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Research: Downtrading is the name of the game and the discounters benefits of it

Updated: Nov 5, 2023

Money saving strategies of households and its impact on the grocery industry

Even in developed economies, the past few years posed significant challenges for numerous households. In 2022, consumer price inflation surged to its zenith at 8.3% in the US and 9.2% in the EU, with an even more pronounced impact felt in the domain of food prices. In the EU and UK, food price inflation peaked in March 2023, with a stunning 19.2% and 19.1% increase in prices respectively compared to the preceding year (Statista, 2023). Similarly, the US encountered a notable spike in food price inflation, peaking at 11.4% in August 2022.


Given that food expenditures account for a sizable portion of a family's disposable income, many households find themselves compelled to implement strategies to economize on their grocery and foodservice outlay. To address this phenomenon, we've developed the 'downtrading ladder.' This model discerns four distinct modes of downtrading that households actively employ to optimize their food-related expenses (see Figure). In this blog, we will delve into each facet of downtrading and its impact on the business models of retailers and suppliers within the dynamic food landscape.

Downtrading trend 1: Promo hunting

The least involved downtrading trend is promo hunting. As most retailers follow a HiLo strategy most brands will be regularly on promotion. By studying supermarket flyers and adopting forward buying, households can save considerable amounts of money. In the Netherlands for example promoted sales account for about a quarter of all supermarket sales and the average discount is about 30% off the regular price. On average consumers save 7.5%. Bargain hunters might even save over 10%. In general this is a costly approach for retailers as well as manufacturers, but it offers households extra opportunities to save money.


Downtrading trend 2: Product downgrading

The act of transitioning to more budget-friendly products can manifest in various ways. For instance, consumers can opt for economical alternatives, such as chicken or pork and canned vegetables and fruits, over pricier items like beef and fresh produce. Additionally, a shift from animal-based proteins (e.g., pork) to plant-based proteins (e.g., beans) is also a means for individuals to cut costs. In cases where consumers prefer to retain their product choices, they can still achieve savings by seeking out more affordable options within the same product group. This might involve transitioning from a widely recognized national brand to a store brand or a fancy label.


For example, when comparing diaper prices at the leading Dutch supermarket chain, Albert Heijn, a pack of Pampers baby dry costs €0.40 per diaper, whereas the regular AH store brand is priced at €0.22, and a diaper of AH’s economy store brand is just €0.13 (AH.nl, assessed August 28, 2023). A study of NielsenIQ in 17 European countries showed a growth in the value share of private labels from 35.8% to 37.0% in 2022 compared to 2021 (PLMA, 2023). This phenomenon also suggests that national brands are experiencing a decline in popularity and need to reassess their strategy in the light of the increasing price sensitivity among many households.


Downtrading trend 3: Store switching

Full-service supermarkets such as Kroger, Carrefour, Tesco, and Albert Heijn are more expensive than discount retailers such as Aldi, Lidl, Trader Joe's, and Walmart. A recent comparison of shopping baskets in the UK revealed that the top four full-service supermarkets (Tesco, Sainsbury’s, ASDA, and Morrisons) are 11.7% pricier than Aldi and Lidl for essential groceries and household items (Which?, 2023). In response, a growing number of UK households have switched stores from the full-service grocers to Aldi and Lidl. From January 2021 to August 2023, the combined market share of Aldi and Lidl in the UK market surged from 13.5% to 17.9%. During the same period, the aforementioned top four full-service supermarket chains experienced a decline in their market share, dropping from 67.9% to 64.2% (Kantarworldpanel.com, accessed August 28th, 2023). Note that this store switching habit might also affect the market share of national brands, as discount retailers such as Aldi and Lidl tend to rely heavily on fancy labels instead of national brands.


Downtrading trend 4: Eating in

Eating in requires the most behavioral change. It requires the consumer to go to the store themselves, and spend time preparing the meal at home. Because the consumer takes upon themselves to perform many tasks performed by the restaurant, the potential for saving money is greatest. If we compare the cost per plate of simple dishes like a hamburger, preparing it at home can lead to savings of approximately 50-70% compared to fast food outlets and typical burger-centric restaurants.


As households tend to allocate up to one third of their food expenditures to dining out (USDA, 2023) much can be saved by eating more at home. Trimming just 10% of a households dining-out instances could potentially curtail food expenses by around 3%, resulting in noticeable savings on your overall food expenditure. In general, this shift in spending patterns will be positive for supermarkets and negative for foodservice outlets.


Impact of downtrading effects on the food industry

Although supermarket revenues are still increasing due to the high level of food inflation, their sales growth is lower than food inflation. McKinsey estimates that supermarkets in the EU has lost almost 8% of potential sales due to a combination of lower volumes and downtrading habits of shoppers[vi]. Each type of downtrading has a specific effect which may differ per type of retailer (full-service vs discount) and type of manufacturer (national brand vs store brand). We made a brief assessment shown in the table "Overview of downtrading effects".


Challenging times for service retailers

When evaluating the repercussions of downtrading across various retailer types (see Table), a clear trend emerges: price-focused retailers like Lidl, Aldi, Trader Joe's, and Netto have emerged as the beneficiaries of consumers' downtrading behavior, substantially expanding their market shares. Full-service retailers such as Tesco, Leclerc, Kroger, and Albert Heijn have marginally benefited from the trend of increased home dining, but also faced sales declines as consumers switch to lower-priced product alternatives and budget-friendly retail banners. For example, according to an article in the Wall Street Journal, Kroger said "sales at its supermarkets would likely decline over the next six months as consumers keep a tight leash on spending. Inflation, high interest rates and reduced government benefits are stretching shoppers’ budgets. Lower-income customers are buying smaller items and cheaper products."


To remain competitive, these retailers must intensify their efforts to construct price-competitive product assortments compared to the assortments of lower-cost retailers. They can do this by expanding their assortment of economy store brand products and by pressuring the national brands to increase their promotion intensity. Another strategy could be to offer better, fresh, ready-to-eat meals.


Can national brand manufacturers hold the high ground?

National brand manufacturers face an even more formidable challenge. Profit margins are higher in the foodservice industry than in the fiercely competitive grocery sector. The transition from foodservice to grocery sales might not necessarily dent overall sales figures, but it inevitably exerts pressure on profit margins. Furthermore, the shift towards discounters and store brands presents a significant dilemma for national brand manufacturers. While some may contemplate countering lost market share by raising prices, this approach offers only a temporary respite for margin-related concerns. Historical data reveals that when product capacity utilization drops by 10% or more, the repercussions for manufacturers' profit and loss statements are substantial. The stock market believes that price increases have run its course, just if we look at the share price performance of S&P 500 consumer staples versus the general market.

Wall Street is concerned that price increases are not the way forward for CPG

Anticipating further escalations in food prices due to industry-wide sustainability initiatives and elevated input costs, any strategy that increases the price gap between national brands and store brands could potentially lead to a further erosion of market shares. Consequently, national brand manufacturers must undertake a thorough reassessment of their price-value equilibrium, questioning the viability of sustaining EBIT margins of 15% or more within the fiercely competitive landscape of the food market. Fighting for market share - in sales as well as volume - will be key to stay vital in the next decade.


Source: Linkedin - Laurens Sloot and Jan-Benedict Steenkamp






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