1. Don’t lower prices if the consumer remains willing to pay more
From a sales revenue point of view, consumers continue to spend close to the levels we saw in 2021. However, when it comes to unit sales, the retail market still looks more like it did in 2019, before the pandemic. It’s important to note that the frequency of purchasing plays a role in consumers’ recognition of higher prices. Consumers say they are noticing the prices of food and gas the most, because they see those prices rise every time they go to the supermarket or fill their gas tanks.
Price Increases Are Hard Not To Notice
Jumps to 95% for those age 55
Q. In General, Have You Noticed Any Price Increases When Shopping During The Past 3 Months Compared To Year Ago?
Q. For Which Of The Following Types Of Products Did You Notice A Price Increase Compared To Year Ago?
Source: NPD Omnibus February 2022
While we’ve noted some erratic consumer behavior over the past few months, we have not seen a large-scale pull-back on overall consumer spending on retail goods. At least, not yet. Checkout data shows that despite a 10% year-over-year increase in the average selling prices in the first quarter, the average amount spent per buyer declined by just 2%. Until the consumer balks at elevated prices, retailers and manufacturers can continue to maintain and even raise prices. However, if or when consumers show they won’t buy as much, then prices will naturally level off and even decline.
2. Keep track of rebounding inventory levels and price accordingly
What happens when stores start to look at rebounding inventory levels?
When unit sales decline, excess inventory increases.
When demand starts to not align with purchasing, retailers will have to use promotions to spur sales.
IIf retailers are forced to promote more products, inventory levels (and prices) will go down. But it seems we have not reached the peak of this elevated pricing. So far, consumers have not shortened up on demand or spending in any large-scale way. However, we are just beginning to see unit sales in some industries starting to fall below 2019 pre-pandemic levels for the first time. For now, it’s worth watching, but it’s not something every retailer or manufacturer will need to address immediately.
3. Understand the impact of promotions and the consumer’s spending threshold
What happens if promotion doesn’t work? How can a retailer be sure it’s not discounting at a higher rate than it needs to? Is 20% off enough? Too much?
Early in the pandemic, there were a lot of spot-sale promotions. But with stores and malls open again, and as the pandemic mindset continues to dissipate, retailers and manufacturers need to focus on the cadence and depth of promotions. To start, they need to understand the consumer price threshold if they want to identify the price points where consumers might pull back on buying. One way to do this is through pricing sensitivity studies that show the consumer limit to higher prices.
Continued Elevated Retail Prices
Compared to pre-pandemic 2019 levels, average prices have seen consistent growth. In April 2022, prices grew 22% compared to 2019.
All weekly data points compared to the same week in 2019
Source: The NPD Group/ Point-of-Sale Early Indicator Report, NPD Universe
Promotions on the Decline
Average discount and percent of units on promotion declined by 1 pt. and 3 pts., respectively, since 2019
*Includes Accessories, Appliances, Beauty, Footwear, Housewares, Juvenile, Office Supplies, Outdoor/Team Sports EQ, Tech, Toys; does not include Apparel
Source: The NPD Group/Price and Discount Trends
4. Give consumers reasons to spend on impulse, to drive demand upward
It’s crucial to find ways to tell consumers now is the time to buy. Increasingly, retailers must entice customers to buy, rather than simply waiting for them to do so. Now that consumers are back in stores again, there’s a lot more opportunity to entice them to spend on impulse again.
The pandemic also got consumers into the habit of buying products based on a need mentality. But as we emerge more fully from the pandemic mindset, and look for ways to increase sales, retailers must find ways to create purchasing impulses in the consumer that go beyond simple needs and replenishment. Developing marketing plans that accelerate replenishment and upgrade is one option. Sure, you could wait for a consumer’s washer or dryer to break down, but if you give that consumer a reason to buy now, they might do so even before the need arises.
5. Recognize where excess costs are coming from and respond accordingly
The components of pricing are transitioning. Many retailers are still scrambling due to ongoing product shortages. In addition, the prices for raw materials, transport, staffing, electricity, rent, and so on are still rising. However, at some point they will stabilize. Once that happens, retailers will be better able to level-set or reduce prices, as consumer demand catches up.
Focus on Checkout: Dwindling Impulse Shopping Opportunities
Our Checkout data shows consumers have been buying less, but they continue to spend more on their purchases. The decline in the number of units they purchase has weakened the average amount spent per buyer. Declining consumer demand is important, but the implications of reduced purchase frequency are even more critical. After all, when consumers shop less often, the resulting loss of impulse-shopping moments will have an even greater impact on retail growth.
To get consumers to purchase more when they shop, marketers must find ways to make products pop. Better displays and offering persuasive promotions are two ways to do this, but behavior differs by channel, industry, and the consumer’s income level.
General Merchandise Buyer Metrics
Q1 2022 vs. Q1 2021
Source: The NPD Group/Checkout Analytics, three months ending March 2022 versus three months ending March 2021.
Director, Industry Analyst
Makeup returned to the spotlight in the first quarter (Q1) this year and, since it is in-demand by consumers, promotions on makeup products fell year over year. While the number of promoted makeup products remained steady, the average amount of discounts declined. Even more impressive: sales of non-promoted products are increasing. That tells us consumer demand for makeup is high so retailers do not need to rush to incentivize purchases.
On the other hand, the skincare category is experiencing growing pains. Lower-priced, ingredient-first brands have changed the consumer and the business. Facial products are leading skincare category sales. The percentage of units sold on promotion increased in Q1, which is in line with 2019, the year before COVID-19 essentially closed retail.
Promotions are a necessity in the business. But what we are learning is that the depth of the discount and the percentage of units sold on promotion can act as a future indicator of health across the beauty industry.
Senior Vice President, Industry Advisor, Food and Foodservice
Rising prices may be contributing to a slowdown in restaurant recovery. Total visits to commercial restaurants in the first quarter (Q1) of 2022 declined 1% versus the prior year, and an early peek at April traffic shows similar softness. For consumers in households under $75,000 in annual income, the Q1 traffic declined by 3.5%. This pressure on consumers is likely to continue. The average case price of goods restaurant operators purchased from broadline distributors increased by $17.50 in Q1 2022 versus a year ago. At the same time, the average eater check paid by consumers only increased by 5%, indicating restaurant operators haven’t passed through all their cost increases to the consumer. Undoubtedly, restaurant operators will need to raise prices further in Q2 to protect margins.
Consumers will take note of the price increases, and behavior is likely to change accordingly. Our Checkout foodservice data foodservice data reveals one major chain raised the price of a premium sandwich by 4%, which translated into a 6% decline in purchases of that item. The chain also saw a 3% increase in sales of a smaller version of the item sold at a lower price. So, while pricing may create behavioral change at the top line, like slowing the industry’s traffic recovery, it also creates behavioral change beneath the surface.
Vice President, Industry Advisor, Home and Home Improvement
In the initial stages of the pandemic, home products were in such demand that we saw units grow while average selling prices rose. However, recently we have seen a more traditional price and promotion model return, where a rise in prices results in fewer units sold. This conventional model significantly impacts lower-income ($50K and under) and younger households (ages 18 – 24). Households with incomes over $100K, and consumers aged 55 and older, who have driven the growth over the past two years, are not showing the same effect as the younger and lower-income households.
We also see mid- and higher-price tiers in many categories doing better than the lower-priced tiers, partly due to consumers wanting to buy the best quality product they can afford. Consumers are eating more meals at home, resulting in a greater need for kitchen electrics and housewares. If a product has the innovation to solve a need, consumers are willing to invest in that product. As discretionary income gets tighter, we may see more spending shifts, but the structural changes in behaviors, like eating and entertaining at home more, will help the home industry in the long run.
Executive Director, Industry Analyst
In recent months, gasoline prices have become a key focus topic for some in the industry, as gas prices rose above $3.50 per gallon. The last time nominal gasoline prices had crossed the $4.00-per-gallon mark was in mid-2008. At that time, we observed a downturn in miles driven and industry aftermarket industry performance.
We can expect to see some negative effects on aftermarket sales caused by higher prices at the pump, but the extent of those effects is not as easy to predict. We cannot assume higher gas prices will cause the same measurable decline in miles driven that were noted in the past. However, the longer gas prices remain higher than average, the more it could impact household budgets. Even if we don’t see a measurable drop in miles driven, other behavior changes around vehicle maintenance could also drag down overall industry performance.
Executive Director, Industry Analyst, Footwear & Accessories
We’ve hit a turning point in footwear in the U.S. In 2021, unit sales recovered to near pre-pandemic (2019) levels, while higher prices, driven by both base price increases and reduced promotional activity, pushed dollars well above. But early 2022 has been a different story. Average prices are still climbing, but units are now falling, not only compared to last year, but also versus the pre-pandemic period. Promotional activity is also starting to pick up in some areas.
In the fashion footwear category, where base prices have increased the most, the share of units sold on promotion and the average promoted discount rate is now higher than it was in the first quarter of 2019. In the performance and outdoor categories, promotional activity is still lower than it was before the pandemic. However, as unit sales slow from their early-pandemic highs, we can expect this situation to change.