One of the major media narratives we are seeing, and will see more of if economic conditions deteriorate, is the idea of trading down. Intuitively, this idea makes sense: Shoppers facing either lower disposable income or higher uncertainty over that disposable income will spend it differently. A quick perusal of the headlines will show how every retailer from Walmart to Trader Joe’s to Tiffany will either suffer or profit from this trade-down phenomenon. However, an even quicker common-sense check should lead us to ask whether Tiffany really has the same trade-down dynamic as Walmart and whether different shoppers will respond differently to economic pressure. This is where differentiating between cash flow, income statement, and balance sheet consumers becomes most critical. Because they will “trade” differently during an economic slowdown, they should be marketed to differently. In the case of drastic circumstances, this framework includes a complete downshift into the mindset of the next-most financially distressed segment.
As with the biblical Ten Commandments, if you don’t get the first one right, the other nine lose some of their pertinence. This piece focuses on the first commandment, which discusses how trading down is a more complex problem than it seems, and one that creates opportunities and challenges for retailers and brands depending on the financial circumstances of the consumer.
Cash Flow Consumers: Trading Out
Starting with the most financially distressed segment of the three, cash flow consumers often live paycheck to paycheck, switching to dollar stores and enhancing their prospects by purchasing products at the lowest prices they can find. But 65% of these shoppers can’t even do that when faced with deteriorating financial circumstances, according to data from the Federal Reserve. Reductions to or uncertainty in their disposable income will cause less of a trade-down and more of a trade-out — redefining the nature of essential purchases and deferring anything they can. A 2018 Consumer Reports piece suggests that when the price of a prescription drug goes up, 15% of consumers begin cutting their pills in half without a doctor’s approval. These shoppers aren’t trading down. They’re trading out of their monthly prescription renewal — what most would classify as an essential purchase.
Products that fulfill multiple needs for cash flow consumers become more valuable in trade-out situations. Anyone who has ever seen “My Big Fat Greek Wedding” laughed at that family’s multiple uses for Windex, but household cleaners are a frequent category rationalization as shoppers turn single-purpose cleaning products into multipurpose ones to stretch their dollar. Nice-to-have categories (like conditioner in a hair care regimen) come under pressure as well.
Even a trade-down will be trade-out for some consumers still looking for an affordable luxury. A consumer who used to buy a $4 pint of Ben & Jerry’s may simply trade out of that category to a $1 candy bar. In general, pack downsizing to lower prices is a big piece of the equation as these consumers seek to simply get from pay event to pay event. Marketers in a trade-out world need to make their brands not just loved, but essential to consumers. They must also watch prices in categories with markedly lower-priced substitutions. Retailers can help keep consumers in these replaceable categories through intelligent bundled promotions that reduce the cost of category participation. Trading out doesn’t really help any retailer, and probably hurts dollar stores and Walmart disproportionately.
Income Statement Consumers: Trading Now
Income statement consumers are the ones most people think about intuitively in the trade-down equation. These shoppers live on a budget and channel their anxiety into adapted purchase behavior. However, where cash flow shoppers lack money pure and simple in a downturn, income statement shoppers lose choices. The trade-down phenomenon to observe with these shoppers is trading now — needing to tap into or maximize reserves to meet lumpy high-cost events or, for the one-quarter of these shoppers who have little to no savings, downshifting into behaviors more typical of cash flow shoppers.
One way that income statement consumers trade now is by adopting private label. These shoppers over index on private label relative to the other two segments during good times. Their existing comfort level with these products, combined with a recession strategy of saving money on weekly purchases rather than going without, will increase their private label purchases.
These shoppers may also give up experiential luxuries (more expensive forms of dining out or the annual vacation, for example) along with extraneous subscriptions — what we call being “$9.99’d to death.”
The trade-now implication for marketers is to reassure consumers that they can help make ends meet. A long-term, low-impact price reset, for instance, can have real power for shoppers who are balancing and juggling. Rerunning elasticities versus private label is critical since shoppers’ decision criteria may have changed. Brands that can provide the “same as” equation like private label versus a more premium brand can also do well here. Determine who your most vulnerable higher-priced substitution is and target it to gain share.
Retailers that are a trusted part of the shopper’s value equation should do disproportionately well with trading-now income statement consumers. Low-cost and reliable retailers like Dollar General and Walmart, as well as value-focused regional supermarket chains like H-E-B and ShopRite should benefit from this dynamic. Retailers like T.J. Maxx or Target with more of a treasure hunt proposition will need to lower the prices on their treasures. What’s more, consumers may measure relative value against a need rather than a nice-to-have, meaning a great price on kids’ winter gear may be more valuable than a great price on a new incremental outfit.
Balance Sheet Consumers: Trading Back
Balance sheet consumers are generally less impacted by short-term shifts in the economy, except when asset values are falling steeply. Trading down for these shoppers looks more like trading back — deferring major discretionary purchases and perhaps reframing more high-end luxury experiences more firmly in the middle of the market.
In a downturn, these shoppers lack some of the freedom they had to disregard price when making basic spending choices. Instead, they may turn to formats that help them manage their budget in a premium way. Costco is great example here. And we see the nuance of trading down with retailers like Target and T.J. Maxx that may get hurt by the behavior of income statement shoppers, but that may benefit from balance sheet shoppers trading back into these formats from more expensive competitors. For marketers, changing the message from self-indulgent luxury to something more grounded in performance, well-being, or good decision- making will be a strong emotional bond to those trading back.
Our first commandment — “Thou shalt have no other solution but trading down” — contains several more complex and nuanced consumer/shopper decisions, as well as more decisions and opportunities for marketers, customer teams, and retailers. This recalibration, combined with the other nine commandments, should help marketers and sellers focus their energy more effectively and profitably in the event of an economic slowdown.