How can inflation affect consumers?

Inflation in China has remained relatively stable over the last 6 years. However, during the last 3 months of 2019 inflation rose reaching 4.5% in December as a result of the African swine fever epidemic causing a shortage of pork and prices to increase by 97%. 

For FMCG categories price increase can be one of the key drivers for value growth. Actually more than two-thirds of the fast-growing categories have seen a price increase higher than market average. 

Therefore, it is critical to understand the reason behind the price change and how shoppers react to the price increase, in order to utilize the price strategy and grow your category and brands. 
Kantar Worldpanel have developed a new solution called ‘Price Growth Response’ that can help you gaining a deeper understanding of important metric.
Basically there are two steps we can do: Price change decomposition, and Shopper reaction deep-dive:

Price Change Components

What components have driven the price change in my category? Is it purely like-for-like SKU price change, or are shoppers switching more of their purchasing to premium products? To answer these questions we decompose the price movement into 3 parts: like-for-like inflation, new launches and core product mix.

At the total grocery level in China, like-for-like inflation and the higher price of new launches have had a similar contribution to the price change. Even though the products entering the market are more premium, the existing products in the market contribute to ~80% of sales across the two time periods (this year vs last).

Price Change Components helps us

• see how inflation impacts price,

• understand the role of NPD to identify whether to launch more premium products in order to meet the consumer demand,

• know the role of core and premium products, and

• form a strategy focused on better management of pricing to feed into your pricing strategy.

Shopper Response to Price Increase

How will shoppers react when prices in a category rise rapidly? Shoppers have a number of options when they experience an increase in price. They can choose to buy more volume, shoppers in a cheaper store, buy more on promotion or move to a cheaper product in the category. Kantar Worldpanel can quantify the impact of these difference responses to show you which one is have the biggest impact on household spending.

At a grocery level we see that shoppers are not being put off by price increases. Shoppers are buying more volume, spending more through promotions and buying more expensive products. The net effect is that household spending in increasing at a faster rate than inflation.

Shoppers’ response to price increase helps us

• understand the importance of inflation,

• quantify different responses to inflation,

• know which factor is behind household spend growth, and

• form a strategy focused on growing household spending to feed into category and brand growth strategies.