People in the US are tightening their belts but they would still prefer to buy larger packs which work out at better value than the smaller alternatives offered by some food manufacturers, James Russo, vice president, Food Sector Marketing at Nielsen, said.
US consumer confidence has plummeted 50 points since January 2006 to 57 points, with basic foods such as eggs seeing a 27 percent price increase, bread 16 percent, milk 13 percent and chicken ten percent.
Russo said that in price-sensitive categories food manufacturers are opting to downsize packages, taking a “less for more philosophy”. He did not name brands but gave the examples of 12 ounce bags of potato chips which are now 10 ounces, while nineteen ounce cereal boxes are now 18 ounces.
This is a “bad move” according to consumers, as a recent Nielsen Panel Views study showed that when given a choice, consumers would prefer larger sizes at a lower price per serving rather than downsizing or reducing the frequency or amount of sales to offset costs.
However, Russo said: “With price increases at such staggering levels, more manufacturers have been offering smaller packs as a better approach than passing on double-digit price increases to consumers.”
The US economy is in a very precarious situation, according to Nielsen, as recent information from The Federal Reserve indicates that economic activity remains weak, household and business spending has been subdued and labor markets continue to soften.
Russo said: “As spending power declines, consumers reevaluate necessities and are forced to make tough choices about their spending habits and the product categories they purchase.
“Knowing which products are most affected by a recession can guide effective strategic decisions with regard to pricing, promotion and assortment tactics.”
Nielsen’s analysis shows that generally products such as seafood, dry pasta, candy, beer and pasta sauces are most immune to a recession and are expected to weather the economic storm. Meanwhile the most vulnerable product categories tend to include carbonated beverages, eggs, cups or plates, food preparation/storage and tobacco.
Passing on rising costs
Food manufacturers are feeling the pinch as well. The Hershey Company has just announced an approximate ten percent increase over its entire domestic product line. The move was to “help offset a portion of the significant increases in the company's input costs, including raw materials, packaging materials, fuel, utilities, and transportation”.
David J West, president and CEO, The Hershey Company, said: "Commodity costs have been volatile over the last several years and continue to remain at levels that are well above historical averages.
"Market prices for ingredients such as cocoa, corn sweeteners, sugar and peanuts are up 20 to 45 percent since the beginning of the year. As such, in 2009 we expect our commodity cost increase to be more than double the 2008 increase.”
He added that consumers are likely to see “higher every day and promotional retail prices as we implement the price increase”.