The squeezed middle has been a preoccupation of the political classes over the last few years – and now it is coming to the food sector as a new type of consumer stalks the aisles.
Typically, consumers spent their household food budget within one or maybe two adjacent market segments – the value, mid-market or premium segment – depending on their social and financial status. However, over the past decade we have seen a new type of consumer emerge, who has moved towards both extremes of the spectrum at the same time, trading down to the value segment for everyday, basic groceries while simultaneously trading up to the premium segment for products that are socially or emotionally significant to them. You can see this elsewhere in the economy – the people flying off for a luxury weekend break on a budget airline or shopping for clothes in both Primark and Armani, for example.
New consumption pattern
As a result of this new consumption pattern, says a report from Rabobank’s Food and Agriculture Research unit, “the mid-market has been under pressure as products in this segment are perceived to offer neither quality nor value to today’s hybrid consumer.” The report predicts that while the extreme ends of the market are set to grow by high single-digit numbers, the mid-market segment will actually decline by 1 percent to 2 percent per year through to 2017.
This change in consumer behaviour is being driven by a combination of developments on both the demand and supply sides. On the one hand, retailers have made it easier for shoppers to trade up or down. Hard discounters, initially targeted at lower-income consumers, now attract customers right along the income spectrum. In Germany, for example, hard discounters account for 43 percent of the market in the lowest income
quartile and 34 percent in the highest.
Another contributory factor has been the growth in private label products. These were initially geared towards the value end of the market, but in recent years private label has expanded to the premium end of the supermarket shelves. “As a result, private label now not only facilitates down-trading but also increasingly allows consumers to trade up to the premium food category,” the report states.
The trend has been exacerbated by the rise of internet shopping and the prolonged economic downturn. The internet has not just broadened shoppers’ horizons, but also enabled people to save money on both value and premium products by increasing price transparency.
Meanwhile, on the demand side, the growing influence of Millenial consumers and the increased empowerment of women – both groups with a tendency to hybrid consumerism – have reinforced the hybrid trend.
Different consumer groups
Women now have greater spending power and more influence over household spending because more women are working and the gender pay gap is shrinking. And they tend, according to an Australian study, to be “more objective in their approach to important grocery store characteristics,” focusing on price, discounts, value for money, consistent and competitive prices as well as low, everyday prices.
Generations Y & Z, those born between 1980 and the mid-1990s, and those born starting in the early to mid-1990s respectively, also known as Millenials, have more brand awareness but less brand loyalty than their predecessors. “For the most part, Millennials rate products on merits rather than on the specific brand the product is labelled with,” the report says.
At the same time, “these generations look for convenience, health and sustainability, which translate into premium, and thus higher priced products.” However, because of their relative youth, Millenials’ purchasing power is not yet at full strength. “Therefore, in order to be able to trade up in the socially and emotionally relevant product categories, it is necessary to trade down in others,” Rabobank says.
However, the bank does not believe that hybrid consumption is a temporary phenomenon. The drivers that have produced it are secular (that is, independent from economic cycles) and long term. Greater consumer awareness, in particular, will help to entrench the trend, ensuring that it is not just a phenomenon of income inequality. Therefore the squeezing of the middle will be ongoing – the mid-market will shrink from 60 percent to 50 percent while the premium segment will grow from 15 percent to 20 percent and value will account for 30 percent of the average shopping basket, up from 25 percent.
The trend is apparent not just in individual products or sectors but applies to retailers, too. While hard discounters such as Aldi are growing alongside premium brands such as Whole Foods and Waitrose, middle-market supermarkets such as Tesco, Safeway, Carrefour and Delhaize are seeing their market share shrink.
According to Rabobank, “the strategic implications of this market dualisation are profound and touch on areas such as product offerings, distribution channels, marketing and brand management. Food processors, food retailers and foodservice companies alike will need to adapt or risk fading away.”
In response, food companies need to re-evaluate their strategies in the context of product attributes, distribution channels, marketing and brand management. “Food processors, retailers and foodservice companies need to continuously distinguish themselves either on quality or price or, preferably, both,” Rabobank’s analyst says.
They will also have to use the internet more, both as a distribution and marketing tool – in a world where it is increasingly hard to bracket consumers together based on demographics or income, more individual marketing will be needed.
Successful brands will become ever more valuable, but at the same time companies will have to work much harder to manage and position them in the face of declining customer loyalty. This could involve moving brands up to the premium segment by focusing on healthier alternatives, using more natural ingredients, using fair trade ingredients and by incorporating corporate social responsibility as well as sustainable business practices.
Another option is “reverse positioning”, whereby retailers offer premium products in value segments or value products in premium outlets – UK high-end retailer Waitrose started its own private label for bakery products, for example, thereby allowing format-sensitive but increasingly cost-conscious customers to continue shopping at their favourite high-end supermarket but at lower prices.
Another option is to offer premium products in smaller portions, and therefore at lower cost to the consumer. This is a tactic that Unilever has successfully implemented in crisis-hit European economies such as Greece and Spain.
If you have the scale, then you can offer products throughout the value spectrum, as Unilever is able to do in ice cream throughout Western Europe.
Then there is the option of developing hybrid products that kill two birds with one stone – for example, a focus on high quality fresh ingredients allows shoppers to save money by cooking at home rather than eating out but also plays to the current trend for healthier food.
As in many of the recent issues that the sector has had to deal with, robust and responsive supply chains will be crucial. Companies focusing on value will need to focus on cost efficiency to be able to compete on price, while supply chains for premium products must be set up in a way that can guarantee quality.
The one thing companies will not be able to do, though, is to ignore the rise of the hybrid consumer.
For more information, contact Carel van der Hamsvoort, Global Head of Food & Agribusiness Research and Advisory.