If you’re old enough to make or spend money, you’ve probably been feeling the impacts of inflation. Recent information shows slight signs of easing, but overall, we’re still close to an inflationary high point over the past 4 decades, without any guarantee that it will return to pre-pandemic levels. Between the pandemic shortages, supply chain issues caused by the war, fuel spikes, and subsequent logistics problems, it’s been a turbulent 2-3 years. Though there are many contributing factors, they’re not particularly difficult to identify. What’s harder is understanding and predicting the societal effects and consumer outcomes.
In a recent Retail Corner podcast interview, Explorer Research Founding Partner Anne Stephenson discussed a growing fragmentation in spending patterns.
“We’re starting to really see the pain in terms of inflation. What we’re seeing is very much a fragmented consumer picture. You have more affluent consumers who are continuing to spend, and then lower-income consumers who are making extremely tough tradeoffs.”
Stephenson points to discretionary spending and a disparity between channels, saying that categories like apparel, sporting goods, and consumer electronics have taken huge hits recently. By contrast, premium and luxury items are increasingly unimpacted or doing better than before. This is referred to as the “bifurcation of consumer spending.”
Inflation Inequality
Where inflation absolutely impacts everyone, higher-income households are more likely to have protection against rising prices. The Washington Post points to “savings, tapping home equity…trimming their 401(k) contributions or holding on to a past SUV model a little longer.” By contrast, middle and low-income workers have less of a cushion to protect themselves.
The increasing cost of necessities like housing, utilities, groceries, and gas, simply means less money to spend on anything else. An article from JLL points out that “Americans are spending 25.6% more on fueling their cars and 11.4% more on buying groceries than they did a year ago.” This is causing a wide-scale shift in spending behavior.
Mind The Gap
A highly illuminating post from Entrepreneur Magazine curates a selection of quarterly stock market earnings across different sectors. Among other things, they show premium brands weathering inflation relatively unscathed. In Q2 Lululemon grew 25% in-store and 42% direct-to-customer, and Capri Holdings (owner of Versace and Michael Kors) saw revenue grow 8.5% year over year. Conversely, Kohl’s and Five Below – both non-luxury discretionary retailers saw losses in YoY and quarterly earnings.
Essential items like groceries are not getting cut, but consumer spending patterns are shifting. This can mean more selective bargain-hunting, change of store choice, increased emphasis on shelf staples, or an overall shift toward store brands – all significant shifts in the path to purchase. Forbes states that due to the necessity of the product, “chains can pass along price increases to consumers without seeing a significant sales drop.”
For retailers, there’s not much that can be done to address the underlying issues, however, awareness of the circumstances facing shoppers, in addition to a keen understanding of intended audiences can help shape messaging, clarify promotions, and assist with stocking and distribution choices. The economic factors impacting consumer behaviors are changing quickly, and being able to understand which changes will have longevity is crucial. In the Retail Corner podcast, Anne addresses the shortening cycle of trends and the impact on consumer insights for businesses:
“We used to say trends are 10 years plus, but trends may be coming a lot faster than we’ve seen. We just look at the change, and from a retail standpoint, what’s happened over the last couple of years has been phenomenal. It’s kind of ‘hats off’ to retailers in terms of how they’ve had to adapt and the changes they put in place, and there are certainly more changes ahead.”
