The Earnest Files: A Cool Summer
Exclusive spending data from data analytics platform Earnest Research confirms that consumers are reining in spending at grocery stores and restaurants. Post-Covid ‘freedoms’ drove spending through the spring, but consumers quickly adjusted as inflation took its toll. Consumer focus has turned to value, as evidenced by increased visits to grocery discounters and warehouse clubs. Check sizes and visit frequency have also dropped at restaurants, but consumers have shown they still appreciate the pleasure of a cup of coffee outside the home, an affordable luxury.
Foodservice: Shrinking Checks and Attendance in Q3
Restaurant transactions dropped 6% to 7% YOY in Q3 2022, a slightly worse drop than in Q2, despite being the first full summer season after the end of the Covid-19 pandemic (see Figure 1). We attribute this contraction to inflation in menu prices, dropping discretionary income, and worsening consumer sentiment. The declining visit frequency was felt along all foodservice subcategories, including those that proved resilient in the first months of the year: fast casual and coffee shop & bakery café.
Average spending per transaction in September slipped nearly USD 0.25 in the summer (see Figure 2), reversing the growth trajectory seen in the spring (+USD 0.52) and making September the month with the lowest average transaction size since March 2022, despite inflation . Checks for all subcategories have slipped in recent months from their peak in July 2022 (for casual dining the peak was in May 2022). This reversal in average transaction growth represents a more cautious consumer who is cutting back spending, perhaps picking lower-priced options and skipping drinks or courses (appetizers and desserts, for instance).
In total spending terms (which is check size plus traffic), total average growth in Q3 was flat (see Figure 3). There was some divergence across subcategories that reinforces the trend of careful spending. Casual dining took the biggest hit between June and August, recovering in September. Coffee shop & bakery cafés improved the most, pointing to the idea that consumers kept spending on minor splurges. QSR seems to have absorbed some of the spending from fast casual.
Food Retail: In Search of Value
Transactions at physical grocey stores dropped 2% in September compared to the same month in 2021, when Covid restrictions were still in place. Discounters have experienced solid growth in visits over the past six months (+6% YOY) as consumers look for value. Warehouse clubs followed as the only other retailer subcategory with gains in visits (+5%), although growth was lower than in the first half of the year.
In addition to prioritizing value, in the third quarter, consumers traded down for lower-priced items, cut out items from shopping lists, and selected smaller sizes . As a result, the average transaction reached USD 62.98 in September, from USD 63.75 in June. This 1.2% decline comes despite a 2.8% inflation in that period. Higher prices typically mean higher average transactions, but the current rate at which consumers are cutting spending is more than offsetting these higher prices.
Big box retailers’ basket size took the biggest hit (-1.8% in September versus June 2022). Most big box retailers have reported higher inventories through the year, especially on non-food items. Discounts to liquidate inventories in Q3 may be partially responsible for dropping basket size.
Discount grocers recorded the lowest drop in basket size in the quarter (-0.4%), and remained as the category with the highest increase year-on-year (+11% vs. September 2021). These numbers show discounter clients manage to keep items on their shopping lists. On the other extreme of the value-proposition range, premium & natural stores grew baskets by only 1% in the year.
Meanwhile, online groceries were the only subcategory to increase their average transaction size in the quarter (+1% September vs. June). This increase is a continuation of an upward trajectory we have seen throughout the year. In absolute terms, average online transcation sizes are second only to those of warehouse clubs. On the other hand, order frequency has consistently dropped since April 2022, after a steady 2021.
In terms of total spending, discount grocers and warehouse clubs continue to have the strongest growth amid Q3’s heavy inflation environment. Meanwhile online, premium & natural, and big box stores – in that order – have been impacted the most.
Careful Spending Is Here to Stay
The numbers presented above confirm the shift in US consumers’ habits that we highlighted in our July report (The Earnest Files: Inflation Edition). Summer marked the start of a challenging trend for many retailers and restaurants as post-Covid excitement waned and consumers increasingly sought value and affordability among rising prices and deteriorating consumer sentiment.
Inflation is set to remain a problem into 2023. Therefore, we should expect similar spending behavior to continue for some time. Foodservice players should prepare to attract guests back to premises through a targeted consumer experience at a budget. Cafés’ performance is a reminder that consumers are in some cases still willing to venture out in search of affordable splurges.
Longer term, shifting consumer demand may have an impact on the retail landscape. We have already seen some changes, not necessarily only from the current circumstances, with Kroger’s bid to buy Albertsons. Assuming antitrust deterrents are overcome and the deal materializes, this acquisition should generate significant synergies in private label brands, vertically integrated manufacturing, and shoring-up of technologies for digital engagement, in line with consumers’ demand for value and affordability.