Here’s what can be said with great certainty about the state of the U.S. grocery industry at the beginning of 2023. There is great uncertainty about retailers’ ability to grow sales due to a unique combination of economic and competitive issues. This is new territory for retailers of food and consumables who benefitted from unprecedented tailwinds the past three years.
Initially, the onset of the pandemic in early 2020 distorted demand as restaurants were forced to close. In the span of a few months, food at-home spending regained all the volume that had been lost over the prior two decades as people gradually ate out more often. Even after competition began to normalize with the reopening of restaurants, grocers’ sales were artificially supported with government stimulus. In 2020 and 2021, a total of $931 billion in direct payments were made to individuals, according to the U.S. Government Accountability Office.
Then in mid-2021 inflation began surging and grocers steadily increased prices which aided sales. Food at-home inflation was 7.4% in January 2022, but by March of last year it hit double digits (10%) and peaked at 13.5% in August (see below). In the fourth quarter, the average item price paid by shoppers globally increased 10.4% compared to a year earlier, according to a SymphonyAI Retail CPG global study of 59 million households and 618 million baskets.
New headwinds threaten grocers’ growth
It was easy to grow top line sales in grocery the past three years, which isn’t to say it was easy being a grocer as there were significant operational, supply chain and labor challenges. While many of those challenges remain, grocers are also seeing sales tailwinds turn to headwinds. This shift is going to be unkind to grocers who lack an intimate understanding of shopper behavior and the ability to develop sales generating strategies based on that understanding. For example, below are several of the biggest challenges and new competitive dynamics facing retailers in 2023.
- Inflation is declining, but the pace and extent of the decline is debatable. Deflation has been mentioned as a possibility by some analysts, but not until the back half of the year when the industry laps the worst of 2022’s increases. Conversely, the U.S. Department of Agriculture’s Economic Research Service in January predicted 2023 food at-home prices would increase 8% but cautioned the actual number could range from 4.2% and 10.1%.
- Billions of dollars in Supplemental Nutritional Assistance Program (SNAP) benefits will disappear in March. That’s when emergency allocations authorized at the beginning of the pandemic cease and monthly benefits revert to pre-pandemic levels. To get a sense of the impact, in 2019, there were 35.7 million participants in SNAP, the average monthly benefit per person was $130 and total spending was $60.4 billion. After the emergency payments were authorized, participation in 2021 increased to 41.5 million people, the average benefit was $231, and spending nearly doubled to a record $113.8 billion. Another record was set in 2022, with SNAP spending projected to be $119.5 billion, an amount greater than the combined annual sales of Albertsons, Dollar General and Hy-Vee.
- Restaurants have fully regained ground lost in 2020 when the pandemic briefly turned the share-of-stomach battle in favor of grocers. By 2021, food away from home spending accounted for 55% of total food expenditures. Foodservice operators reported continued gains in 2022 and were slower to increase prices than grocers eager to retain their own foodservice shoppers.
- Pricing actions and promotions are expected to increase. As inflation ebbs and the need to increase units grows, major retailers are expected to invest in price to gain market share and ramp up promotional activity to entice value-oriented shoppers. This will put pressure on traditional grocers to leverage shopper data to better understand behavior and increase the precision of marketing investments.
However this combination of factors plays out in 2023, it is clear grocers need to elevate their use of shopper data by leveraging advanced technologies to truly understand shopper behavior. Doing so will allow retailers to optimize and personalize promotions and make more strategic pricing and assortment decisions, retain loyal shoppers and attract new ones. To illustrate what’s possible, SymphonyAI Retail CPG applied advanced analytics capabilities against a massive data set to reveal insights representative of the type grocers need to win in 2023. The global study examined the behaviors of 59 million households and 618 million baskets to reveal:
- The effect of 10.4% fourth quarter inflation was uneven on different shopper segments. Price sensitive shoppers felt the increase more because prices on key value items they purchase increased 15.5%. This resulted in leakage of price oriented customers at conventional grocers.
- Retailers can affect price perception by investing in only 8% of their assortment. With increased precision and dynamic customer analytics retailers can identify price investment priorities that are seasonally relevant in categories with higher than average inflation. For example, the perceptions of price sensitive shoppers could be impacted by investments in categories such as cooking oil, rice and pasta, poultry, canned goods, frozen vegetables and meals.
- Retailers can re-connect with price sensitive shoppers by amplifying promotion messages across 9% of their assortment in categories such as treats and convenience items, sweet snacks and desserts, fruit, salty snacks and carbonated drinks. Identifying where to amplify promotion messages in categories with higher than average promotional spend can help traditional grocers regain price sensitive customers.
- Price sensitive shoppers traded down in categories such as cleaning and baking. By adjusting assortments so these customers have room to move and manipulate their spend retailers’ price investments can be targeted to only 7% of the assortment.
- Taking a similar customer precision approach in different categories enables retailers to impact 60% of price perception by investing in just 25% of the range.
- Quality-oriented customers continue to seek and are willing to pay more for superior alternatives, but only in select categories. Health, hygiene, and seafood are categories where quality driven customers continue to splurge.
- Paper goods, produce and ready-to-eat meals are areas where quality-oriented customers sought to reduce spending.
This is just a small sample of the insights essential for growth that can be revealed when advanced technologies are used to analyze shopper data. The top takeaway is that retailers faced with an uncertain environment can dramatically improve their understanding of key drivers of shopper behaviors so that in a resource-constrained environment investments can be more precisely target against opportunities that will have the greatest impact.
Retailers can’t control macro-economic conditions, SNAP reductions or competitive actions, but they can determine their own fate in an unforgiving market through deeper shopper insights and AI-powered analytics.
Discover what’s possible with shopper data and how AI-powered analytics can improve sales performance in an uncertain world. Connect with an expert in AI shopper insights today!
