Cash-strapped consumers adopt the 'trading down' trend

Cash-strapped consumers adopt the 'trading down' trend

Most quarterly earnings seasons have a key theme, a question that crops up in almost every analyst call and press conference. Working from home, re-opening, supply chains, inflation. For a time, it’s all anyone can focus on - until the next buzz word arrives. As the April to June results emerge in the UK, my guess is that we will be hearing a great deal about ‘trading down’. How cash-strapped consumers behave and the winners and losers in a period of penny-pinching will be front of mind.

A recent McKinsey report suggested that British consumers are already reacting to the cost-of-living crisis by changing how they spend. They are cutting back, in both what they buy and where they buy it. They are shifting from supermarkets to discounters, buying more own label products and cutting back on things they don’t need.

The stock market is quick to react to these transitions and the relative performance of companies impacted in different ways by these trends will already be pricing them in. But the penny can be slow to fully drop, so it might not be too late to think about what a period of self-imposed austerity might mean for our investments.

Higher prices have triggered one of the biggest squeezes on UK household incomes since the 1950s. We are seeing one consequence of that in the latest UK rail strike and suggestions of a more widespread European summer of discontent. You can agitate for better pay, but it is uncertain whether you will get it. One thing that squeezed consumers can always do is adapt their behaviour. No surprise then that McKinsey found that two-thirds of UK consumers say they are rethinking how and where they shop.

The consultant found that half of consumers have bought cheaper household products, 40% have downgraded the snacks and frozen food they are buying, with a quarter choosing less fancy bread and other bakery products. The recent fall from grace of Netflix indicates another area in which consumers are economising. There is growing evidence that people are avoiding unnecessary car journeys and thinking twice about renewing warranties.

There are different ways of looking at the trading down phenomenon. One is to consider how people behave when money’s too tight to mention. After the financial crisis, a couple of Harvard Business School professors, John Quelch and Katherine Jocz, identified four consumer segments that respond in different ways to a squeeze in household budgets.

The most vulnerable and financially hardest hit they call the ‘slam on the brakes’ group. These typically lower-income consumers reduce spending across the board, cutting out, postponing or substituting purchases. Mainly poorer people, this group also includes anxious higher-income consumers if they have other worries, like lingering Covid fears.

The ‘pained but patient’ segment realise that this may be a short-term squeeze that will pass in due course. They will cut back a bit, but they can take a longer view because they are relaxed about keeping their job and their overall financial position. This probably represents the majority. The risk is that this group tips over into the brake-slamming category if recession drags on.

‘Comfortably well-off’ describes people in higher salary brackets and retirees with a secure income. They may be a bit less conspicuous about their consumption, but they will carry on pretty much as they did before.

Also unfazed, for a different reason, are the ‘live for today’ segment. Probably younger, often urban renters, almost certainly more interested in experiences than things (other than phones and other gadgets), they will keep spending unless they lose their job.

The second way of analysing the trading down theme is by type of purchase. Here, the key questions are: do people have to buy this; can the purchase be postponed; is it a justifiable if not a necessary expense; or is it an unjustifiable nice-to-have?

In the end it’s about the hierarchy of needs. People will always spend on physical requirements - air, water, food, shelter, clothing; next most important is safety and security - employment, health, property; above these two levels things become much more expendable - love and belonging, esteem and self-actualisation become less of a priority when times are tough.

With a recent Ipsos survey showing that 80pc of US consumers expect to buy more on promotion, shift to cheaper brands buy more own brand lines or simply buy less, we should get ready for these divergent share price trends to continue for the time being.

Tom Stevenson is an investment director at Fidelity International. The views are his own.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

Prior to making an investment decision, retail investors should seek advice from their financial adviser. This document is intended as general information only. Please remember past performance is not a guide to the future. Investors should also obtain and consider the Product Disclosure Statements ("PDS") for the fund(s) mentioned in this document before making any decision about whether to acquire the product. The PDS is available on or can be obtained by contacting Fidelity Australia on 1800 119 270. The relevant Target Market Determination (TMD) is available via This document has been prepared without taking into account your objectives, financial situation or needs. You should consider such matters before acting on the information contained in this document. This document may include general commentary on market activity, industry or sector trends or other broad-based economic or political conditions which should not be construed as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be construed as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity's funds is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. References to ($) are in Australian dollars unless stated otherwise. Details of Fidelity Australia’s provision of financial services to retail clients are set out in our Financial Services Guide, a copy of which can be downloaded from our website.

© 2022 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.


Want more insights like this?

Get our free, monthly e-newsletter bringing you valuable insights, opinion and education.