How Rising Costs are Impacting Consumers - a Suzy Research Whitepaper

How Rising Costs are Impacting Consumers A Suzy Research Whitepaper

January 2022

Table of Contents 3

Introduction

4

The State of Inflation: Consumer Understanding

5

The Consumer Experience: Back to the Basics

6-7

Lifestyle Changes: To Switch, Delay, or Give Up Altogether?

8

How Consumers Are Paying For Purchases: Changing Habits

9

Industry Deep Dive

16

What Else Can We Learn?

17

Looking Forward

Introduction For many businesses that survived the lockdowns of 2020, 2021 was supposed to be a year of recovery and rebound. Instead, it came with a whole host of new challenges -- supply chain issues, labor shortages, and inflation among them.

Those challenges have now been passed on to the consumer. According to the US Bureau of Labor Statistics’ consumer price index, prices paid by Americans in December 2021 were up by a whopping 7% compared to a year earlier -- the sharpest increase since 1982.

But with near-endless options in the global marketplace, brands have to keep their prices competitive for that valuable spot in a consumer’s grocery bag or online cart. While there are a number of factors that determine what a consumer shops for, pricing is often the top consideration.

For brands, toeing that thin line between profits and customer loyalty has been especially hard this year. In addition to dealing with supply chain issues and labor shortages, it also means navigating changing consumer habits and desires, as well as keeping up with the competition.

That’s why Suzy set out to connect the dots between what’s happening in the world, and what’s happening on the ground with consumers. In December 2021, we surveyed 1,000 American consumers about how they’re being impacted by pricing changes and which behaviors they’re changing as a result.

This whitepaper takes those findings to create a holistic picture of not just the factors affecting pricing, but also how consumers are responding. In it, we give businesses the tools to best serve their customers and remain competitive in this turbulent market.

The State of Inflation: Consumer Understanding To start, we need to understand the factors driving inflation -- and how consumers feel about those factors. So what is driving it? Three main causes: Supply chain issues

Price correction

Manufacturing, transportation, and logistics for nearly every kind of good has been severely impacted by the pandemic. Around the globe, factories were hit hard with the quick and constant spread of the virus. Many factories shut down or were forced to reduce production because workers became sick, or the facilities were part of nationwide lockdowns. In response, shipping companies cut their schedules in anticipation of a drop in demand for moving goods around the world. These have created astronomical price increases -- for example, container shortages and traffic jams at ports have caused the price to ship from China to the US to increase tenfold in just a few months.

During lockdowns, prices for some goods actually fell. For example, cancelled flights and the sudden absence of daily work commutes meant demand for gas plummeted in early 2020, and gas prices hit a low.

That makes recent price increases feel even steeper than they would if compared to 2019 numbers.

Labor shortages The American labor force has been declining slowly for decades, but saw a steep drop in the beginning of the pandemic after millions of Americans lost their jobs. In addition, unemployment insurance benefits had the added boost of pandemic relief, and people were making more off of unemployment than the wages they made while employed. This, of course, was a major incentive to remain unemployed. Even after many businesses reopened in 2021, the labor force still hasn’t recovered*. As a result, many businesses are having a hard time trying to fulfill pent-up demand with fewer workers.

What do consumers think about all of this?

With so many factors at play, it’s hard enough for businesses to keep track of it all, let alone the average consumer. Even though more than half of respondents to our survey (60%) said they think inflation will affect their daily life, less than half (45%) understand why it’s occurring in the economy.

That hasn’t been helped by the governmental response. Up until last month, Federal officials were still calling inflation “transitory,” but have since changed their tune. Officials are now saying to expect even higher inflation in 2022 as the economy tries to stabilize -- though, optimistically, they’re also saying current pressure should give way to healthier price growth in the long-term.

*As of December 2021, 61.9% of US civilians are in the labor force, (US Bureau of Labor Statistics) -- a full 1.5 percentage points lower than February 2020

The Consumer Experience: Back to the Basics We ended the year on a bit of a low note — the highest 12 month price increase in four decades.

According to the BLS, energy (both gasoline and natural gas) was the biggest contributor to inflation, with prices up a massive 29.3% from December 2020 to December 2021. Food prices were up 6.3%, while all other categories rose 5.5%.

Part of that worry is likely due to the fact that wage increases haven’t been keeping pace. Earnings growth is at its strongest point in decades, but inflation has completely cancelled out those gains.

Just over a third of respondents (34%) were confident in their ability to afford basic necessities, while 17% weren’t confident at all.

Unsurprisingly, those categories were most noticed by consumers, with the majority seeing an increase in grocery prices (80%) and gas prices (71%).

Many consumers are finding that they’re having to make changes to their lifestyles -- which means changes to the products they buy. 45% of respondents said they planned to tighten their purse strings by only spending on essentials, and another 43% said they would start to set budgets.

These price increases weren’t just the most noticeable among consumers -- they were also the most worrying. When asked, respondents were most concerned about specific categories going up in price. Food (73%) and gas (68%) topped the list, followed closely by other necessities such as utilities (67%) and medicine (57%).

But what, exactly, are considered essentials to consumers -- and what’s important enough to be factored into those newly-minted budgets?

Lifestyle Changes: To Switch, Delay, or Give Up Altogether?

Shaking it up For non-essentials, people are willing to be a bit more flexible in which brands they buy -- but some categories stand out as must-haves.

On the other end of the spectrum, toys and games were more interchangeable. Only 16% were likely to stick with their favorite brand no matter the cost, while 34% were likely to switch it up if the price wasn’t right.

In particular, consumers were least likely to budge on personal care items, such as deodorant and toothpaste, with 41% of respondents saying they’d buy their preferred brand no matter the cost. Pet food was a close second at 39% -- unsurprising, considering 95% of pet owners consider their pets to be part of the family. Skincare and beauty (32%) and cleaning supplies (31%) were also some of the most loyalty-inspiring categories.

Pricing affects not just which brands people shop for, but where they shop, too -- and our data shows that low-cost retailers are winning this round. When we asked if consumers had started shopping at any new stores due to inflation, budget chains like Aldi, Dollar Tree, and Family Dollar were the most common answers.

Walmart and Target also received high marks. The two have notably refused to increase their prices, choosing to absorb the rising costs rather than pass them on to consumers. Though that’s eaten into company profit margins, it’s won them points with existing customers and scored them some new ones.

Pushing it back

Giving it up

Rising prices are also causing consumers to rethink major purchases -- at least, for the time being. We asked consumers an open-ended question about what purchases they were planning to postpone or pursue due to rising costs. More than 50 respondents said they would delay purchasing a car. There were far fewer respondents who said they’d purchase a car sooner than expected, and about a third of those said they were doing so to get ahead of even bigger price hikes in the future.

If prices keep creeping upwards, there were also some expenses consumers were willing to forego altogether. Respondents were most likely to give up restaurants and take-out food (49%), followed by vacations (45%) and new clothes (39%).

Only 16% of respondents said they wouldn’t give anything up.

House and home related projects such as remodeling and repairs, along with big ticket items, like new furniture and major appliances, were also on the list of purchases our respondents would most likely postpone.

Lifestyle Changes: To Switch, Delay, or Give Up Altogether?

What can brands do?

Raising prices is inevitable for many companies, but it’s a hard decision to make. Companies risk customers choosing a cheaper brand over theirs, or temporarily holding off on a purchase in that category altogether. Losing customers could cut into profit margins, making those price increases worthless. But there are a few options available to brands making this choice:

Be honest

Target a new customer base

Authenticity goes a long way -- simply explaining the reason your prices are increasing can help customers understand what they’re paying for and why.

Expanding your market to include more upscale customers or more frequent purchasers can help offset customers you may lose.

Cost transparency is associated with a 21% increase in the probability of purchasing an item.

Plus, the more that consumers understand these factors are outside the control of individual businesses, the more likely they are to realize that other brands are facing the same problems and may soon have to raise prices, too. It may not be worth making the switch to a cheaper product.

Offer coupons This one’s an oldie, but a goodie. Coupons give existing customers an incentive to buy and new customers an incentive to try.

Offering coupons within loyalty programs can be especially effective.

This can go hand-in-hand with making improvements -- higher-quality products can attract a different customer base.

Make improvements Coupling price increases with quality increases could help customers feel like they’re not just paying to offset business expenses, but paying for a better product that also benefits them.

Some areas of improvement include organic and sustainable ingredients.

Demand for these is on the rise in multiple industries, and customers are willing to pay more for these goods.

How Consumers Are Paying For Purchases: Changing Habits According to the Federal Reserve, 83% of adults in the U.S. own at least 1 credit card -- and they aren’t afraid to use it. The ability to set up payments to make over time is helpful. 65% of respondents said they used a credit card in the last three months, and about half of that (32%) said they were using credit cards more frequently due to recent price increases.

But high interest rates on credit cards can be a detractor. Though still in their early stages, alternative financing tools like Afterpay and Klarna are beginning to see some adoption, with 14% of respondents saying they used installment payments in the last three months. According to Salesforce data, the use of the BNPL (Buy Now, Pay Later) payment method during Cyber Week in 2021, jumped 29% year over year.

Among users, half had used Afterpay, followed by Klarna (45%) and Affirm (40%).

Consumers are also looking for ways to stretch their dollars. As a result, coupons and discount services are also popular, with the majority (59%) of respondents having used one in the past three months.

28%

28% of respondents said they were using cashback softwares more often due to price increases. The most popular services were Ibotta (23%) and Rakuten (21%).

37%

For now, physical coupons (37%) are still more popular than digital (29%). But as ecommerce increases, digital coupon services are seeing higher rates of growth.

27%

About a quarter (27%) of respondents said they were using digital coupon softwares more frequently compared to 18% that said the same about physical coupons.

22%

Honey (22%) and Swagbucks (21%) lead the pack among digital coupon services.

Industry Deep Dive: Beauty The beauty industry has been hit hard by supply chain issues -- rising raw materials costs, sourcing difficulties, and packaging component delays have run rampant.

To make matters even more difficult for beauty brands, a growing number of customers expect natural ingredients and more sustainable manufacturing practices. This puts even more strain on companies -- often, it means finding new suppliers for pricier materials. For companies that began this process pre-pandemic, the supply chain issues are an even bigger blow.

Luckily for the beauty industry, consumers can get very attached to the products they use -- it can be hard to find something that works perfectly, so people tend to stick to their “holy grails” for a long time. 1 in 5 women said it had been a year or more since they last switched up their beauty routine.

That’s probably why beauty scored so high in terms of brand loyalty. Just under a third (32%) of respondents said they’d keep buying their favorite skincare and beauty products no matter the price. Women in particular were far more likely to say so than men, at 38% compared to 26%.

What can beauty brands do?

Consumers are already likely to be more accepting of price increases for their favorite beauty brands, so go ahead if you need to, but keep it real as to why. Be honest about what’s driving the price increases -- and take the chance to highlight new sustainability initiatives or ingredient reformulations in the process, if applicable.

38% of women say they’ll remain loyal to their favorite skincare/ beauty brand no matter the price, compared to just 26% of men

Industry Deep Dive: Food & Beverage The food and beverage industry is in a tricky position -- people can’t stop buying food like they can with other expenses, but they can opt to shop at discount chains or choose the store brand instead.

Restaurants and takeout food were especially at risk -- 49% of respondents said they’d give up eating out if prices rose any higher. That’s a blow for the restaurant industry, but may be to the benefit of food and beverage brands. Just look to 2020, when restaurants and bars weren’t an option at all -- frozen food sales jumped 21%, and ready-to-drink alcoholic beverage sales rose a whopping 63%.

In the grocery aisles, there’s another battle being waged -- the battle between brand-name favorites and cheaper alternatives. We asked an open-ended question -what products and brands would you purchase no matter the cost? Two main subcategories inspired unwavering brand loyalty:

Comfort foods Kraft products were mentioned by name more than a dozen times, and other well-known brands like Kellogg’s cereals, Coca-Cola, and Oreos were also popular in the responses.

Speciality foods Several people mentioned that they’d continue to purchase organic produce no matter the price. Vegetarian and vegan products like MorningStar, Impossible Foods, and Oatly were also mentioned.

What can food and beverage brands do?

Coupons are a tried-and-true method of keeping loyal customers coming back. Emphasize what sets your brand apart from alternatives, whether it’s a hit among kids (and the alternatives don’t taste quite the same), or it uses organic ingredients, for example.

Industry Deep Dive: Retail 2021 wasn’t exactly a clear-cut rebound for the retail industry. Though sales were up for much of the year, December ended on a decrease despite the holiday season. 2022 is looking like yet another rollercoaster of a year, both for consumers and the retail brands they buy.

When it comes to pricing, not many consumers said they noticed increases in major retail categories like adult clothing (34%), toys (21%), and furniture (20%). But that may be because consumers were paying less attention due to the non-essential nature of these purchases.

For retail brands big and small, the biggest threat isn’t customers going elsewhere, but rather customers holding off on purchases altogether. 42% of respondents said they would outright stop buying new clothes if prices keep rising, for example.

42% say they’ll stop buying new clothes if prices keep rising

29% said they’ll remain loyal to their favorite clothing brand no matter what

That also means for most consumers, there’s a price ceiling to their loyalty. Only 29% of respondents said they’d buy their favorite clothing brand no matter the price, for example, and that was even less for toys and games (16%).

However, there’s a bright spot: When customers are loyal to certain retail brands, they’re ride or die. We asked an open-ended question -- what specific brands would you purchase no matter the cost? Nike was by far the most popular write-in, with two dozen respondents naming the brand, followed by other heavy hitters like Adidas and Apple.

What should retail brands do?

Shifting marketing strategies to target those big spenders and loyal buyers is one option. For the more budget-conscious, coupons and discounts can be especially attractive, and draw consumers to make purchases that they otherwise would have waited to make.

Industry Deep Dive: CPG Two years into the pandemic, and people are still hoarding toilet paper -- only this time it’s not to get ahead of shortages, but to get ahead of price increases.

Dozens of our respondents said they planned to stock up on household goods like cleaning supplies, hygiene items -- and yes, paper products -- in anticipation of further inflation.

But while that may sound like good news for the CPG industry, the reality is a bit more complicated. Given that many products are everyday necessities, there’s no shortage of people buying -- but people aren’t particularly loyal to their specific brands of CPG products, either.

Personal care items inspired the most loyalty, with 41% of respondents saying they would buy their favorite brand no matter the price. But less than a third said the same about cleaning supplies (31%), pet supplies (28%), and paper products (27%).

We also asked what brands in particular consumers would keep purchasing at any price point. Some brands like Clorox, Charmin, and Dawn were named by our respondents -- but a good chunk of respondents said they’d be willing to spring for alternatives if need be.

41% said they’ll remain loyal to their favorite household brands no matter the cost

What should CPG brands do?

It’s all about loyalty. Keeping in communication with your customers is key, and offering coupons and discounts can go a long way. Be honest and upfront about any price increases, and try to highlight any big quality improvements that might set your brand apart from others.

Industry Deep Dive: Automotive The automobile industry is facing pricing pressure from all sides: raw material prices have soared, labor costs are rising, and the chip shortage is still ongoing.

Couple that with the massive increase in gas prices -- up 29.3% from December 2020 to December 2021 -- and car ownership gets a whole lot more expensive.

Average U.S. Gas Price Increase SOURCE: THE US ENERGY INFORMATION ADMINISTRATION

But among consumers, sentiment about buying cars wasn’t as negative as those numbers would suggest. When we asked our respondents an open-ended question about which purchases they were holding off on due to inflation, many said they would wait to buy a car -- but there were also quite a few who were planning to purchase sooner to get ahead of rising costs.

What does that mean for the auto industry?

For now, it might be best to shift gears away from customers waiting for better deals and towards those that have disposable income to spare. That could mean marketing towards a more luxury audience, or it might just mean highlighting new features and improvements to appeal to everyday consumers.

Plus, there’s still a chance to grab the attention of consumers that are waiting to take the plunge. If demand for new cars picks up again in 2022 (as is expected), building loyalty now could pay off.

Industry Deep Dive: Tech Before the term “supply chain” began creeping into the news cycle, there was a predecessor: “chip shortage.” The work-from-home-induced surge in demand for computers and the temporary closure of multiple Chinese chip factories caused a huge disruption in the tech industry that still hasn’t fully settled down.

When we asked our respondents an open question about which purchases they’d delay due to price increases, big-ticket tech items like computers and phones were some of the most popular answers. (40% of our respondents said they would hold off on buying new personal electronic device if prices kept creeping up.)

But paradoxically, phones and computers were also some of the most popular responses when we asked what products people would try and purchase sooner.

For these, electronics are a need rather than a want -- and buying as soon as possible to get ahead of future price hikes is the best bet.

Just under a third (30%) of respondents said they’d purchase their preferred brand of personal electronics no matter the cost. But some brands inspired extra loyalty: Apple and Samsung were named about a dozen times each in an open-response question we asked about which brands consumers would keep buying no matter the cost.

What should tech companies do about this division in consumers?

Each warrants a different approach. Consumers that may see tech as an unnecessary expense otherwise could still be swayed by coupons and discounts. Or, companies might opt to switch gears and market to the latter audience. In this case, highlighting increases in quality can help ease the pain of higher prices among consumers that are still willing to spring for full-priced new tech.

Industry Deep Dive: Consumer Electronics The consumer electronics industry has been, unsurprisingly, among the hardest hit by the ongoing chip shortage. The effects were felt long before inflation began ticking up, as consumers were repeatedly hit by out-of-stock messages while trying to buy their favorite video gaming consoles or home appliances.

As electronics companies continue to recover from stocking issues, many can’t afford to discount the stock they do have. But consumers are willing to wait for better deals or a slowdown to inflation: 40% of our respondents said they would hold off on buying new personal electronic devices if prices keep rising.

40% said they won’t buy new electronics if prices keep going up

So what options are available to the consumer electronics industry?

Electronics purchases are typically deliberate -- not impulse buys.

That means brands’ communication can go a long way. Being honest and upfront about stocking and pricing challenges can generate goodwill among consumers, as well as keep them informed about restocks or sales.

Plus, keeping customers in-the-know about upgrades or new improvements can help sway their decision, especially among those that may have otherwise held off on making a purchase. Companies can also try going after a new customer base of those that are still willing to make big-ticket purchases despite inflation.

What Else Can We Learn?

At Suzy, we understand that each business has different, specific questions they need answered. That’s why we let you take the reins. With access to more than a million consumers, there are countless ways to tailor surveys to your needs.

We can help you connect with your audience in minutes, to answer personalized questions about their changing buying habits, brand sentiments, purchase plans, and more.

Here are just a few examples of other questions you can ask with Suzy:

What actions are consumers taking due to rising prices?

We learned from this survey that consumers are scaling back to essentials and delaying some purchases. But maybe your business needs insights on how long consumers plan to hold off on major purchases, or wants to break out a subsection of this broader survey. We’ve got you covered!

Which categories are consumers using alternative payment options to make purchases?

Coupons, cashback services, and loyalty programs are popular, especially as people look to save -- but their popularity differs across industries and product categories. At Suzy, we can help your brand discover the specific habits of your consumers.

Who do consumers think should be responsible to help stop rising prices?

Do consumers in your industry blame the government? The pandemic as a whole? Or do they think the onus should be on corporations to keep prices down? Your messaging may change depending on the answer. Luckily, we can help you find that answer -- within minutes.

Looking Forward With 2022 now in full swing, consumers are still facing some of the same purchasing challenges of the past year. Whether it’s price hikes or out-of-stock notices, the end result is the inability to keep buying the same products they love.

Meanwhile, brands are struggling with the same issues from the other side.

Juggling supply chain issues and rising materials costs with catering to consumer needs is no small feat -- but there are ways to do it. It’s just a matter of knowing how your consumers are responding to the challenges.

That’s why it’s more important than ever to keep up-to-date with consumer sentiment. At Suzy, we provide real-time insights from real consumers, so you can stay informed and plan your next move.

Want to learn more about Suzy? Reach out to us at suzy@suzy.com