How will inflation affect shopping behaviours?

Welcome back to dunnhumby's?The Science of Shopping?newsletter where we look at the trends shaping the future of retail, and share the top insights that matter most to retailers and CPGs. In this edition, we explore how shopping behaviours might change during these inflationary times and how retailers can get prepared.

Prices are rising everywhere. In some places wages are also increasing, but for most prices are rising faster than wages and so in real terms, incomes are decreasing. And as real incomes fall, the amount that individuals and households spend on food will also fall.

Special Report: Find out what matters most to customers during inflationary times

Retailers must respond to these inflationary pressures to remain competitive and stay relevant to their customers. So let’s take a deeper dive into what economics can tell us from the customer perspective and about how shoppers may respond. And in turn, how retailers should use this customer-centric insight.

Some households will have to make real and difficult choices between heating and eating. We can be certain though that the typical absolute spend on food will decrease and shoppers will seek out value for their food spend. Let’s look at how shoppers will go about seeking out that value-for-money. Customers can switch any of the following:

Switching products

If a retailer increases the price of a supermarket product the volume of sales will go down. This is the law of demand?and is because shoppers are sensitive to price. How sensitive? How much will the sales volume go down?

The reduction in sales is because shoppers are switching to cheaper products in the sub-category or deciding not to buy in the sub-category at all. Here, we are talking about switching between products that essentially perform the same function, and differ largely only in price and perceived quality, for example, different brands of tins of tomatoes. The decision the shopper is making here is a straight-forward one – can I get the same for less, or can I get better for the same price?

Learn more about the impact of customers switching products

Switching categories

Food expenditure elasticities of various broad food groups are typically close to 1, with small cross-elasticities, meaning that spend on a particular food group/category simply scales near linearly with the total food budget. So, shoppers typically don’t change the mix of their basket that much in response to a small change in overall food budget, and we would expect to see them simply reduce spend across the board.

For larger reductions in budget, shoppers will make more radical adaptations to their shopping. Econometric theory says those adaptations will take place over long timescales – over short timescales customers are less price sensitive because they haven’t yet worked out what adaptations to make, and so most likely will reduce volume or switch to cheaper retailers in response to a large budget reduction. However, what defines the ‘short-run’ timescale? The natural timescale is the purchase/consumption cycle. Given for most grocery goods consumption cycles are short (under one month), we would expect that customers that have experienced larger income reductions will have already begun to adapt their category and product purchase patterns.

Switching Retailers

Shoppers have a choice of retailers. They can in principle substitute one mid-market grocery retailer for another mid-market grocery retailer, or one value retailer for another value retailer. In practice, there are barriers to switching retailers. Shoppers will often gravitate to the closest physical store within their price-bracket because there are costs associated with doing multiple trips – time costs and transport costs. Consequently, shoppers traditionally don’t multi-stop shop. Previously this has meant that the retailer that wins a shopper’s custom for one or two of their KVIs will typically win the shopper’s entire basket. The winner-takes-all nature of this competition means that retailers have traditionally been willing to sacrifice significant profit margin to ensure they win.

With shoppers increasingly seeking out value, their willingness to multi-stop shop should increase, and online has an important role to play here. The Covid pandemic has resulted in increased online grocery shopping in some geographies and so at first sight the fact that information gathering is notionally easier for online shopping means we would expect multi-stop online shopping to increase in these inflationary times. The reality will be more complex. Delivery costs are a non-negligible percentage of an online grocery shop, acting as a disincentive to shoppers spreading their online shopping across multiple retailers. Potentially, there are also other, cognitive, disincentives to multi-stop shopping.

Omni-retailers such as Amazon offer alternatives to multi-stop online shopping whilst keeping delivery costs down for the shopper. With an increasing number of shoppers becoming comfortable with online grocery shopping this may cause the middle ground of retailers to become squeezed, with shoppers being attracted to the very big online players and the very small niche providers.

While much of this article has focused on the uncertainty ahead, and likely routes that the industry could take, one thing remains certain: it has never been more crucial for retailers and brands to keep the customer at the heart of every decision.

Explore more about how inflation will change customer shopping patterns.

Until next month, visit?The Science of Shopping?and?dunnhumby?for more. Thanks for reading – and please subscribe to get the best of dunnhumby directly in your feed.