The Effect of Inflation on Consumers and What It Means for Brands
It’s a bit of an understatement to say that COVID-19 impacted consumer behaviour over the last few years. And the likelihood is many of those behavioural changes are set to continue. But as we settle into our new normal over the remainder of this year, it’s clear – especially from data around the 2022 federal election – that a central concern for Australian consumers is the cost of living.
Inflation has occurred across the globe and impacted industries at varied rates. The result of this is that those consumers affected by inflation have adapted behaviours to counteract rising prices. Here in Australia, we’re looking for cheaper alternatives in our weekly grocery shopping and daily life as inflation takes hold. While in the US, where they’ve already seen an inflation rate of 7.5% (now 8.5%), consumers are simply buying what they can find and afford.
A recent survey of 1,036 Australian adults aged 18 and over by advertising technology company TTD and YouGov shows that eight in ten people have already made changes to purchasing habits. And unlike the panic-buying in response to COVID-19, consumer spending is tightening with consumer confidence an astounding 20 points lower than during the most severe part of the pandemic. The net result is a significant increase in Brand Switching and a decrease in Brand Loyalty.
So, what do these changes in consumer behaviour look like and what can brands do to lessen or ease the impact of inflation on their business?
Understanding the major behavioural shifts
According to this McKinsey article, over the course of the pandemic 75% of consumers have tried new shopping behaviours, in particular the broader adoption of online shopping, including a surge in the usage of meal delivery services.
But arguably the most frightening behavioural change from a marketing point of view was their lack of brand loyalty, often driven simply out of necessity.
Rather than purchasing from brands they were loyal to, supply issues forced consumers to consider competitor options, alongside factors including:
- Overall purpose/necessity of the good and/or service.
What we’re seeing now with inflation is very much similar. With rising energy costs, supply chain problems, heightened consumer demand and the war in Ukraine, to name a few, consumers are still considering competitors and or cheaper options.
The TTD/YouGov research goes further, showing that of those who have switched to cheaper brands or stores, 66% are making less purchases in general, half are only purchasing when items are on sale, 41% are buying in bulk, and 50% are putting discretionary purchases, such as holiday-related items, on hold.
What effect is this having on brands?
The severity of inflation and its impact on consumers is varied across different verticals. According to Diana Smith, Associate Director of Retail eCommerce at Mintel Reports US, the retail industry hasn’t yet experienced the full impact of consumer shopping shifts. However, as inflation grows, consumers are expected to spend less on discretionary items, particularly in apparel, beauty and electronics. It’s also likely that they’ll turn on private-label brands to save money, and instead shop at more affordable, low-cost retailers. Meanwhile “recommerce” is also booming with considerations of value and sustainability driving increased interest in circular shopping options across multiple retail categories.
From our observations, beauty brands will really have to fight to maintain loyalty as customers are more well-informed than they used to be and have become more accustomed to shopping around for best prices. And while the travel industry is facing higher operational costs due to inflation, rising prices are impacting consumers differently, with affluent consumers actually more likely to take holidays or travel overseas. Consumers not sitting in this bracket of affluency, can and will switch to options that offer more value for their money.
But if there’s a category on more notice than others, it’s general food, drinks and other household essentials. Prices have already increased and are only going rise further as inflation continues (just ask anyone shopping for iceberg lettuce). Household names like KRAFT and HEINZ are at risk of losing market share to lesser-known competitors and store brands that are more readily available and cheaper. On the flipside, store owners in the US have said that the shortage situation has given them more leverage with major brands and the flexibility to test newer and often lower cost products with their customers.
How can brands respond?
According to the TTD/YouGov research around 68% of Australians surveyed are expecting the pressure on households to get worse in the year ahead, while 44% will be actively looking to buy from cheaper brands whenever possible. Clearly, things aren’t getting easier anytime soon. So what can brands do in response?
Retail & Ecommerce, Cosmetics & Personal Care:
- Reward customer loyalty through offering flash discounts and savings on shipping.
- Communication is key. If prices need to go up, communicate that to the consumer and explain why. Transparency can really drive trust in a brand.
- Customers are also increasingly focused on issues surrounding conscious consumerism. Brands that can promote sustainability, ethical sourcing, support for a cause, and fair pay can increase their appeal.
- To rationalise price increases, travel brands should look to better communicate the value and benefits they offer.
- Increasing interest in the areas of wellness and sustainability have become key priorities for many consumers, so travel companies that can promote experience around these themes are in a better position to manage price increases.
Food & Drink:
- Demonstrating how products can be part of an affordable meal can attract consumers. For example, sharing a recipe to swap beef for beans or lentils is not only healthy and sustainable, it’s also budget friendly. This is a positive way to help people save money without making them feel like they’re losing out.
- Brands can also partner with influencers and content creators to showcase how their products can be used in budget-friendly meals for the week. (Here’s an example of this that I particularly enjoy.)
We’re undoubtedly seeing a lot of the change in consumer behaviour that developed through the pandemic carry over to this period of inflation, especially around the notion of value. It’s more essential than ever to understand your customers and how economic conditions are influencing their everyday lives. Brands need to stay nimble and adjust to changing consumer needs, including developing products, marketing campaigns and messaging that align with those shifting needs.
If you’re unsure what your brand’s best response is to changing consumer demands and behaviours, we’d be happy to be your sounding board. Reach out via email@example.com