Blog: Dean BestWhen will consumers tighten their belts?

Dean Best | 6 July 2007

At what point do consumers reach a ceiling they are no longer willing to pay for a product? This is of course a question facing anybody selling anything, but in the food and drinks world it is all the more pertinent since the strategies of many of the top producers and retailers became so focussed on the idea of 'premiumisation'.

I was at a food and beverage conference last month in central London that investigated potential growth strategies for the industries going forward. Inevitably, alongside ideas such as environmentalism, organics and health, premiumisation was much discussed.

One speaker in particular championed this concept, suggesting that the opportunities for premiumisation were almost limitless. Now don't get me wrong, I am well aware that the likes of Whole Foods and Tesco and brands like Rachel’s Organic and Green & Black’s have successfully travelled down this road in recent years. But something about his unqualified optimism didn't sit well.

I realised it was my own shopping habits that were causing my doubts. Increased inflation and rising interest rates here in the UK have without doubt blunted my own personal spending power, causing me to think twice before I drop the premium sausages into the basket, or reach for organic salad, rather than standard products.

The question must be asked then, how does this theory of unlimited premiumisation sit if we enter a sustained period of economic recession? In the UK and US, this question has been largely academic in recent years.

And at the moment in the US it looks set to continue to be academic as the economy there continues to thwart the doom-mongers. But here in the UK there are signs that we are on the verge of a far less attractive financial outlook.

Indeed, the idea for this blog was sparked by a blog written by the BBC's economics editor Evan Davis. He pointed out that real household disposable incomes (i.e. incomes after tax and inflation) in the UK have fallen for the second consecutive quarter. Putting this in numbers, households were 0.3% poorer in the first quarter of the year than they were three months before.

He does point out that consumer spending was robust, growing 0.5% in real terms and the economy grew strongly, by 0.7% in the quarter. But his analysis ought to at least make us stop and think.

"It seems that the economy is still being to some extent sustained by consumers who are struggling to adjust to the fact that their spending power is not rising as fast as it was. They are still spending more even though their income has not been rising," he wrote.

"One wouldn't want to be too alarmist about this, but it slightly smacks of the cartoon character chased off a cliff - with the legs still running before the character finds the ground is no longer there and a fall is imminent."


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