Inflation Outlook Executive Briefing

While pricing power is gradually diminishing, resilient US consumers are still paying more to sustain volumes, but in Europe, demand is likely to wane.

Lower income households have turned to credit while interest rates remain low.

And in 2023, its key to look out for bullwhip effects and inventory release intensifying the downward price momentum.

Consumers are already or plan to change their consumer goods purchasing and eating out habits, such as switching their shopping to cheaper alternatives or buying less. But they cannot be considered as a single, homogenous mass when it comes to these concerns and behaviours, as there are significant differences in attitudes between different regions, ages, and income cohorts.

Global market forecasts and consumer survey data confirm that ‘non-essential’ or ‘indulgence’ categories within consumer goods will be the most impacted going forward.

Consumer businesses should consider range and pricing architecture to ensure that portfolios offer consumers the ability to either buy at lower price points (e.g., value ranges, smaller pack sizes, etc.), or buy ‘better’ via premiumisation benefits that offer strong value for money, or higher volumes.

Brands with a presence in ‘non-essential’ categories should consider how they can remain relevant and available to consumers, perhaps in smaller packs with more accessible prices, or as part of cross-category price promotions with adjacent but more essential purchases.

Consumer businesses must also be ready to be agile with their strategies to appeal to different regions or consumer cohorts, as necessary.

New shopping habits are emerging, with lower volumes, more considered purchasing, and shifts in product choices to cheaper brands and retailers. Value is of primary importance

Non-food retailers are most at risk – especially those with limited cash reserves to support them through what will be a difficult couple of years at the very least. Heavy discounting from weaker operators hit all players in the sector and margins will be under pressure from both cost and selling prices.

Investors in the sector will be deterred by the risk as inflationary pressures come up against the impact of a global recession and we will see another shakeout of weaker players — particularly those that have relied on growth to drive their businesses and neglected profit.

Value players can raise prices, as long as the differential with competitors remains the same. Luxury retailers can, and have, raised prices because their marketing justifies the aspirational value of their products – and the return on investment as luxury products maintain, and often increase their value.

The middle market is most at risk – especially in non-food categories. We are likely to see far less capital expenditure and investment in the short term as retailers conserve cash to support their businesses in the short term. Resilience will be key to survival.

Survey data shows inflation is disrupting behaviour and retailers need to adapt to their customer's needs where they can.