According to a new McKinsey report, the trend of "trading down" among American shoppers is gaining momentum in 2024, with 77% of consumers opting for more cost-effective shopping habits. This shift in consumer behavior is largely driven by the need to manage budgets more efficiently in the face of economic pressures. As product prices rise and personal or economic circumstances dictate spending limits, consumers purchase fewer items across various categories.
Trading down involves consumers seeking out less expensive alternatives to their usual purchases. This can mean buying cheaper brands, shopping at discount stores, or reducing the quantity of certain goods. The trend is reshaping the retail landscape, as shoppers bypass full-price stores in favor of bargain chains to save money.
Major discount retailers like Walmart and Dollar Tree are reporting gains from this shift, with an influx of new customers from various income brackets, including those with household incomes over $125,000. Retail executives have differing expectations for revenue growth in 2024. 65% of executives from outperforming companies anticipate growth of 5% or more, while 71% from underperforming companies expect a more modest 1% to 4% growth.
Despite these projections, overall consumer spending is showing signs of moderation. For instance, January 2024 saw a small increase in dollar spending but a slight decline in inflation-adjusted expenditures compared to the previous year. The consumer packaged goods (CPG) industry also reflects these trends, with sustainability becoming a central theme.
Brands are investing in eco-friendly initiatives, such as waterless products and zero-waste efforts, in response to evolving consumer preferences and technological advancements. The global online retail revenue, which was $5.2 trillion in 2022, is expected to reach $6.3 trillion by the end of 2023 and is predicted to hit $8.1 trillion by the end of 2024.
As consumers prioritize value and savings, the retail sector must adapt to these changing behaviors. Companies are encouraged to focus on profitable volume growth, balancing price, volume, and product mix to cater to the discerning shopper looking for more bang for their buck.
With no room left for price increases, CPGs must fundamentally reshape their businesses to reignite profitable, volume-driven growth. They must also ensure they meet the demands of a consumer base that is increasingly critical about off-brand products and looking for ways to stretch their dollars further.
