Inflation-Weary Shoppers Hunting for Deals Are Turning to Cheaper Brands

U.S. consumer price inflation surged 9.1 percent over the past 12 months to June, the fastest increase since November 1981, according to government data released on July 13, 2022. Angela Weiss/AFP via Getty Images

More American consumers across the country are purchasing cheaper store brands at supermarkets due to rising grocery prices, adding pressure to the big food brands.

Purchasing Cheaper Store Brands

The trend has been in the making for years, but it’s now starting to hit traditional brands like Kellogg and General Mills where it hurts. Two of the biggest food companies by market capitalization have seen their stock prices drop by more than 15 percent over the past year.

The major change in spending habits began in March with the sudden spike in gas prices and the highest level of inflation in 40 years.

What Does Inflation Tell?

Inflation is a sign that consumers are feeling less wealthy, and they’re changing their spending habits to reflect this. In the case of food, it means buying cheaper brands instead of name-brand products that used to be considered necessities.

Credit card companies report that consumers are trending toward lower-cost items, such as store brands, as they struggle with the effects of inflation. This is a troubling trend for companies that make their money from credit card transactions. As consumers begin to feel less wealthy, they’re more likely to use cash and debit cards instead of credit.

The soaring costs of food, gas, and rent have made generic store brands more attractive for strained household budgets.

Most of the major food brands have raised their prices since the start of this year to offset rising production costs, leaving generic products, on average, 30 percent less expensive.

In terms of sales, purchases of food and beverages under store brands have risen to 1 percent of market share for the four-week period ended July 10, according to the latest data from market research firm IRI. In comparison, purchases of store-brand food and beverages were just 0.7 percent of the market share a year ago. The data shows that consumers are turning away from big brands and opting for cheaper alternatives.

Further, according to IRI, 47 percent of breakfast meats and 50 percent of crackers were bought using a coupons or through other discounts. At least 39 percent of toilet paper and paper towels also were bought with discounts, the highest since the beginning of the year.

Steep Competition

Brand-name toilet paper and paper towels now face steep competition from store brands.

Store brands currently make up 21.6 percent of total expenditures, a reversal to pre-pandemic levels, after consumers made a shift toward brand-name products over the past two years.

When the pandemic disrupted production across the board, many generic-label manufacturers struggled to keep up, as they had less flexibility to adjust their prices, unlike the larger name brands, which were able to cut varieties to increase efficiency and keep up production.

The Shift Back to Generic Brands

The shift back to generic brands may continue, as consumers look for ways to cut their budgets in the wake of increased health care costs brought on by the pandemic. Store brands are generally cheaper than name brands, and consumers have also reported that they are more readily available at stores across the country.

Big food companies like Kraft Heinz and General Mills were able to capture more of the market from the generic-label manufacturers, who were running out of stock more often; but now that has changed.

The big food giants are all scheduled to report negative second-quarter results next week, which will weigh on the impact of store brands.

Industry analysts say that name-brand companies typically lose ground to generic brands when the economy shows signs of a downturn, as they raise prices to offset the costs of inflation.

Store brands are usually cheaper because they do not have the added marketing costs of the name brands or their variety of product options.

Private Label Advantage

Another reason why store brands are gaining in sales is because they are appearing faster on shelves than their name-brand competitors, which are now facing their own worsening supply chain crisis.

When prices rose in the past, brand names had an advantage by switching packaging materials or ingredient suppliers in order to cut down on expenses, said Steve Oakland, chief executive of TreeHouse Foods.

“With all the inflation, private label is the best deal it has ever been,” said Oakland.

Lower-cost store-brand items, made by companies such as TreeHouse Foods, are sold at big retail chains like Walmart and Kroger.

Brand-name manufacturers are facing more limitations in their options, due to the supply chain disruptions caused by the conflict in Ukraine and the pandemic-based lockdowns in China. Many manufacturers are also facing increasing pressure from retailers, who are demanding more private-label products in order to compete with Amazon.com and other online retailers that don’t charge a premium for their merchandise.

Meanwhile, the price gap between store brands and national brands has widened for the first time since the start of the pandemic, according to Morgan Stanley.

Brand-name producers are returning to pricing tactics used during the financial crisis of 2008–09, such as reducing portion sizes, to keep prices the same or higher.

Other national brands are trying to convince shoppers to stay with them by emphasizing the superiority of premium products over cheaper store-brand alternatives.

The National Brands Strategies

The national brands also are now spending more on discounts and promotions on goods, including sodas and paper towels, to keep shoppers in higher-end stores and buying brand-name products.

The brands are trying to ensure that shoppers continue to buy their products as the economy slows and incomes remain stagnant. In recent years, consumers have turned away from traditional brands in favor of cheaper store brands and generics.

Excess Savings

At the beginning of 2022, American consumers had saved $2.5 trillion in excess savings, which were spent on paying down debts and monthly bills.

Before the release of second-quarter results, investors were concerned about consumer spending due to factors such as soaring inflation, higher interest rates, and the after-effects of the COVID-19 pandemic.

Credit card executives report that consumers seem to be holding up well so far, as charge-off rates at the five largest U.S. credit card lenders dropped to an average of 1.9 percent in the second quarter from 2.6 percent a year earlier.

Despite these positive trends, the central concern facing investors is that consumers might be getting ahead of themselves. Although retail sales this year have been strong, retailers are still struggling to clear out their excess inventory. This could cause a “retail inventory correction” that would hurt the economy.

Many lenders are reporting that consumer spending is still at record highs, led by high inflation, which has not deterred Americans from spending on travel, goods, and services.

The total volume of credit card purchases rose by 20 percent, to $1.1 trillion, in the second quarter of 2022.

“I’m struck, though, by the strong starting point for consumers as we look into the potential headwinds of inflation and more economic trouble,” said Capital One CEO Richard Fairbank, on a conference call with analysts.

“I would contrast this, of course, to the Great Recession or the great financial crisis, where the consumer was in a much weaker position going into that,” he added.

In addition, American Express reported last week that spending on travel and entertainment surpassed pre-pandemic levels for the first time in April, boosting business earnings by a record $340 billion in the second quarter.