Consumers Price Sensitivity Grows but with an Everyday Focus

A new study by The Nielsen Co. suggests that consumers have become more price sensitive in the recession but that that their cost concerns are selective enough that pressure for broad-based roll backs is not pushing the market toward deflation, at least not yet.

Consumers are looking for price breaks, but where and how they want them differs according to product category and type.

One interesting revelation in the study is that private label products are subject to less price sensitivity than national brands. Consumers who purchase private label products have acted on their price sensitivity, noted Mark Laceky, Nielsen's vice president, North American pricing practice, and aren't immediately looking for additional cost savings. That may well explain the reluctance among retailers including Wal-Mart to start slashing private label prices at a time when they are clearly looking to take market share from national brands. Even retailers who have said they might consider private label price cuts as commodity costs come down after their run up in 2007 and early 2008 have suggested that widespread roll backs aren't what they intend, as is the case with Kroger. Nielsen found that private labels are 30% less price sensitive than national brands.

The Nielsen study looked at 300 grocery and general merchandise items and found that, among national brands, price sensitivity in the recession is focused on frequently purchased product categories such as water, coffee and other everyday beverages, comfort foods including bacon and shelf-stable items including snack bars. Among general merchandise products, air fresheners were particularly price sensitive. Less price-sensitive items tend to have higher prices per unit, longer times between purchases and, in food, fall in the frozen/refrigerated and fresh categories such as eggs and milk.

Nielsen suggested that national brand manufacturers should hold the line on prices where they can, develop plans to rapidly adjust pricing if a category becomes volatile and watch carefully for signs of price erosion.

While the Nielsen study was focused on commonly bought items, it may suggest why some occasional, relatively expensive and, as they are termed, discretionary purchases such as video games have faired well in the recession. To explain the phenomenon, observers have generalized that consumers are willing to spend on affordable luxuries at home to save money on pricey activities outside such as restaurant dining. Yet, the Nielsen study suggests that consumers are engaged in a more specific strategy, looking for everyday bargains to hold down their overall spending and free money for more expensive purchases.

One potential ramification of that strategy is a gradual increase in pressure on the price of everyday items as consumers demand more price cuts to support their already reduced lifestyles. National brand producers could be forced to cut prices as one then another buckle to consumer pressure or as shoppers switch to private labels. It might not happen all at once, but cuts in one category might spread to others, eventually forcing retailers to slash private label prices to maintain their advantage over the national brands. At that point, both national brand and private label producers would be pressuring commodity producers on costs, raising the specter of deflation.

Here's to the arrival of recovery.