Is the United States heading into an economic recession? The answer doesn’t really matter, according to Nik Modi, HPC, beverage and tobacco analyst at RBC Capital Markets.
A recession is defined as two straight quarters of gross domestic product (GDP) decline, he said during a recent webinar hosted by Swedish Match and CSP. And while this hasn’t happened since 2020 amid the COVID-19 pandemic, consumers are concerned.
“The reality is, it doesn’t matter about the semantics over a recession,” Modi said. “Most Americans already feel like they’re in a recession. And that really is what matters when it comes to consumption and consumer behaviors.”
U.S. GDP growth year-over-year was expected to be up by about 1.8% at the end of 2022, and up only 0.4% by the end of 2023, according to FactSet estimates and RBC Capital Markets.
According to Chicago-based consumer data firm Numerator, 74% of Americans already feel as though the country is in an economic recession, and 71% think the economy will worsen in the next few months.
Modi highlighted what this could mean for the purchasing habits of convenience-store and other consumers…
The threat of recession and inflation have led to consumers feeling uncomfortable making major purchases—like a home or a car—and purchases of everyday household items, Modi said, citing data from Political Geography Now.
For example, 67% of consumers feel less comfortable making purchases of household items compared to six months ago, according from October data.
“Consumers are anticipating things getting a bit tougher as we move forward,” Modi said.
And while inflation has disproportionately affected the low-income consumer, the pressure is now spreading into other income strata, Modi said.
How consumers respond to inflation includes:
• Stocking up for essentials when they’re on sale
• Searching for coupons
• Decreasing spending on nonessential items
• Making fewer shopping trips
Where a retailer’s store footprint is will affect the strategies a company should be employing to keep and attract consumers, Modi said.
For example, in higher-income territories, consumers might go to larger pack sizes to get better value; however, in lower-income areas, consumers look for smaller pack sizes that have a more affordable price point, he said.
“It’s really important to understand these nuances in terms of where your footprint is,” Modi said. “And really understanding the consumer dynamics in that area because that could actually dictate a strategy that could be different.”
Overall, consumers aren’t well positioned for a downturn of the economy, Modi said, as savings rates have come down dramatically, outstanding credit card debt has spiked, there is an increase in delinquency rates and foreclosures are rising.
Consumers are trading down as they worry or struggle with finances.
These trade-downs can come in many forms, Modi said. Those include adjusting quantity/pack size, delaying purchase, changing retailers for lower price/discount stores like dollar, changing brands to lower prices or private label and using buy now, pay later options.
Since April, household penetration in the convenience channel for private-label products has been on the rise, Modi said, citing data from RBC Capital Markets and Numerator.
During the height of the COVID-19 pandemic, consumers shifted to branded products and private label suffered from supply chain issues; however, with inflationary pressures, private label will now play a larger role in purchasing decisions, he said.