In the early years of my nearly two decades working at The Packer, a recurring story line in our Know Your Market sections was the fate of the middle market.
The terminal/wholesale market was feeling the effect of changes in how the buyers — whether grocery or foodservice — sourced produce.
Many adapted to the changing buyer landscape by offering new services such as fresh-cut fruits or vegetables or custom packaging or repacking.
The growth in “ethnic” (more specifically, Asian or Latino) markets also started to rapidly expand in many areas at that time, making up an increasing share of the small grocery and restaurant business that the middle market segment had long served.
But since the Great Recession landed on the U.S. economy like a boulder on a box of brown bananas, another more far-reaching middle market is struggling to remain relevant.
The U.S. middle class mass market that has served as the juiciest target for marketers since the post War World II boom is showing its age.
In response, more marketers are setting their sights at the highest income brackets, or, conversely, low-income deep discount shoppers.
A recent front-page report in The Wall Street Journal detailed what it described as the two-tier economy reshaping the U.S. market.
According to the article, the wealthiest 5% of U.S. households account for a bigger percentage of consumer spending than ever.
Those households (bringing in at least $196,000 annually, according to 2013 data from the U.S. Census Bureau) made up nearly 30% of consumer spending in 2012, a 12% increase since 2009, according to the Journal. Spending for all other households fell by 1% during the same time period.
The wealthiest 5% of households made up about 30% of consumer spending in 2012, the article says, up from 23% in 1992.
While the report centered largely on the housing and mortgage markets, it also briefly mentioned how income trends affect the grocery market.
It’s not news to most suppliers that since the recession hit a little more than six years ago many consumers have switched to economy brands.
At the upscale end of the retail market, Whole Foods Market Inc. reported record sales per gross-square-foot last year, according to the article.
But much like the rest of the middle market, mid-tier grocery chains are struggling.
Safeway Inc., the second-largest U.S. supermarket chain, was purchased last year by a private equity group that also owns No. 5 U.S. grocer Albertsons, with company officials saying the deal aims to reduce costs — and prices for shoppers — in a bid to compete with discounters and high-end stores.
Even the almighty Wal-Mart appears to be losing some of its mojo.
In mid-2014, seemingly unstoppable Wal-Mart’s traditional supercenter business model struggled with declines in same-store sales as it attempted to craft a strategy to adapt to new competition from online, specialty and local retailers.
Perhaps it’s telling that on the same front page as the Journal’s article chronicling the emergence of the high-low marketplace appeared another report about mass-market fast feeder McDonald’s letting go its CEO after two years of declining sales.
Among the reasons cited for the burger giant’s sales slump was competition from boutique burger upstarts like Shake Shack.
If Wal-Mart and McDonald’s are feeling squeezed, it’s a safe bet most consumers are. Even some in the spendy top 5% are tempering their purchasing decisions with some caution, comparison shopping and product substitution.
So what does the shifting lay of the consumer landscape mean for produce suppliers?
University of California-Davis researcher Roberta Cook first offered these insights in a 2013 marketing study and updated the information last summer:
- The economic downturn has had a major effect on the food marketing system. More than originating new trends, it intensified pre-existing forces driving greater competition at all levels of the food system, such as channel blurring and margin pressure.
- This means suppliers face more pressure than ever to increase productivity and efficiency in order to remain profitable on lower net margins.
- This comes at a time when supplier costs are growing due to food safety, traceability and sustainability expectations.
Cook’s research had this to say about consumer behavior:
- Consumption rates of fresh produce increase markedly with income level. So, more lower-income people means a challenging environment for the produce industry.
- 48 million Americans (nearly one in seven) received food stamps (SNAP) in 2012 versus 17.3 million in 2000.
With national unemployment down in the 5% range, a brighter consumer outlook is likely to follow.
But the Great Recession could prove to have a lasting generational effect on consumer behavior not unlike the Great Depression did last century.
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