The Earnest Files: Inflation Edition
Inflation increasingly impacts wallets – from gas and rent to food. To measure changes in consumer spending in restaurants and grocery stores, we look at data powered by Earnest Research. In this article, we flag changes in both foodservice and food retail. At restaurants, consumers started cutting down dining-out frequency and order sizes in June. Similarly, visits to grocery stores have become scarcer, except for retailers that provide value and bargains, such as discounters and wholesale clubs.
Foodservice: Less Spending as Summer Starts
Consumers are eating out less. Restaurant transactions dropped 10% YOY in June 2022, following a 5% YOY decline between March and May (see Figure 1). This contraction results from the inflation in the food-away-from-home category (7.7%) and dropping discretionary income.
The steep drop was felt along all foodservice subcategories. The coffee shop & bakery café and fast-casual subcategories performed better in Q1, as breakfast and lunch routines resumed with more in-person work. Casual dining’s growth trajectory, on the other hand, has inverted.
Despite the 10% reduction in restaurant visits and high single-digit inflation, the average spending per transaction was only 7% higher YOY in June, in line with the average for the first half of the year. In real terms, it represents flat restaurant checks with less frequent visits.
Acknowledging that restaurant checks are comprised of various dynamics (volume, product mix, and inflation), casual dining becomes a particular case. Checks in this category have grown the least (6%) despite full-service restaurants – in which casual dinning is included – having printed the largest inflation (8.9%) and dropped the most visits (-14%). Lower checks in real terms are likely an effect of consumers opting for lower-priced menu items, skipping drinks and additional courses (appetizers or entrees, for instance), or both. In any case, it points toward consumers becoming more conscious of spending at full-service restaurants as prices increase and discretionary incomes slim.
Food Retail: Grocery Trips Decline, and Average Basket Underperforms Inflation
In-person purchases at grocery stores in June dropped 5% compared to the same month in 2021, when Covid restrictions were still in place. Warehouse clubs and discounters have received increased visits in recent months as consumers look for value in the current inflationary environment.
Common knowledge has long stated that inflation leads consumers to more frequent, lower-ticket purchases (similar to gas stations, as filling up the tank becomes a higher expenditure at current record-high gas prices). Numbers indicate that we still don’t see this behavior in most grocery purchases.
Average baskets were 6% higher in June, which is substantially lower than inflation in the same period (food at home: 12.2%). As seen in restaurant spending, reduced/flat traffic and inflation above the increase in average basket represent overall contraction in total expenditures. Consumers are worried about spending, and numbers may indicate trading down to lower-priced items and brands and increased focus on bargain hunting. This is corroborated by the change in where consumers shop: discount grocers led the basket-size increase throughout Q2 (7%, 8%, and 9% in April, May, and June, respectively).
Another indicator of consumer focus on value can be found on the other end of the grocery value spectrum: premium & natural stores. Despite double-digit inflation, premium & natural stores lost basket size throughout the year and were sustained mainly by an above-average increase in transactions. Loyal consumers for this premium segment have likely behaved like the gas station example.
To sum up the changes in shopping trips and basket sizes: Discount grocers and warehouse clubs emerged as the winning categories in Q2’s inflationary environment. It is remarkable, though, how spending dropped monthly in that quarter.
Meanwhile, online grocery – the pandemic’s rising star – kept steady at 2.80 orders/month/active client in the past twelve months. However, average order growth has been at low single digits (see Figure 5), being eaten up by inflation that translates into decreasing real spending.
Expect More Careful Spending During 2H 2022
Consumers have started shifting their habits amid persistent inflation in both foodservice and food retail. Despite rising prices and deteriorating consumer sentiment, consumers kept spending in all food channels in the first five months of the year, supported by solid employment, savings from the pandemic, and the joy of eating out after Covid-19. This joy should ease as dining out, traveling, and gathering become more routine.
While economists debate whether monetary authorities will be able to tame inflation and avoid a recession in the remainder of the year, we should expect the shifts observed in June to become more the rule than the exception. Consumers are more careful with their overall spending; consumer sentiment reached its lowest point since measuring began in the 1940s. Employment and income indicators remain strong, but consumers have started tapping into savings to cover basic needs.
However, we should not underestimate the summer's power to keep people out of their homes. The season is expected to sustain spending on everything food-related for a bit longer, and industry players can use that period to adapt to upcoming times of austerity in shopping carts and restaurant orders with an increased focus on affordability.
