While consumers spend less, inflation continues to drive FMCG (Fast-Moving Consumer Goods) sales. A new report cited by FoodNavigator reveals that growth and resilience are possible through strategic pricing structures that support new product development (NPD) and sustainability.

Inflation, the main culprit

Consumer behavior consultancy firm Circana has unveiled the latest information on the food industry, detailing changing consumer spending patterns and sales of FMCG.

In the latest FMCG demand signals report, Circana's data shows that the value of FMCG sales continues to be almost entirely driven by inflation, which has increased by an additional 10.1% year on year (YoY) to €636 billion.

There is a decline in unit demand in FMCG, which is not expected to recover before the second half of 2024 as European consumers continue to buy less, with a 1.3% decrease in unit sales in the last year.

"Consumers weary of inflation favor discount and offer-based shopping," said Ananda Roy, Global SVP, Strategic Growth Insights, Circana, to FoodNavigator. "Despite these challenges, growth and resilience prospects lie in innovation, sustainability, and strategic pricing strategies to withstand future shocks," Roy added.

Today's food industry faces a "new era of prices," said Roy. In this era of changing consumer loyalty, manufacturers and retailers must reassess their pricing strategies to boost demand, protect volume, and achieve unit growth.

Food and beverage brands must adopt a new approach to pricing, avoiding changes that erode margins without generating significant volume increases. "The future threat of a price war underscores the importance for brands to avoid a race to the bottom," Roy detailed.

Evolution of consumer buying habits

The report showed that in this stage of the cost-of-living crisis, buyers have adopted a range of behaviors to moderate the impact of rising prices. Shopping around, buying smaller food packages, purchasing more from discounts, and being savvy about deals are popular ways today's consumers shop.

Consumers are also highly price-focused when trying new products. Therefore, if a product is not on sale or available at an attractive price, they will buy another brand, switch to a private label option, or move to another retailer.

There is also evidence that categories, products, and even once-considered "everyday" out-of-home consumption are now seen as discretionary by buyers. "That doesn't mean they're not being bought at all," said Roy.

Instead, more often, a product becoming discretionary suggests that consumers are buying less of it, making what they have in their cupboards last longer or postponing the purchase.

"However, all these adaptive behaviors—buying more from discounts, switching to private labels, and purchasing only essentials—will only go so far," said Roy.

The continued decline in units not only sees consumers shopping differently, but they must also make difficult choices about what they can and cannot afford each time they shop. "Sometimes, the only affordable option for them is to consume less, especially as inflation is still concentrated on everyday food," Roy added.

Challenging consumer trends set to continue

Projections indicate that the pressures consumers face in making purchasing decisions will continue in the near future. "As disruptions and global uncertainty persist, many of the challenging consumer trends and behaviors we've seen over the past two years will continue for another year," Roy said.

Inflation has decreased significantly in recent months. However, this is expected to lead to a demand recovery. "Unit sales have continued to decline, showing how financially challenging consumers are and how fundamentally the cost-of-living crisis has changed their shopping habits," Roy added.

Several factors explain why demand has remained unexpectedly weak, according to the report. While business confidence and consumer sentiment have improved in the last six months, service inflation has started. "Soaring costs of insurance, rents, and mortgage interest rates are squeezing incomes in nominal terms," Roy said.

Recent news about lowering food prices must also be put into context, Roy said. While inflation for FMCG is decreasing, prices remain much higher than in January 2021.

As reported in Circana's previous demand signals report, "disinflation" rather than deflation drives category pricing. "The net effect is that European buyers continue to feel much worse than they did two years ago," Roy said.

Losing and regaining market share

Food and beverage brands have not gained market share as private labels continue to gain ground, the report states, following the rise of the supermarket and private label. and fewer new product launches.

Circana's latest demand signals report for 2023 flagged a "peak point" for private labels and indicated that European consumers increasingly perceive it as the choice of quality. After six months, the march of private labels continues. "In addition, private labels are becoming increasingly premium," Roy added.

Now representing 39% of food sales in the European Union (EU), the private label segment is worth €246 billion for retailers, after increasing its value share by another 2.2 percentage points in the last year, up to June 2023. Two years ago, this share was 35%.

Private label expansion is not expected to continue, however. "It is important to note that there will be a limit to private label growth," Roy said. In today's European retail environment, retailers, like brands, are the biggest factors in value, innovation, and traffic. Retailers want private labels to compete strongly with brands, but they don't want private labels to fail.

"Private labels must be seen as serious competition, and brands need to identify sources of growth and opportunities, especially in the areas of innovation, sustainability, and pricing, and increase their resilience to future shocks," Roy said.

Now, however, it is a challenging environment to do so. "Creating new demand is far from easy right now, but our analysis shows that it can be done," Roy said. Intuitive, well-directed innovation is at the heart of a successful brand story, and a strong push for new product development (NPD) gives buyers new reasons to connect with a food and beverage category.

Looking ahead, the focus, the report states, is on inspiring buyers and positioning products as versatile ingredients that can be used to create interesting meals. "In the next 12 months, winning brands will invest in bold NPD that sets the agenda, responds to new consumer behaviors and consumption moments, not those that shift the margins of portfolios," Roy added.