Price increases starting to slow consumer spending

Price increases on products are finally affecting consumer spending. Unit sales of general merchandise goods such as apparel, footwear, toys, and sports equipment declined in nine of the ten weeks from December 26 through March 5 compared with the same period a year ago, according to market research firm NPD Group.

Brands have been raising prices and reporting record profits, but with the recent spike in gas prices and a renewed effort to control inflation, consumers are finally cutting back.

In February, crocs finance chief Anne Mehlman told analysts that the company’s average selling price rose nearly 19% last year because of price increases and fewer discounts. But as Citigroup Inc. analyst Paul Lejuez noted in a recent report about the impact of inflation on apparel companies, despite a strong job market and rising wages, consumer “wallets are not infinite.”

It isn’t just the rising gasoline and toilet paper prices that are eating into disposable income, but also a shift back to spending on services like dining out and travel, which also cost more. Airlines are raising prices by over 25%, and customers are noticing that the cost of eating out has gone up dramatically in some cases.

Consumers blame brands for raising prices, and who can blame them when corporations report record profits and give their CEOs millions of dollars in raises? Some believe that many brands were immune to rising prices, but that’s a rumor. Consumers only have so much money to spend, and giving up a Starbucks $5.00 latte has become more of an option.

I just looked at some research done for one of the largest CPG companies in the US, and the executive summary said it all “price increases on select product categories will be in direct conflict with market share goals in the coming year.” So brands need to ask a straightforward question “do we give up market share for more profitability, or can we increase market share and prices simultaneously?”.

Of course, it largely depends on product categories, Some are more volatile to price than others, but one buyer told me she sees a lot of movement in lower-cost brands. Her plans include adding more private label products.

One tactic that still seems to be relevant is coupons. According to recent data, the coupon market size in the US has reached over $100 million in worth, and over 300 billion coupons were printed in 2016 alone. With the transition to digital coupons on the rise, projections of this growing marketing trend are visible. Estimations show that 145.3 million digital shoppers will use coupons in 2021. For comparative purposes, 142.3 million redeemed online coupons in 2020.

Over 90% of consumers use coupons. If this number surprises you and you think it’s too high, it’s possible that you still ascribe to the social myth that the only people who use coupons are those who are either poor or cheap. 

Research shows, however, that people look for discounts and special offers, regardless of their income bracket. For example, only 15% of consumers say they rarely rely on a coupon, meaning almost everyone uses them at one point or another. Who doesn’t like free money, right?

On average, statistics on coupon usage show that consumers who use coupons spend 24% more than regular customers. Discounts increase store traffic and stimulate sales. For example, research shows that 63% of consumers say they’ve bought an item just because they had a coupon for it or it was on sale.

The other issue that will be a challenge is convincing the C suite that marketing is essential. If brands can make more money with price increases, who needs marketing? Don’t laugh. I’ve already heard from clients who are having to answer this question.

Brands think that consumers don’t feel small price increases, but that’s a mistake; consumers believe it. To ignore it is a huge mistake.

About richmeyer

Rich is a passionate marketer who is able to quickly understand what turns a prospect into a customer. He challenges the status quo and always asks "what can we do better"? He knows how to take analytics and turn them into opportunities and he is a great communicator.

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