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An Imperfect Inflation: Will 2022 Be Different?

This current period of inflation is not the first, nor the last, but it is unique, writes Ananda Roy, International Senior Vice President – Strategic Growth Insights, IRI. This article first appeared in ESM Issue 1 2022.

Inflation has risen sharply in recent months, in all the major global economies, and the outlook for 2022 suggests that we are sailing into choppy macroeconomic waters.

This is not the first period of inflation that we have seen, of course, and it certainly will not be the last, but this one is very different.

There has never been such a convergence of factors since the Great Depression, in the 1920s, with rising commodity and energy prices, shipping costs and transportation disruption, continued uncertainty around COVID, and government and cross-border issues unique to every country, such as Brexit in the UK.

Combine this with changes in our weather patterns that are affecting crops such as grains and oils, and you have a perfect (or imperfect) storm.

A new IRI research report, due to be published shortly, will show that there’s a strong feeling of optimism right now, as uncertainty over the pandemic starts to ease, despite consumers – across 12 international markets – acknowledging that the price of goods and services will go up.

Understanding Inflationary Behaviour

In our report, we examine past periods of inflation to try and understand how consumers shop, buy and consume. FMCG manufacturers and retailers have tended to apply well-established revenue management principles during these periods, typically price pack architecture, but we have also identified 12 other behaviours that shoppers use.

We also look at whether consumers change where they shop, the frequency and consumption of their purchases, the quantity of what they buy, and whether they upgrade, defer a purchase, or even leave a category altogether.

So, despite inflationary pressures, manufacturers and retailers have an opportunity to apply other techniques, rather than just revenue and price management principles, to maintain or increase value and volume sales revenue.

Looking at past inflationary events, we can begin to understand how sustained inflation can affect consumer category choices, depending on income and based on price sensitivity and perceived value.

Income Driven Consumption

Among low- to middle-income consumers, for example, we see much more trading down, buying on deal and substituting, with the highest impact seen in fresh fruit, vegetables, meat and seafood. This leads to higher consumption of frozen foods, impulse purchases like frozen desserts and chocolate, as well as discounter private-label and value range packs.

Among middle- to high-income consumers, we also see some trading down, but there’s also a focus on ‘smart deals’ and premiumisation, where it’s justified, such as more at-home indulgence, plant-based and better-for-me products, as well as mid- to premium range private-label ranges.

The most resilient FMCG businesses see inflation as an opportunity. This is a time when consumers are actively evaluating their category, brand and consumption choices, rather than being induced by significant marketing and promotional activity.

New shopper and consumer behaviours are being established, many of which will continue after the worst of the current inflation recedes. For high-performance category leaders, counter-intuitively, there has never been a better time to grow their business.

IRI’s new report examining inflation and the impact for FMCG manufacturers and retailers will be published in Q1 2022. For more information on IRI, visit www.iriworldwide.com.

© 2022 European Supermarket Magazine. Article by Ananda Roy, International Senior Vice President – Strategic Growth Insights, IRI. For more Retail news, click here. Click subscribe to sign up to ESM: European Supermarket Magazine.

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