Coping with the Economic Crisis: What Will Consumers Do?

It’s torrid times around the world for many consumers and businesses and, likely, it’ll get worse before it gets better. But, hey, it WILL get better! What’s up? Pundits are quick to advise us that a succession of unprecedented events have brought us to where we are now. Harold Macmillan, Prime Minister in the UK 60+ years ago, when asked what was the biggest challenge for a statesperson or an economy, famously replied “Events, my dear boy, events”! The past 3 years, we’ve sure had events to disturb us but none were unprecedented as all had happened before!: Covid  – what about the 1918 Spanish flu pandemic; rocketing food price inflation this year – at similar levels to the August 1973 food price peaks when, wait for it, the Russian and Ukrainian harvests failed and oil prices surged because of OPEC action; Russia invades the Ukraine – yes, just like they did in 2014; extreme weather events – hmm we’ve just become much more aware of what’s been happening for years, i.e. climate change. They’ve all happened before and they’ll happen again!

On the plus side, some positives come out of the wreckage caused by these events coinciding:

  • food security appears on the political agenda as we learn that, irrespective of national income, we can’t simply assume that food for our citizens will always be available when we want it. Sensible food policies may emerge (fingers crossed!);
  • similarly, energy security is top of mind – European dependency on Russian oil and gas at a time when Russia is at war with a neighbouring European country and Europe is placing heavy economic sanctions on the warmonger beggars belief. Surely, this will lead Europe towards a more secure set of energy policies with the prospect of renewable energy being sharply accelerated? Further, at the household level, certainly in the UK, we’re much more conscious of “saving energy” because it translates directly into saving money in income-stressed homes;
  • and what about key manufacturing input security? It’s worrying to note the reliance that the world has on chips from Taiwan at a time when China is sabre-rattling and President Chi has just been anointed as de facto President for Life!;
  • the extraordinary global shortage of labour brought about by, inter alia, the pandemic, governments restricting immigration, better-heeled older workers reassessing their life preferences, has accelerated the commercialisation of automation, not least in food production;
  • and the globalisation of news coverage has made us increasingly aware of the impact of climate change on peoples’ lives and, for our own self-interest, the impact that weather has on food supplies.

The IMF notes that food and energy prices continue to drive the global inflation surge. In the UK, consumer price inflation is at around 10%, highest as it has been for decades, with food price inflation a hefty 14%. The UK Office for National Statistics has shown that a basket of the lowest priced grocery items from supermarkets “value lines” are 17% higher now than 1 year ago. It’s the same story in many countries with particularly damaging consequences for those on low incomes (in many emerging nations – e.g. much of Africa – half the household income is spent on food and double digit food price inflation is devastating). In so-called higher income “developed” countries, household incomes in general have increased over time, but polarisation is more evident – there are comfortable “haves” and a much larger grumpy group of “have nots”. The story is the same in the UK, much of Europe, North America, or Australia.

Interest rates are rising quickly in many countries with huge consequences for those with home mortgages to pay. For 10 years or more, we’ve had historically low costs of money – a boon for spenders and a bane for savers! Energy prices have come off recent astronomical highs but are way above recent memory bringing huge additional costs to families for heating, light, cooking and transport (notwithstanding government support which will need to be paid off by our grandchildren). Family budgets are under extreme pressure and are causing significant changes in purchasing behaviour for food, and the postponing of larger purchases (e.g. for furniture, clothing, electricals, and entertainment).

We’re most interested in the impact on food purchasing and consumers are:

  • switching to discounters (e.g. Aldi, Lidl);
  • buying less items such as trimming back on “indulgent” snacks;
  • “stretching” meals by using smaller meat portions and lower cost protein foods;
  • buying less alcohol to save money, or drinking at home rather than in the pub;
  • buying more “Value” private label products, more frozen and tinned foods to save on food waste;
  • seeking advice on using up leftovers and reducing waste;
  • even thinking about energy efficiency in cooking – air fryers became fashionable during the “lockdown” and, now, are seen as being the sensible way to cook to save energy costs;
  • less eating out and this can translate into trading up for quality foods to eat at home;
  • “parking” concerns about the environment, animal welfare and other social issues whilst coping with the squeeze on the family budget.

What of the future? Analysts suggest that things will get worse before they get better! A short recession is likely in Europe (and we are in one already in UK) although the USA economy may squeak through unless burgeoning interest rates causes the housing market to collapse. Haven’t we seen all this before – what about the 2008 recession? Then, there were differences to now: there was low inflation; no Covid/energy/war in Europe issues; falling interest rates; much higher unemployment; and the online retail sector was growing rapidly taking many traditional players by surprise.

At the consumer level, the “heavy carrying” will be by lower income households. In the current economic crisis, 40% or so of households are and will continue to struggle until inflation abates and economic stability returns. Household saving rates have fallen sharply (after rising during the “Lockdown” period of the pandemic) and, so, the big holiday or the house extension will have to wait a couple of years or more. Those serving consumers will need to focus on showing them that their offer is helping them save money. But, remember, value means different things to different consumers and their economic groups. The “should we heat or eat” households need much more help than an Aldi price match basket of basic foods from Tesco. But, all households grumble about rising food prices, including those comfortably off who are outraged that their seeded, olive organic sour dough loaf has gone up by £1 a loaf. Food businesses should be attuned to and deliver on what consumers value and this can be much more than just low prices. However, grocery retailers, not least the big traditional supermarket chains, need to compete with “the barbarians” close to their forecourts (i.e. the discounters!) whilst responding to the needs of local communities and the producers of the food products that are on their shelves. There’s much talk of “partnerships in the food supply chain”. Retailers must walk the talk to ensure that those who actually produce our food, and have been operating throughout this harrowing period, are set fair for the longer term.

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About the authors
Prof David Hughes: Around the world, David speaks to senior agribusiness and food industry managers about global food industry developments that are and will affect their businesses and industry. Energetic, engaging, humorous and insightful, David gains the very highest evaluations at seminars, conferences and Board level discussions in every continent he visits. Miguel Flavián: works for several Spanish organisations and companies to help them to learn from the developments of the British grocery market and improve their business back home.
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