How covid-related supply chain crisis, war in Ukraine and inflationary environment are affecting consumers and their food spendings
By André Purits
Over the last few months the world has witnessed a complete reversal of the exuberance displayed during the roaring recovery of 2021 and is now facing a severely dampened outlook for the rest of 2022. Consumers and businesses alike, suddenly find themselves navigating a complex set of headwinds and anticipating a recession. Continued Covid-19 related lockdowns in China, coupled with the Russian invasion of Ukraine in February, have caused severe supply chain disruptions putting upward pressure on already stretched commodity prices. To put this in perspective, Russia and Ukraine have historically provided a combined 20% of the world’s wheat (12% of the world’s traded calories) and 40% of Europe’s natural gas — inevitably disruptions have had significant repercussions on the prices of food and energy, adding fire to an already inflationary environment.
To boost the economy since the Global Financial Crisis of 2008 and through Covid-19, central banks have held interest rates at historically low levels resulting in artificially inflated asset prices, and an overheated economy. To counteract these inflationary pressures, central banks now find themselves having to rapidly raise interest rates; in June the Fed and BoE raised rates to 1.75% and 1.25% respectively. Higher rates and anticipated further increases are already being reflected in lower asset prices, less investment and slower growth ($10 trillion of household wealth has been wiped in the stock market this year, while the S&P 500 is down approximately 20% in 2022).
Equally, in the private sector, total VC investment fell 13% in Q1 2022 to $160 billion, marking the first quarter over quarter decrease in the last few years with similar trends expected in Q2. Unsurprisingly, consumer sentiment about the state of the economy is increasingly bleak, as worries about the prospect of continued war in Ukraine and rising prices are now the top two trending worries in Europe, well ahead of Covid-19 (Exhibit 1).
Consumers are feeling the squeeze across the board and are citing groceries and food for home as the number one source of price increases (Exhibit 2). Higher prices are changing the structure of households’ budgets with basic needs including energy, transport and food now accounting for a higher percentage of household spending.
So how do we think consumers will react? Looking back at consumer trends during the GFC (Exhibit 3) we see that total US household spending on food remained relatively stable during the period (the shaded region) with only a minimal decrease in spending (-7%). However, the composition of the spending changed, with expenditures on food away from home decreasing, and expenditures on food consumed at home increasing. Consumers are much more easily able to cut down on discretionary restaurant spending, than on the number of calories they consume — people still need to eat!
Secondly, we observed consumers engaging in downtrading (switching from preferred brands to cheaper generics), taking advantage of coupons, sales and buying items in bulk, and reducing the number of items purchased. Below (Exhibit 4) we can see that discount and warehouse channels experienced growth at the expense of traditional grocery channels as consumers opted for cheaper alternatives (sales at Costco, Walmart and Target all climbed 15% from 2007 to 2008). However when analysing brand purchasing patterns we see that consumer favourite national brands experienced very little decline in sales, suggesting brand as a defensive moat. This is in line with our findings that during crises, we observe consumer spending becoming polarised; part of the demand goes to the bottom of the price range (white-label SKUs) and part of the demand flies to the market leading brands. Mid-tier brands with neither strong brand nor competitive pricing therefore suffer the most during recessions. Perhaps the most surprising trend of all however, was by nature of spending more time searching for food, consumers maintained (and some research even suggests improved!) the nutritional value of their food basket.
While the situation is of course still developing, and we haven’t yet entered a recession, many consumers are already displaying similar purchasing behaviours. In a recent McKinsey report, consumers reported having already cut back on restaurant spending, downtrading for cheaper brands and trying new channels. Looking ahead, we expect these general trends to continue, and we are sharing these analyses and conclusions with our portfolio companies to help them prepare for a winter, which is definitely coming.
