Supermarket reactions to the decline in consumer spending
A series of pressure points have forced the supply chain to British supermarkets to absorb fairly significant increases in their cost bases. These pressure points include raw materials and energy, both of which were further exacerbated by Russia’s invasion of Ukraine, and the labor process as a whole, which is a result of a combination of the pandemic, Brexit, the benefits system, and the UK’s cumulative failures in skills development.
In fact, since 2020, suppliers have experienced six or seven waves of inflation, setting new records for food inflation. If food inflation were to exist in isolation, it would put a severe strain on British consumers, particularly those with modest means, since inflation for necessities is regressive. But this inflation in food is accompanied by a stepwise adjustment in household energy bills and persistently high motor fuel prices. Therefore, the budgets of British households are really being squeezed.
What kind of response have merchants given?
What is the impact of this inflation on the domestic supply chain and how have British supermarkets responded to it? The supply chain’s cost inflation has undoubtedly been passed through, as seen by the noticeable price increases and shelf life. Due to consumer reductions, those same supermarkets have experienced a decline in volume, or the quantity of items placed in a basket.
Perhaps more worrisome is mix, where retail customers have exhibited some traditional characteristics related to trading down. Tesco has discussed moving from premium to standard and entry price lines, from chilled and fresh categories to ambient and frozen, and from proprietary brands to private label. NielsenIQ, for example, has observed a discernible shift in the latter category.
More generally, hard times have caused a larger decline in internet involvement than pandemic normalization; according to NielsenIQ, in October 2022, only 11% of people were online, compared to 15% at the height of the coronavirus concern. Additionally, there has been a significant decline in demand for the relatively inflated sub-categories like plant-based and meatless, which has resulted in a number of high-profile profit warnings (like Beyond) and corporate scale backs in this area. The need to save costs has also resulted in an unusual influx of customers into the German cheap stores that are present in these islands. This is because consumer behavior involves making more, smaller basket purchases throughout the month, using more cash, and peaking at the end of the month when pay is received. Therefore, consumer behavior, supermarkets, and the supply chain are all being significantly impacted by the recession in the UK.
You may also like:
Food security in emerging nations: issues and remedies
Are drinks the secret to increasing cannabis use among consumers?
Managing the lack of labour for mushroom picking
What does this signify?
The effects of this prolonged cost challenge period on the supply chain may vary depending on who you ask. In its Q3 2022 results, Unilever reported growing profits together with a 12% inflation rate and a 1.5% decline in volume2 in its sales mix. That result is a result of a combination of productivity work, mix developments, and good market cost recovery. Supermarket executives are unlikely to miss margin accretion. That being said, a similar performance is unlikely to be seen very often in the private label space, where retailers have more leeway to postpone, delay, and contest price recovery.
This kind of stance is characteristic of the industry, but it also shows that suppliers and retailers are becoming more conscious of the risks associated with over-inflating, which leads to a reduction in units, mix degradation, and a push into the discount channel. To be more precise, there is more room for punishment for over-inflating at this time than there was during calmer periods. As a result, we witness a lot of providers and shops attempting to assist the customer right now.
Thus, to sum up, a consumer recession—and a severe one at that—has significant behavioral and financial ramifications for both supermarkets and the supply chain, though the latter may be more affected than the former. Generally speaking, competing for customers these days almost always results in margin pressure and consequent cash flow issues, which, regrettably, will lead to business collapse for some. Strong balance sheets and enough cash flow are essential for survival, and they should improve performance in less difficult times. Finally, any proprietary brand operator who exaggerates should exercise caution to avoid devaluing their brand at this moment.