Inflation & Substitution Spending

As prices for certain products have risen and continue to rise, customers are faced with two main issues:

• When to spend their money (Are prices going to get higher? When/if will they come back down?)
• What to spend their money on (Which of my alternatives are the right value?)

This entry will focus on the second of those two questions – what to spend. If consumers believe that prices are not coming back down or at least not coming down within their particular time frame, their focus shifts toward which alternatives represent the best value.

Therefore, rising prices doesn’t necessarily mean that consumers will not be spending money. It might mean that they will spend their money differently than they would have if prices were more stable.

For instance, consumers still need the basics – e.g., food, shelter, transportation – and even the not-entirely-basics like recreation. Still, consumers have choices within those categories.

There is the long-held view that consumers move along the value chain in times of economic uncertainty – perhaps from Macy’s to Kohl’s to Target and from Whole Foods to Kroger to Aldi to Family Dollar.

The questions businesses must ask then include:

• What is the value alternative for my product or service?
• For which product or service is mine a value alternative?
• How can I position my product or service as the best value? (long life, reusable, etc.)

Opportunities, therefore, exist for products and services that are seen as a value compared to competitive alternatives. For instance, private labels are less expensive than comparable branded products, and investing in home recreation products which can be used repeatedly might be seen as a better value over one-time travel or experiential spending.

Freedonia analysts will continue to watch how inflation trends affect consumer spending, from delays to substitutions.

For more information and discussion of opportunities, see The Freedonia Group’s extensive collection of off-the-shelf research. Freedonia Custom Research is also available for questions requiring tailored market intelligence.