Looking at the future consumption trends from the performance of the US supply and demand in the first half of 2022

Author: Xuan.Liao

In the past 2020, 2021 and the first half of 2022, most of the consumer phenomena we have seen are short-term phenomena. Which of them are short-term phenomena and which are unchanging rules? The consumer track has been hot and cold. What are the future trends and what long-term issues should we pay attention to?

1. Inflation brings about changes in consumer behavior

Inflation is eroding everyone’s purchasing power, and people are feeling the effects directly in their pockets:

1) If inflation continues in the future, consumers will cut back on spending

As energy and food prices soared, U.S. inflation reached 8.6% in May, the highest level in more than 40 years. The U.S. Department of Labor released the first quarter labor data, and companies across the country adjusted their salary increases significantly. Although the wages of "workers" rose sharply, they could not keep up with the rate of inflation.

(Data source: statista)

According to Forbes, consumers spent a total of $83.1 billion on online shopping in March, an increase of $16 billion from February, and US consumer spending grew 3.1% in the first quarter. With inflation continuing, consumers are beginning to use their savings for consumption. This reflects their current optimism to a certain extent, and consumers expect the impact of inflation to be only temporary. ①

(Data source: Bloomberg)

However, Fed Chairman Powell said in March that the current wage growth rate is inconsistent with the Fed's inflation target, and workers' wages are still not keeping up with the high inflation level in decades. Bloomberg's poll data confirms this: if inflation continues in the future, 84% of American residents plan to cut spending.

2) Inflation makes consumers more price-driven and tends to look for products with high cost performance

In the first quarter, Dollar Tree, a chain of discount grocery stores, and Dollar General Corporation, a chain of grocery stores, performed better than analysts expected:

   Dollar Tree's overall sales rose 6.5%, Dollar Tree's same-store sales increased 11.2%, and the retailer's gross profit increased 19.2%.

Dollar General's sales rose 4.2%, but same-store sales fell 0.1%; however, the retailer's quarterly profit beat expectations.

(Data source: eMarketer)

The data shows that some consumers are becoming sensitive to commodity prices and are choosing products with better cost-performance as substitutes.

2. Consumer behavior has changed, and retail players will win and lose

This year is a turning point under the influence of the epidemic, and a large number of consumers have returned to their pre-epidemic lifestyle. Although inflation cannot stop people from spending money, it has changed their consumption patterns. Because of this change in external factors, the winners and losers in the first quarter have been reshuffled. ③

(Data source: eMarketer)

Companies that provide low-cost essential consumables

As mentioned in the previous paragraph, consumers have become sensitive to the overall environment, and price has become their primary consideration again. At the same time, consumers prioritize essential consumables, the sales share of consumables has increased, and demand for non-essential products has slowed down .

In a challenging first quarter, retailers with good value for money (Dollar Tree) and merchants with strong private-label brands (BJ's Wholesale Club and Target) gained ground, with one bright spot for Target being that its $30 billion private-label portfolio grew faster than the retailer's total sales in the first quarter.

In a quick survey on private brands in January, nearly 90% of American adults decided to choose private brands. Private brands are more popular because companies can control costs and have lower prices than competitors, and the ultimate reason is the price orientation of consumers.

On the other hand, companies that sell discretionary items such as electronics, such as Best Buy, have been hit as changes in consumer behavior have slowed demand for such purchases.

Clothing and sportswear retailers, beauty retailers

As consumers return to travel, offline gatherings, and socializing, they need to repurchase new clothing and beauty products to show off their new status in front of their friends. Therefore, the book numbers of clothing retailers (Nordstrom, Macy's, Express), sportswear retailers (VF and Deckers), and beauty retailers (Ulta Beauty) are "thriving."

However, UGG, HOKA and The North Face, which have opened independent websites, have started to cheat, with some consumers purchasing products from brand websites. UGG and HOKA's fourth-quarter financial reports showed a 31.2% year-on-year increase in net sales, partly due to a 22.2% increase in sales on independent websites. This indirectly reflects the importance of brand loyalty programs , which help drive an important part of revenue growth by incentivizing consumers to purchase directly from brands.

Home furnishings and home improvement retailers

As consumers spend more time working from home due to the pandemic, they choose to rearrange and improve their home environment, which has led to first-quarter profit growth for home furnishings (Williams-Sonoma) and home improvement retailers (The Home Depot).

In particular, Williams-Sonoma, which focuses on "digitalization", provides additional design services to consumers, such as allowing customers to feel the decorative effects of wood and fabric, focusing on providing high-quality customer experience rather than just sales.

Luxury goods retailers

Luxury brands (Burberry, LVMH Moët Hennessy Louis Vuitton) have a loyal customer base that is not affected by inflation, and users still pay for their favorite products. However, these users prefer to shop in offline physical stores, which has caused a great impact on luxury online sales e-commerce (YOOX Net-a-Porter).

3. What do price-driven consumers really want?

We tried to analyze the changes in consumer behavior in Q1 to figure out what companies should do in the future: Consumers want both quality and beauty, as well as value for money. But is this a short-term phenomenon, or will it last for a long time? All of this ultimately depends on the company's strategic goals .

1) Return to the product itself

Unstable supply chains and rapid inflation make it difficult to build brand loyalty. In this case, companies should focus on the product itself, quality, innovation, brand value and users , rather than marketing gimmicks. ⑤

(Data source: eMarketer)

The survey on price vs. brand value preferences of different age groups shows what consumers really care about. Brand value is important, but it is not the only driving factor. Data shows that consumer behavior is also affected by factors such as price, convenience, product availability, and corporate culture. As people's disposable income increases, many consumer products are no longer just aimed at "low price" as the goal of making products, but seek to make customers feel different on a spiritual level .

As for pricing, a survey report titled "Understanding the Global Price-Sensitive Consume" released by Boston Consulting Group last year also tells us the answer: there is little correlation between national income levels and consumers who prefer low prices.

(Data source: BCG)

Consumers who claim to be value-conscious may also be quality-conscious and brand-conscious: they may choose low-priced products based on the short- and medium-term macro environment; they may not choose low-priced products based on convenience, environmental protection, etc. Just like the luxury brands such as LV and Burberry that are not affected by inflation, consumers are less sensitive to luxury brand prices. Low prices are not a means to win , and correct pricing can ensure that brands win the market with differentiated value and maximized profits.

Another factor was revealed in a survey of the fast-moving consumer goods industry in the article “How to Fight Inflation Through Innovation ”: if a company’s products can provide innovative uniqueness, reduce substitutability and always surpass competitors, consumers are willing to pay for rising prices.

(Data source: IPSOS)

The report found that in the highly homogenized and commercialized instant coffee category, a company proposed a unique "instant espresso" product concept, which was highly praised by consumers, who believed that this product was not only innovative but also had no substitute. When the product price was raised for sale, the impact on innovative companies was far less than that on non-innovative companies.

When product price increases are unavoidable, whether it is a direct price increase or an indirect price increase through cautious methods such as downsizing and cost reduction, it is a delicate choice for companies. To become a successful player in the industry track, it is necessary to balance short-term gains and face long-term risks and return to the product itself.

  2) Promote sustainable development

As stricter regulatory policies and global emission standards are implemented, companies that are committed to the development of ESG will benefit greatly. Sustainable development is becoming a top priority for companies, and companies that focus on sustainable development will also win the hearts of corporate employees and consumers.⑧

U.S. consumers want to live more sustainable lives, especially younger generations, and many are willing to pay a premium for products and services that align with their values, including providing information about the carbon impact of the products they purchase.

(Data source: eMarketer)

Sustainability is a major consideration for millennials and Gen Z consumers when evaluating brands. Millennials have a spending power of $600 billion, while Gen Z has a spending power of $140 billion, and 70% of them consider sustainability very important. As younger generations have extremely high expectations for companies and brands to demonstrate social and environmental responsibility, those that do not will quickly fall out of favor with consumers.

“Sustainability” is no longer just a buzzword, but it is critical for brands and retailers to respond to changing consumer expectations – in terms of product sourcing, packaging and environmentally friendly delivery.

3) Technology and digitalization are life-saving remedies

Just like Luo Yonghao, the maker of the Hammer phone, who bid farewell to social media and live streaming a few days ago without looking back and turned to plunge into the AR technology industry.

Technology and digitalization will definitely be a card in the hands of future enterprises. Market data shows that in the next six years, the global retail digitalization market is expected to expand to more than US$23 billion, almost double the market value in 2019. Focus on improving digital hard power to lay the foundation for future development of enterprises.

(Data source: statista)

We are now standing at the darkest moment of the market. The essence of the crisis is the adjustment of the radical production and lifestyle of mankind in the past. From the perspective of long-term development trends, a fundamental change in consumption patterns is more in line with the requirements of economic and social development. The consumption development trend is no longer just about speed, but also about quality.

Sources:

① "US consumers continue to spend"

https://content-na1.emarketer.com/us-consumers-continue-spend

"US shoppers are turning to their savings to manage price increases"

https://content-na1.emarketer.com/us-shoppers-turning-their-savings-manage-price-increases

② "Inflation drives consumers to Dollar Tree and Dollar General"

https://content-na1.emarketer.com/inflation-drives-consumers-dollar-tree-dollar-general

③ "Q1 has been wild. Here are retail's winners and losers"

https://content-na1.emarketer.com/q1-has-been-wild-here-retail-s-winners-losers

④ "Private labels help retailers like BJ's Wholesale Club appeal to value-oriented shoppers"

https://content-na1.emarketer.com/private-labels-help-retailers-like-bj-s-wholesale-club-appeal-value-oriented-shoppers

⑤ "What Values-Driven Consumers Really Want"

https://content-na1.emarketer.com/spotlight-what-values-driven-consumers-really-want

⑥ "Understanding the Global Price-Sensitive Consumer"

https://www.bcg.com/publications/2021/consumer-price-sensitivity

⑦ 《Innovation in inflationary times》

https://www.ipsos.com/en/innovating-inflationary-times

⑧ "Technologies to Drive Sustainability"

https://content-na1.emarketer.com/technologies-drive-sustainability

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Supply and demand

Consumption Trends