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Cost-Cutting Consumers Trade Down from Steak to
Chicken
Reports from retailers across many sectors indicate that consumers
are trading down in their shopping behavior. With the housing
downturn, weakening labor markets and surging energy costs,
the trading down behavior is having a major impact on retailing,
presenting opportunities for some chains and challenges for
others.
According to Deborah Weinswig, Retailing / Broadlines, Food
& Drug, and Home Improvement, Citi Investment Research,
trading down behavior affects all consumers, which leads to
belt tightening and bargain hunting, and can be broken down
into four key bullet points.
“Trading Down” to Private Label
Private label has become more appealing to consumers, as the
quality and packaging of store-branded products has significantly
improved. Prices are also typically 20% lower than like-branded
items. Safeway Stores recently noted that its corporate brands
have gained share and that this was an industry phenomenon.
Similarly, Target commented that private label penetration
increased 300 bps in 2007 from 15% to 18%. BJ’s and Costco
both mentioned food and health and beauty products have gained
market share.
“Trading Down” to Lower-Priced Products
Warehouse clubs and food retailers have all commented that
they are experiencing trading down from “steak to chicken.”
With food inflation estimated to increase 3.5% to 4.5% in
2008, higher food prices will likely force more consumers
to buy less expensive foods. The USDA forecasts could prove
to be low, since food inflation was already 5.8% in January
2008.
“Trading Down” to Cheaper Channels
This type of "trading down" includes switching to
lower-priced channels. Around the last recession, Wal-Mart
outcomped Target almost every month (5/00-7/03) and that reversed
when the economy strengthened (8/03-11/07). Now for 3 months
in a row, we have seen Wal-Mart outcomp Target and we believe
this is the beginning of a longer-term trend. This observation
was part of the thesis for our recent downgrade of Target.
“Trading In” From Restaurants
In 2007, food-at-home share of the consumer’s overall
food expenditures increased for the first time since 2001
to 53.2% (the highest share since 1997), representing a +210
basis points year-over-year increase (the highest year-over-year
increase in food-at-home share since the 1940s). Most recently,
January food-at-home share further expanded to 54.6%.
In an economic climate as turbulent as this one, it is likely
that luxury retailers will not significantly lose their shopper
base and low price retailers stand to gain from the trading
down shift. However, retailers in the middle of the spectrum
are likely to feel the squeeze. Retailers such as Nordstroms,
Tiffany’s and Neiman Marcus in the luxury field and low-price,
value retailers such as Wal-Mart, Costco and BJ’s will
capitalize on the shift. But mid-price retailers like Kohl’s,
The Gap and Target can expect to feel the affects of “trading
down” behavior.
-Christina Zarrello
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