By Mike Ljubicic
Inflation has been a topic of widespread discussion recently, with varying opinions and thoughts expressed, and – as we all know – the industry is under scrutiny. However, it’s important to put facts on the matter.
To contextualize inflation globally, it is essential to distinguish between modern and traditional trade markets. Modern trade is primarily represented in developed markets such as Western Europe, Canada, the U.S., Australia, New Zealand, and select Asian markets. This market segment is dominated by larger stores with scanning checkouts that account for most fast-moving consumer goods (FMCG) purchases. At the same time, traditional trade is still prevalent in developing markets with “mom & pop” shops/kiosks selling small-size items.
How Canada compares to other markets
In Q1 2023, global FMCG inflation was up 13%. In Canada, inflation hit 9%, and11% in the U.S., while most Western European markets ranged between 13% to 16%; in central European markets like Poland, inflation reached 22%. In addition, many developing markets worldwide had grocery inflation rates well above 20%. It is, therefore, a global phenomenon that is not unique to Canada.
Consumers worldwide are adjusting their spending to compensate for rising prices on food, utilities, fuel for transportation, and mortgage debt, among others. In Q1 2023, Canadian consumers were paying more for FMCG and consuming less – with a 6% increase in dollar spend and a 3% volume decrease. This has resulted in an average increase in spending of $700 annually per household, considering that 62% of Canadian households are one to two members. Consumers are trading down in specific categories, leveraging promotions, and forgoing some of their discretionary spending. This trend will likely continue in the short term, with more than 50% of Canadians believing a recession will play out in the next 12 months. Consequently, consumers surveyed intend to spend less on out-of-home dining, entertainment, and international holidays over the next six months and more on groceries, utilities, and transport. However, they are less likely to cut back on categories such as pasta, frozen vegetables, tea/coffee, cereals, and dairy than on more discretionary categories such as chocolate, alcohol, snacks, and meal kits.
Some commentaries in the press have raised concerns about the lack of competition in Canada’s retail environment. However, a comparison with other modern trade markets reveals that Canada is no more concentrated in its retail sector. The top five retailers in Canada account for 75% of the total annual sales of roughly US $95 billion across FMCG categories, with dozens of banners operating from conventional, discount, drug, ethnic, and warehouse clubs nationwide. The situation is similar in 15 Western E.U. markets, where the top five retailers per market also account for 75% of total annual sales, ranging from 60% to 99% by country. In the U.S., which has a larger volume of sales, the top 12 retailers account for approximately 75% of the total, which is 2.4 times more than Canada in a largely regionalized market that is 12 times our size in volume. In Australia, the top three retailers reach 75% of tracked grocery sales.
Inflation is a global phenomenon influenced by supply chains, commodity prices, and geopolitical events. While Canada is not immune to the effects of rising prices, the country’s inflation rate is below the global average, with consumers adjusting their spending patterns accordingly. While the short-term outlook may be uncertain and many Canadians are anticipating a recession, the effects of inflation are being felt worldwide and require a concerted effort to address.
What can Canadian retailers and manufacturers do to help consumers struggling with inflation? Promotional sales remain a crucial driver of growth, with 50% of shoppers willing to stock up when their brand is on sale. However, retailers must avoid promoting too aggressively to win back shifted share – promotions should be used purposefully to build brands, not to undermine loyalty. Additionally, while CPG inflation rates are slowing down, there is still a long road ahead of us to return to pre-pandemic levels. Retailers and manufacturers must focus on innovation, promotion, and value for money to drive growth and meet the needs of today’s consumers.
Mike Ljubicic is managing director for Canada, NIQ | nielseniq.com
