When a customer assesses their grocery needs and then makes purchase decisions in the aisle or online, that selection process usually filters through one of two motivating factors: price or quality. For certain products, the lowest price will catch the shopper’s eye and effectively close the sale. On the other hand, the customer might be happy to pay a bit more for premium quality or a specific product attribute they can’t get at a lower price point.
A product’s price elasticity plays a role in the setting of initial retail prices. However, understanding a customer’s sensitivity to price, promotions and quality—and in what categories they’re motivated by one over the other—has real implications for grocery retailers’ investments. Especially in the current retail context, it’s critical for grocers to know precisely which customer segment—price-focused or quality-focused—is driving performance in which categories so they can invest accordingly. And shopper motivation sure is shifting.
As we approach the two-year mark of the start of the COVID-19 pandemic, we set out to understand if customers are becoming more price-sensitive. Headlines about inflation and climbing grocery prices might lead you to believe that price is the biggest pain point, and therefore the biggest influence on grocery shoppers’ decision making, but the conversation is more nuanced than that.
We analyzed 2.2 billion shopper transactions in the U.S. and Europe across our client base of mainstream grocers, and we found that today’s shoppers are increasingly more likely to be motivated by quality over price. Are you surprised? We were. Here’s a breakdown of the dynamics we observed, followed by clear opportunities for harnessing growth.
Quality Is More Likely to Drive Purchase Decisions
When we looked at transactions between July 2020 and June 2021, we uncovered a 10% increase in quality-driven customers compared to a 6% decline in those driven by price. What’s more, our analysis revealed that grocery shoppers are nearly 1.5x more likely to migrate up to the quality-driven segment (24%) than to move down to the segment more focused on price (18%). And as they migrate up, spending more per item as they do so, quality-driven shoppers’ average unit spend has increased by 9%, or 9 cents on every dollar.
Source: Symphony RetailAI
We drilled down further into the data, wanting to understand to what degree that upward migration wasn’t just a result of higher prices due to inflation. What we found was that only a little more than one-fourth (28%) of that price increase was caused by inflationary factors. This means the large majority (72%) of that unit spend increase can be attributed to product mix.
Quality-driven customers are actually purchasing more premium products than they’ve typically purchased before. This could be by choice, having a genuine desire to buy products because of their organic, sustainable, healthy or otherwise superior quality. Or as pandemic waves have limited certain types of discretionary spending—such as travel, dining out and entertainment—shoppers may want to direct their spending to more high-quality goods for home consumption. It’s also possible that a shopper’s decision to buy an upmarket product could simply be influenced by the mix of products the retailer and its CPG partners decide to offer in the first place or have available on hand. However, we also analyzed categories heavily purchased by quality-driven shoppers, and the pre- and post-out-of-stock trends were relatively consistent.
Source: Symphony RetailAI
Even though we are seeing growth in the quality-driven segment, don’t forget about the price-driven shopper. The price-driven customers are still a third of your customer base. When we looked at categories most important to this segment—ones that haven’t experienced growth since the start of the pandemic—we found the greatest opportunities for retailers to be in meats and poultry, baking goods and canned soups. Could some of these categories be underperforming for you also?
Understand Shopper Motivations Before Modifying Assortments/Promotions
With these learnings in hand, it’s time to determine where adjustments can be made to be sure you’re reaching the right customer need—for both price-driven and quality-driven customers. This will look like optimizing assortments to have the right balance of key value items (KVIs) and key quality items (KQIs) available. As well, you’ll want to be sure you’re not over-investing in promotions that aren’t worthwhile; if a category is a proven winner with more quality-focused shoppers, promotional spend can be dialed back. On the other hand, for categories that are important to price-sensitive shoppers and rank high on shopper response to promotions, these are categories where you may want to reinvest in promotions.
Price and Quality Motivations Are Dynamic, so Plan Accordingly
The distribution of quality-focused or price-focused customers will undoubtedly fluctuate over time—the distinction isn’t a static or all-inclusive trait of one shopper or household. For every item in their basket at the end of a shopping trip, you’ll find a mix of both price-motivated and quality-motivated purchases. But as you consider assortment, price and promotional strategies for the year ahead, our insights point to the importance of a true customer-centric approach. This approach will be one that constantly considers how customers are motivated by price and quality, which requires a careful segmentation of them to know which one is driving performance.
Charisse Jacques, SVP of global customer-centric retailing services for Symphony RetailAI, has more than 20 years’ experience of helping retail and consumer-oriented organizations achieve their goals through innovative strategic thinking, data-driven decision making and analytics.