In the Inflation Exploration blog series, Mintel explores all the ways that inflation effects consumers around the globe.
Over the last two years, COVID-19 has dominated the consumer mindset. In 2022, though, the emphasis has increasingly been on the cost of living.
The COVID-19 pandemic created a perfect storm for inflation. When scarcity from supply chain disruption increased prices of goods and services, people had to spend more of their disposable income. This added pressure to employers to increase wages, thus raising the cost of production. When attributing a labor shortage driven by consequences of the pandemic (e.g. sickness, lack of childcare), it is less surprising that inflation accelerated much more than expected in 2021.
It’s more important than ever for brands to understand their consumers and the circumstances they face. Brands across industries need to be prepared to adapt during a period of uncertainty for consumers. Here, we identify five strategies for brands to help consumers deal with a sustained period of inflation and less disposable income.
1. Food and drink: promote versatility and demonstrate values
Packaged brands and retailers have mostly benefited from consumers cooking at home, while foodservice companies are finding ways to recover from the effects of the pandemic. Rising prices along with the labor shortage are likely to prolong the foodservice struggles. The priority of CPG brands and retailers will likely be keeping production lines moving and products on shelves. Product versatility will need to meet the needs of consumers.
Discretionary spending on nonessentials like foodservice, alcoholic beverages, and premium products will be impacted in both directions. With prices rising across virtually every good and service: the relative accessibility of most food and drinks will trigger a lipstick effect. Conversely, brands need to keep in mind that consumer belt-tightening measures may include bulk buying, brand or channel shifts, and product attribute re-prioritization.
2. Beauty and personal care: provide consumers with flexibility to meet their needs
While sales in the beauty industry have rebounded, the growth may be affected due to inflation and supply chain issues. Beauty and personal care categories tend to be elastic in the face of rising prices. With the abundance of products at a wide range of price points, beauty consumers are accustomed to a variety of categories in order to stay within their budget. Retailers can respond by curating a selection of products/brands across a scale of prices that serve similar purposes allowing for consumer purchase flexibility.
Product purchase justification is key when it comes to consumers making the decision on how and where to spend their dollars, especially when money might be tight. Brands need to communicate in clear terms why that product is an essential part of a beauty or grooming routine. Amplifying messaging around multi-use products will appeal to the budget-conscious user of beauty and personal care.
3. Retail: remain nimble and adjust to changing marketplace dynamics and consumer behavior
Concerns about inflation combined with supply-chain woes, pandemic-related fears and staffing shortages all impact how and where consumers shop. It’s likely that consumers’ willingness to spend on discretionary items will diminish while costs remain elevated. This means some categories, including apparel and beauty, will be negatively impacted before they’ve even had a chance to fully recover from the early pandemic effects.
As retailers are likely to raise prices, transparent communication will go a long way, especially if coupled with other value add offerings such as free shipping, flexible returns, and promotions. Buy now pay later offerings can help consumers better manage their money and allow them to justify spending. While these challenges have caused some retraction, retail sales continued to grow in 2021 and are projected to grow in the coming years.
4. Leisure and entertainment: deliver “normalcy” safely to attract cautious, yet eager consumers
Leisure spending has historically been closely linked to the amount of extra spending money consumers have. When fixed costs rise and household budgets are constrained, leisure and entertainment expenses have been among the first to be cut. However, after two years of pandemic-induced disruption, consumers are eager to return to live entertainment.
There is acknowledgement that life has changed, and people want to escape from the responsibilities of making sure their surroundings are safe. While rising costs for out-of-home entertainment will prevent some consumers from going to events, at-home alternatives take on even greater priority. During the pandemic, consumers added streaming services and video gaming surged. And, it’s important to remember that inflation is not uniform across categories – in fact, digital technology tends to counter inflation as prices tend to decline over time. With the value that at-home digital entertainment provides and the lower-cost, spending on these activities is expected to remain strong and stable.
5. Financial services: more opportunities to adapt to changing consumer needs
Despite high inflation, consumers are still spending and increasingly looking to finance their purchases through credit. As the landscape evolves, financial services companies need to remain flexible and adapt their products and marketing messages to reflect changing consumer needs.
After mostly downplaying the threat of inflation in 2021, the U.S. Federal Reserve abruptly changed course in early 2022, indicating multiple projected rate rises. Analysts are predicting anywhere from three to seven hikes this year. As interest rates rise, savings rates should also edge up. Younger consumers, in particular, plan to invest more in 2022 and inflation will likely fuel growing interest in fintech solutions that make investing in cash alternatives like stocks and cryptocurrency fast and easy.
Consumer behavior
In the US, prices are rising much faster than wages. Inflation began it’s steep ascent from pandemic lows in 2021 and wages were unable to keep up, resulting in reduced purchasing power for US consumers.
Young consumers indicate that they will purchase more using credit and take on debt to fund essential purchases in response to rising prices. This comes at a time when consumers already have record levels of debt and with rising interest rates on the horizon.
Overall, consumers will cut back on nonessential spending and will have to make difficult choices around how they spend their money. For many, that also means stretching their dollars via low-cost alternatives.
Brands can support consumers by providing creative ways to help make their money go further, such as offering discounts or opportunities to buy in bulk.
Brazil’s inflation rate reached 18-year high
High inflation is unfortunately not as novel for Brazil, as the country has struggled with an uncertain economy for many decades. However, inflation was relatively low in the few years leading up to the pandemic. Even in January 2021, inflation sat at a more manageable 5.2% before nearly doubling in the second half of the year.
According to the Wall Street Journal, “While the global economy is forecast to rebound more than 4% [in 2022], including in countries bordering Brazil, more economists expect Brazil to remain stuck in recession during 2022 as it battles one of the world’s highest annual inflation rates.” Brazil indicates what’s to come for other economies experiencing rising inflation. As a result, consumers have had to cut back and look for low-cost solutions to the rising cost of living.
Canadian perspective
The Bank of Canada left its benchmark interest rate on hold at 0.25% in December 2021 but indicated a series of rate hikes in 2022. The central bank expects inflation to peak around 5% in the coming months. Wages rose 2.6% during the same period, meaning that Canadians experienced a decline in purchasing power.
Tiff Macklem, Governor of the Bank of Canada, has tried to keep Canadians optimistic in 2022, predicting, “We do expect inflation is going to remain uncomfortably high in the first half of this year, before coming down fairly quickly in the second half, as the pandemic recedes and things normalize.”
What we think
- Learn from the past: Inflation and recession change consumer priorities and purchasing power. Brands that performed well after the last recession focused unerringly on delivering value. The key to this is showing flexibility and empathy in pricing and innovation, and convincing consumers that tangible benefits are worth the extra money.
- Prepare for uncertainty: Prices are on the rise caused by surging demand and supply chain issues following an unprecedented global pandemic. Central banks will fight inflation, which could lead either to a ‘soft landing’ or a more disruptive economic slowdown. Either way, brands need to be prepared to adapt during a period of uncertainty for consumers.
- Recognize that circumstances vary hugely: Many people will see inflation as an irritation rather than a major threat. Others are already struggling, though, and even small price changes will tip them into serious financial hardship. It’s more important than ever to understand your customers and the circumstances they face.
