“Technically, if you just look at the basic definition of a two-quarters contraction in GDP, we’re in a recession.”And while consumer spending may not yet fully reflect this shift, they are starting to tighten their wallets, RBC Capital Markets chief executive Nik Modi told attendees last week during a webinar hosted by IRI.
“We think it’s going to get a lot worse”he said, pointing to changes in the way the government, retailers and manufacturers are dealing with inflation and the ongoing fallout from the pandemic.
“Consumers have been really shielded by the inflation we’ve seen since late last year”As the government issued stimulus checks, paused student loan payments and expanded prepayments for child tax credits — all of which have ended or will end soon, he said.
“That’s a lot of money that went into the pockets of consumers”or diverted to other expenses, including groceries, clothing, rent and mortgage, or other necessities like school supplies, he explained.
At the same time, he said, retailers and manufacturers who thought inflation was short-lived or could absorb higher costs by managing other aspects of the business are now realizing they can’t make up for it all and are now enforcing belated price increases.
A “heavy cliff in consumption” is emerging
When these shifts take effect, consumers who have been holding their spending steady will begin to pull back by negotiating down or outright.
“As consumers, we really don’t want to compromise on our lifestyle until we have to. And I think we’re getting close to that point. My fear… is that no one really expects what I believe will be a severe cliff in consumption, which I believe will happen over the next few weeks and months leading up to the start of the holiday season.said Modi.
“Companies are being caught off guard by what is happening and so I fear they will knee-jerk and initiate layoffs, which will then lead to a much worse situation.”he said.
This is already happening in part, as companies like Walmart, Gopuff, 7-Eleven, and others announce layoffs.
Consumers are also equally unprepared with the low personal savings rates since the pandemic, leaving very little cushion to carry them — and the businesses they typically support — through the recession, Modi said.
How will this recession compare to previous ones?
With this in mind, Modi said this recession “will feel very different than what we saw in 2001 and 2008”However, some of the lessons learned from these declines could help companies navigate the current situation.
He explained that previous recessions were “shock-oriented” – they came from a rapidly evolving crisis leading to a deep bottom. But this one builds up slowly and will likely be flatter but also last longer.
“It will cause some growth sluggishness”when the US enters “An environment where consumers are really battered by inflation and potentially rising unemployment,”he explained. “I’m not sure we’ll see stimulus coming into the market like we’ve seen in the previous downturns, because as we all know, that’s one of the reasons we have this inflation problem… so it’s a chicken and egg.”
Lessons from Coca-Cola, Birds Eye, Monster and Other Recession Winners
Still, he said, CPG makers could learn from brands that have done well during the last recession, including Coca-Cola.
While Coca-Cola plays in a segment that tends to be much more “sustainable” than other staples, it still posted “remarkable” growth during the last recession, with organic sales growth of 4% year over year and a 3% increase in volume Year 2009, Modi said.
He explained that part of this was because the beverage giant used the 2008-2009 crisis to double down on its vision for 2020, investing in digital, consumer insights and personalization so the company would do it when consumers ready to spend again after the recession ready to meet them.
This is the same game the company used recently during the pandemic when it decided to reorganize itself at an already distracting time so it could hit the ground running as the world reopened and consumers took part in events and coca -Cola products could enjoy together again.
Another common theme between Coca-Cola’s response during the last recession and what it’s doing now is the focus on absolute price points, packaging, elevating brand equity to justify purchases – all decisions affecting both retail partners and consumers benefited brand.
Birds Eye and Monster Energy also saw notable growth during the last recession, with compound annual growth rates of 16.1% and 18.6%, respectively, from 2007 to 2011, added KK Davey, IRI’s President of Strategic Analytics, during the webinar.
He explained that Birds Eye has grown in part by appealing to baby boomers with ads promoting Steamfresh products as part of full meal recipes, and by expanding its offering to include more convenient options like steamed vegetable sides and microwavable meals made with grains, pasta and proteins advanced . Monster won by introducing new lines that focus on unique needs, including a coffee and iced tea mix for morning occasions and different sizes for different users.
These cases illustrate how brands can attract new users and expand usage during economic downturns by investing in emotional marketing, offering multiserve and multifunctional products, offering solutions that save time and money, offering little treats and focusing on health, wellness and diet deal concerns.