US Recession Pinching End Customers

The US economy has been in a softened, recessionary mode since last year. Consumers have been dealing with high prices and shaky job prospects. Budgets are being challenged and spending has taken a conservative turn. Shoppers more than ever are frequenting three or more channels for key categories, buying only when they feel they have a good price.

With the rising cost of milk, eggs, meat, and corn contributing to the biggest jump in food prices in 17 years, consumers have started to feel the pinch.

Some shoppers, already dealing with falling home values and rising fuel costs, are finding creative ways to save money. They are now opting for cheaper ingredients and private-label goods and are leaning more heavily on discount grocers, which has led U.S. retailers to offer In-house brand & private-label goods at a significant discount. This is the time when U.S. retailers reported their slowest monthly sales in January 2008. Restaurant diners, who have been eating out less frequently, will likely face even higher prices on menus.

The food prices are rising for a number of reasons. A growing middle class in Latin America and Asia can afford more meat and milk, which has driven up the demand for grain to feed cattle and hogs. A drought in Australia in 2006 reduced the supply of milk available to Asia, further pushing up the cost. Increasing global demand for U.S. wheat and poor harvests in other wheat-producing countries have caused wheat prices to soar to record levels last year.

Demand for grain-derived ethanol, driven by government incentives, has helped push up corn and soybean prices, which in turn have raised the cost of many products derived from these crops, like oils, and high-fructose corn syrup, a sweetener used in everything from soft drinks to ketchup. The egg prices too were up by 19.5%, milk rose by 13.3%, chicken by 10%, navel oranges 19.8%, apples 11.7%, dried beans up 11.5% and white bread missed double-digit growth in 2007 as compared to 2006. On top it of it; rising fuel costs are making it more expensive to transport food from the producers to stores, consumers, and restaurants.

Retailers are feeling the pressure, and most feel as though they are already in a recession and are trimming their costs everywhere they can, reducing advertising, delaying new hires and renovations, curtailing employee travel, and saving gas for their delivery trucks. Not only had this but Macy's, the second-biggest US department-store chain, cut 2,300 jobs as January 2008 sales dropped 7.1% over the previous month. Even Wal-Mart’s sales rose only 0.5% in January 2008 as opposed to the forecast of 2%. Even manufacturers like Kraft and Kellogg are boosting ad spend to tout the brand to consumers as an ‘ultimate indulgence’, so that recession weary consumers can treat themselves and their families to the best.

A number of initiatives have also been taken by food retailers to attract the budget-conscious customers with product improvements, cost cutting, and strict inventory management. Burger King and Wendy’s are increasingly offering more food for less money by offering double cheeseburgers on dollar menus copying the same strategy of McDonalds. Taco Bell is offering Gordita Supreme, one of the largest menu items, for 99 cents which was earlier priced at $1.50. Likewise, Quiznos sandwich chain launched a line of $2 small flatbread sandwiches called Sammies in November 2007, having a combo meal with two Sammies, a medium drink and either chips, a side salad or a bowl of soup for $6.

This is how the manufacturers, retailers, and shoppers are playing their roles in the current U.S. recession, which is similar to the role they have played in the 2001 recession. An aspect, which needs to be pointed out, is that the retailers, by defeating brands with generics and private label, are changing the way the consumers perceive value. There has to be some cost-effective program for customers, as price alone will lead to their downfall. Manufacturers offering new consumer choices while retailers quickly counter with private label or a generic brand then engage in pricing that defeats the manufacturer. Is there a retailer - manufacturer war?

By Vikash Ranjan