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Looking At Inflation And The Past – What Can History Teach Us?

John Ross

Last updated on February 22nd, 2022 at 02:37 pm

When prices rise slowly, shoppers and the economy can adjust. But when inflation accelerates, as we are seeing in stores across the globe today, what happens then?

For many younger store associates, this may be their first time going through a major inflationary period. Certainly, food prices in the U.S. have not seen cost acceleration since the late 1970s and early 1980s. And even for those who lived it, many are asking what 6 percent or greater inflation means today.

Let’s begin with a review of how inflation impacted America last time. In the short run, American consumers saw larger paychecks and behaved accordingly. Spending went up, but so did consumer goods prices. 

Eventually demand plummeted, shoppers traded down into discount and other formats. Big box discounters and wholesale clubs got their boost during this period, and dollar stores followed later as not one but two recessions hit the economy hard. 

So, lesson one: Inflation refocuses shopper attention on price. 

In the long run, shopper confidence plummeted. It was the beginning of the great growth of private label products and the start of the “smart consumer.” 

Publications such as Consumer Reports flourished. Things such as MPG ratings on cars and extreme couponing came from a time where people felt like they were swimming against the current of rising prices.

Lesson two: Shoppers seek a partner to help them make their paycheck go further. 

Simply put, consumers looked to retailers to help them make their finite dollars go further in an environment of seemingly infinite price increases. 

These two lessons are simple to understand, even intuitive. As consumers’ wallets shrink in spending power, they need to be smarter about spending so they don’t lose ground so fast they can’t afford to feed their families. 

So what are we doing to address these two lessons?

In the 1980s, many retailers went on a campaign for low pricing. They would say, “We are lowering the cost of the grocery bill.” Up went hundreds of yellow signs, slogans such as “price buster,” challenges for shoppers to compare prices, price guarantees, etc. And many did drop prices, trying to stay competitive with the discounters to avoid losing shoppers to that growing channel.

In the short run, shoppers responded to promotions. Average promotion response rate is 20 percent greater during economic downturns, so of course lowering the cost of grocery bill campaigns worked.

But over the long term, there is little evidence these campaigns drove sustained market share. How come?

My old boss at The Home Depot, a smart and intuitive marketer, used to say, “If everyone is fighting the battle using the exact same weapons, how can we ever expect to win the [share] war?”

And he was right. When every retailer tried to solve the problem the exact same way – deals and discounts – no one stood out and the shopper became less loyal. 

But not all retailers choose to battle inflation and then economic recession with a price-only strategy. Some big names we all know, such as Costco and The Home Depot, fought economic hardship by deciding to differentiate their take on value.

These chains and others like them exploded from the 1980s while the ones who tried price alone mostly no longer exist.

Target’s “cheap doesn’t mean it has to be dull” merchandising philosophy was born in the time, as was Costco’s “innovation anyone can afford” strategy. So was The Home Depot’s “You can do it, we can help.” In fact, the biggest growth retailers from the recession until today – the ones that grew and survived – were the ones who figured out a way to sell value without defaulting to price alone.

Differentiation, it seems, is the weapon that grows share, even when times are tough and shoppers are looking for a deal. 

Over the years, I have taught marketing classes to business school students all over the U.S. They are always looking for some marketing trick or tactic that is more sophisticated than differentiation. They want a big data solution, artificial intelligence technology, digital marketing tool or Madison Avenue campaign that will miraculously unlock market share and their future careers. 

It is true that those can drive incremental success over less sophisticated tools. But incremental progress when shoppers are in economic distress is a different matter. 

When times get tough, shoppers need retailers and brands to be partners. And the ones that see that – and figure out a way to deliver value to their customers on more than just price – win in the short run and grow market share over time. 

The Home Depot wasn’t the first chain to sell power tools and lumber. It wasn’t even the first to offer a big-box format and discounts. It was the first, however, to understand that education was the main idea. 

Teaching people how to do it themselves saves the shopper more money than just selling the product cheaper. Today, many copy it. But at the time, it was exactly what the retailer needed to serve shoppers during economic distress. 

So what is your big idea? Would managers and associates be able to describe why shoppers should come to your stores versus a competitor? Would the shoppers be able to say it? And how is it different when the economy is at risk versus when times are good? Better yet, how should it be different?

For the marginal middle class and lower income shoppers, this next year could be tough. Regional and local grocery chains are critical to making sure they are cared for and served with respect. If not us, then who? Now is the time to determine how to serve them better.

For more information, visit iga.com.

About the author

John Ross

President and CEO of IGA

John Ross is the president and CEO of IGA, the world’s largest voluntary supermarket network with aggregate worldwide retail sales of over $40 billion per year.

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