).

There are some glimmers of light among the general battening down of the hatches. 2012 is an event packed year for the UK, and a combination of Euro 2012, the Olympics and the Diamond Jubilee may encourage some to splash out. Generally though, consumers will remain wary.

Inside Consumers' Heads - The Psychology of Dealing With Economic Difficulty

Consumer confidence has fallen again according to GfK NOP the social research company, and is now lower than at any time in 2010. It is unlikely to bounce back any time soon. Indeed research done with British consumers by Bord Bia the Irish food board shows that most of us think that there will be no light at the end of the economic tunnel for at least 3 and possibly as much as 10 years.
The lack of confidence seems to stem as much from an overwhelming air of uncertainty as from the harsh reality of coping with rising prices and near static wages.
People are uncertain about whether their jobs are secure. They are rattled by an economic performance which is up one quarter and down the next, and which does not follow a comforting path of modest but predictable growth. They have lost the security blanket of rising house prices, and worse, are bracing themselves for an increase in mortgage rates which many feel unable to afford.
We know much about the way consumers are dealing with economic pressures - searching for money off promotions, comparing prices on the internet, working to a budget, cooking from scratch. The Bord Bia research indicates just how deeply this behaviour has become entrenched.
They point out that 62% of British consumers agree with the statement "I find myself thinking twice before making even the smallest purchase". Haggling has become a way of life for many. As one male put it "We're negotiating on absolutely everything now - gas, electricity, house insurance, Sky subscription. We didn't use to do that". The pursuit of the good deal has become a game, even among the better off.
In summary, as Bord Bia puts it, the consumer's relationship with time has fundamentally changed. Now people are prepared to put in time to get the peace of mind that they have secured the best deal.
Bord Bia also points out that this search for value is here to stay, even when the better times come round again.
In a nutshell, offering the best value, that elusive combination of quality, price and service, will be a prerequisite for business success in the years to come.

Food Inflation + Recession Worries = Less Food Bought

DEFRA’s recently published Family Food Survey compares 2009 with 2006 and shows that people coped with rising prices and recession pessimism by buying less food. They did not, as might have been thought, buy the same quantities as before but pay less by searching out good deals, moving to value ranges, switching to own label products, or flocking to discount supermarkets.

So, in volume terms, 2009 saw grocery shoppers buying 11% less red meat than in 2006, 7% less fish, and even 4% less poultry which is usually the fall back protein when prices rise. Sales of vegetables have fallen by 3%, potatoes by 6%, fresh fruit by 11%, fresh milk by 3%, and butter and spreads by 2%. Even bread sales have fallen by 5%.

The only fresh foods bucking the downward trend are eggs, up 6%, cheese and yogurts which are level with 2006, and, bizarrely, cream where sales are up by 5%.

By contrast, flour sales are up 8% which could mean that people are baking more. Confectionery, which usually holds up when times are tough has seen purchase grow by 9%, and cereals are up 3%.

Overall, when food inflation soars shoppers seem to work to a budget, and accept that they will get less for their money.

The cutback does not mean that people are necessarily eating less. They could be reducing the amount of food they throw away. A DEFRA study published in July 2010 estimated that 15% of food is wasted, with bread waste reaching a shocking 40%.

As far as the catering sector is concerned, the DEFRA figures show that the amount of food eaten outside of the home in 2009 was 9% less than 2006, although expenditure, excluding alcoholic drinks was up by 3%.

Short term, the DEFRA figures show signs of growth in grocery food buying 2009 compared with 2008, and, given anecdotal evidence about a return to premium food purchasing and the excellent performance of more up market retailers, it would seem that 2010 saw a further increase. What consumers will do in 2011 though, is difficult to project. Food inflation is ramping up again, and signs of depressed consumer confidence are re-emerging.

So, how can profits grow if volumes are shrinking?

Food inflation can help when prices rise ahead of costs. Currently food inflation is running at about 4.6%, compared with wages at about 2%. Those businesses with clout will negotiate lower costs from suppliers.

Another strategy is to develop premium products so that maximum revenue is extracted from a smaller volume.

The third, albeit often costly avenue is to grow market share, stealing volume from competitors.

Examples of all three will no doubt be seen this year.

Sales Fall Again at ASDA - Cheap Prices are not Compensating for Poor Quality

Here’s another confirmation that consumers do not just buy food purely on the basis of price. Mysupermarket.com the price comparison website says that ASDA is the cheapest of the “Big Four” (ASDA,Tesco, Sainsbury, Morrisons), yet ASDA yesterday announced that like for like sales fell by 0.4% in the three months to July 31st, after a 0.3% fall in the three months before that. At the same time Kantar Worldpanel, the research company which reports on how supermarkets are faring, said that ASDA continues to lose market share, whilst Morrisons and Sainsbury motor ahead.

Commenting on the company’s performance, Andy Clarke, ASDA’s new chief executive was vocal on the subject of price being different from value. Saying “We have got to be the best value. What we have been is the best price”, he promised that in future customers would see a “step change” in quality - “We are not as well known for the quality of our food as we could be”.
Despite this commitment to better products, Clarke also said that UK consumers are facing difficult times, that ASDA would respond by offering everyday low prices, and that as a first step towards this goal, ASDA would cut the price of staples such as bread, milk, and eggs.

He is not alone in recognising that as well as offering great quality, supermarkets have to offer sharp prices to ensure that shoppers walk through their doors as opposed to competitors. Even Waitrose, store of choice for the affluent, recognises this and anyone venturing in to a Waitrose will see aisle ends featuring promotional offers. In fact all supermarkets with the exception of ASDA are heavily price promoting with Kantar reporting that nearly 35% of all products are bought on promotion compared with 31% a year ago.

The focus on price is unlikely to ease any time soon. Consumer confidence has taken a bit of a dive recently as the scale of government cutbacks is becoming clearer, and they seem less willing to spend. Whilst this has yet to happen in supermarkets where sales in the last 12 weeks grew by 4.5%, supermarket supremos will be turning their attention to driving growth against a background of consumer thrift.

So how will they make money when heavy promotions lead to lower profits, and shoppers demand good quality? Harder bargains will be struck with suppliers of course. But a more productive answer might lie in developing a new “super premium” market segment with even higher cash margins than current premium ranges, and with a quality so irresistible that shoppers are happy to buy. We know that even in the depths of recession, consumers were prepared to spend on top quality goods if they felt they were worth the money.

Innovative suppliers who can deliver superb quality products at an acceptable return to themselves and their supermarket stockists could do well. Not easy though.

What Do Recent Results and Comments From the Big Four Supermarkets Tell Us About the Consumer?

Few know more about consumers than bosses of the big four supermarkets. Each day they scan data from the checkouts to see what is selling and what isn’t. Those with loyalty cards analyse how different types of consumer are spending their money. Tesco alone tracks the shopping behaviour of 16 million Clubcard holders. So, when the bosses speak its worth listening to how they see consumer trends.

The last twelve weeks saw Morrisons grow fastest at + 7.4%, hotly followed by ASDA at +7.2%. Sainsbury grew by 5.4%, and Tesco by 3.1%. However Tesco reckons that in recent weeks it has grown faster than the others due to offering double points on its Clubcard. (A point dismissed by Sainsbury as a “throwaway remark” not backed by figures.)

Where all four supermarket bosses are agreed is that food inflation has receded, growth rates are slowing, the battle for market share will intensify, and the focus will be on building customer loyalty.

There is agreement too that consumers are loosening their purse strings, albeit slightly. Both Tesco and Sainsbury reported higher sales of organic food and premium produce like Sainsbury’s Taste The Difference range and Tesco’s Finest. They said sales of ready meals are up after a long period of decline. Sainsbury said that sales of welfare friendly Freedom Foods have grown by 130%. At the other end of the scale, both said their lower price ranges were doing well, with Tesco very pleased with sales of their discount range, and Sainsbury’s Basics range having grown by 30%.

There is less concensus among the bosses about consumer confidence over the next few months. Terry Leahy of Tesco has called the bottom of the recession “We are past the low point and things are getting better in the UK. People feel their finances are under control”.

Justin King of Sainsbury is more gloomy. He sees increased VAT, increased taxes, interest rate rises and continued fear of unemployment as likely to put a damper on consumer spending, and that the current rate of promotions, which account for a third of sales compared with around a quarter historically, will need to continue. Andy bond of ASDA agrees - “Many of our customers are still cautious”, and will continue to search for the everyday low prices offered by ASDA.

King and Bond may be closer to the truth than Leahy. The National Consumer Confidence Index, published monthly by TNS (the market research company) does indeed confirm that consumers are a bit more positive about the economy. The improvement is marginal though. Whilst 72% of those interviewed think their household income next year will stay about the same as now, 71% think there will be less jobs available over the next 6 months, and 72% feel bad about the economy generally. Only 34% think the economy will be better in 6 months.

Its encouraging to see even tiny tips of green shoots. But there is no sign yet of a wholesale abandonment of thrift from the majority of consumers.