Inflation & Independent Grocery

When the world behaves unpredictably, operating an independent grocery store becomes increasingly difficult. How is a retailer supposed to plan for the coming months and years with so much economic uncertainty? Independent retailers may not be economists, but they must make decisions—from hiring to capital spending—based on economic predictions. And with the most recent Bureau of Labor Statistics (BLS) report that grocery prices experienced their biggest year-over-year increase in over 40 years last month,  grocers cannot ignore the impact inflation is having on their shoppers. 

"Right now, depending on which news source you're using, overall inflation is between five and eight percent, but those numbers are not homogenous," IGA CEO John Ross explained in the recent webinar, Don't Be A Victim To Inflation: Simple Strategies to Maintain Price Authority, Increase Sales, and Drive Shopper Loyalty. That means categories are experiencing different inflation rates—for example, used cars and trucks are up over 37 percent, while shelter is up just over four percent. Food pricing surged 7.9 percent year over year in February, while food-at-home prices jumped to 8.6 percent year over year in the same month, according to the BLS.

"There are a lot of factors going on depending on which sector of the economy you take a look at, but what's common in all these sectors is that all the arrows are going up," Ross said.

Food retailers expect commodity pricing to move up or down at different rates, and use what Ross called "a media mix strategy" to divert the shoppers into categories where there is more value, offering promotions to soften the impact of rising prices in categories like dairy or meat. "This is the way we have run our businesses for a long time," he said, "but what we have not seen, probably since the 1980s, is all of the food indexes rising." 

So how can independent retailers plan for the future when inflation is causing everything to be so unpredictable? Below, Ross and Nielsen's Vice President of North American Retail Analytics Arthur Dmitruk answer four key questions about the impact inflation is having and will have on the independent grocery industry. 

Q: What's causing inflation?

John Ross: According to The Fed, there is a strong correlation between COVID and rising consumer prices. And with this thinking, we can assume that when COVID is a distant memory, this curve will start to decline.

But that's not the picture that our consumers see. For the last two years, they've lived in a world of pandemonium: labor market disruption, skyrocketing prices in automobiles or housing, civil unrest, our ability to keep the local grocery store supplied. Our consumers see a world that is ever-changing and much more complicated—they might not be attributing the current rise in prices exclusively to a global pandemic. And what consumers believe is something we should take seriously.

And so with all of these things building and changing over the last 20 years—labor trends, energy consumption and constriction, the housing market, and socio-political effects—it's no wonder that inflation is at the level it is now.  

How long will it last?

Arthur Dmitruk: It's a difficult question to answer. The models designed to predict the outcomes of inflation are starting to run astray, with the Ukraine and Russia conflict and the Consumer Price Index inflation hitting 7.9 percent—a four decade high. We're seeing things that point to an acceleration in the future, so I'd say we're looking at a long term impact—potentially into 2023 and beyond. 

How will consumer behavior change?

John Ross: The impact of inflation is different by geography and category, which means its effect on consumer behavior varies as well. For example, when the economy is bad, lower income people are hit worse. And with inflation, the group to pay attention to is the newly constrained, which are a group of people we would traditionally consider middle class, lower middle class, marginal middle class. This group is a core target for independent grocers—our stores tend to over-index this group—whether it's a rural, suburban, or urban store, we tend to serve that group better than the rest, which means they're going to need us now more than ever before. 

You can deconstruct shopper behavior during these time periods of rising inflation into three phases:

Phase 1—Shoppers Become Hypersensitive To Price

In this phase, sticker shock at the basket causes shoppers to rationalize the decisions they make. They shift into sale items, choose private label brands more, become open to sales, bundles, discounts, and making protein rationalizations (switching from meat to chicken or stepping away from meat entirely). But ironically, that phase lasts a very short time. 

Phase 2—Shoppers Make Compromises

In this phase, the shopper's ability to rationalize what is a good price fades. When prices escalate, they lose the ability to make judgements about what is a good value, so they’re open to engage with brands and retailers that help them make judgements about value. This helps them feel like they're being smart in an environment where they don't know what is the right decision.

Phase 3–Shoppers Become Loyal

Now, shoppers turn to the brands who, in phase two, helped them make good pricing decisions, rewarding them with their loyalty. Home Depot, Target, and Walmart have all done this and made their brands what they are today through this strategy. It allows you to create value with the customer during inflation, develop a relationship with the customer as inflation moderates, and have sustained loyalty with them over time. 

What should retailers do?

John Ross: As independents, we are much better positioned than our competition to serve our shoppers through inflation, as long as we approach it from the lens of value—we must visually demonstrate value. 

1. Show Shoppers The Savings

Walk the store to determine where you can make value statements to help the shoppers make more budget friendly choices. Put meal solutions together for shoppers, like IGA has with the Family Meals Made Easy! recipes that offer two meals out of the same ingredients, and make your private label products prominent with endcap displays. 

Most importantly, highlight the national savings IGA is providing you! IGA has leveraged our collective bargaining power to attain amazing offers for your shoppers through the National Digital Ad. We're also buying digital advertising on your behalf to encourage shoppers in your area to go into your stores, but we need you to help drive shopper awareness by calling out the deals in your stores and on social media. 

2. Get On Board With Digital

Expect digital to be the turbocharger for all of this. If you're still relying on print advertising alone, please stop waiting for a faster train. It's never going to leave the station. It's time to get more bang for your advertising buck by adding your local offers to IGA's National Digital Ad platform.  

3. Leverage These Key Words: family, less, fresh, local, community

The true value proposition for independents is that our stores are locally owned and community focused. Shoppers believe that a store that buys locally has a better product and saves them money, which is an enormous advantage for our stores right now. The power of local and the power we have as independents will allow us to help our shoppers feel confident that there is someone looking out for them.

Use IGA's quarterly sign kit to show shoppers that we're their partner in value as costs rise. The kit helps shoppers stretch their dollar further with signs that link to cost-saving recipes for family meal planning (like home recipes for their favorite restaurant meals; casseroles for quick, inexpensive, and hearty meals; and videos that show them how to use one protein source for multiple meals). Also included are evergreen signs designed to stay up as long as this inflationary period lasts, including one that reminds shoppers that food that comes straight from your neighbor's farm is fresher, with no additional costs; and another that reminds shoppers that their money stays in the community when they shop their local independent grocer.

We're moving into uncertain times right now, and entering Phase 1: Shoppers Become Hypersensitive To Price, but this eroding price reality is sending the shopper into a sweet spot that is perfectly served by independent grocers right now. We have the credibility, the trust, and the connection to be able to tell consumers that shopping with us is a good decision. 

Ready for more information on inflation? Stay tuned to The IGA Minute for an announcement on the date and time of Part 2 of the inflation webinar series, when IGA CEO John Ross will dive deeper into the data with Nielsen.