3 Industries in Which the ‘Trade Down’ is Real

October 20, 2022

As NFL teams trade down to get draft capital, American households are opting for lower-priced goods to save money.

With inflation as stubborn as a mule, we are seeing more pronounced effects on consumers’ purchase decisions in several areas.

From grocery stores to liquor stores, recent headlines show that consumers are fed up with high prices everywhere—and seeking out cheaper alternatives to their usual draft picks.

The so-called ‘trade down’ isn’t cut and dry. We see two main trends:

  1. Affluent consumers virtually immune to inflation continue to spend on luxury items, and
  2. Some industries are seeing are experiencing the ‘down draft’ more than others.
The trade-down economy is benefitting certain value-centric companies at the ‘expense’ of less budget-friendly competitors. Brands that offer more bang for the buck are winning. 

And with the Fed bracing for a lengthy rate hike battle and recession probabilities rising, these bargain businesses could be stealing market share for months to come… 

1. Fast-Food Restaurants 

An early summer survey found that 1 in 3 consumers are choosing less costly restaurants and meals to offset higher prices. Heading into the fall, LikeFolio data suggests that trend has accelerated.

As more families feel the pinch, eating out is still a thing, just less so at ‘sit-down’ establishments.

Eye-popping checks are creating alligator arms and causing diners to second-guess where they go. Toss in the server tip and a dinner at Olive Garden or Outback Steakhouse is leaving diners feeling bloated—and not just from the all-you-can-eat breadsticks and bottomless nachos!

This is playing right into the hands of fast-food chains. Consumer mentions of hitting a fast-food restaurant are up 20% YoY on a 30-day average.

McDonald's says consumers are handling restaurant inflation in one of two ways.

  1. Shunning the combo meals and hopping over to the value menu, and
  2. Trading down from full-service or fast-casual chains
The CEO at Burger King's parent company, Restaurant Brands International, recently brought up the possibility that expensive grocery store prices are moving food spending from the supermarket to fast food.

Regardless of the reason, the buzz around fast-food joints is heating up like a fresh batch of fries. McDonald's and Jack in the Box mentions are up +17% YoY and +16% YoY, respectively.

Jack in the Box isn’t just benefitting from greater demand for sourdough burgers. It is now cranking out affordable tacos and burritos after wrapping up the acquisition of the popular Mexican food chain Del Taco.

The pricier Shake Shack is also attracting more buzz these days. The higher-end burger joint is still less expensive than many alternatives.

At the other end of the spectrum, full-service and premium fast-casual restaurants are falling behind. You know budgets are getting squeezed when Denny’s demand starts to slip.

A sharp slowdown in sales growth at Bloomin' Brands and LikeFolio data reveals that places like Outback Steakhouse and Bonefish Grill are off the menu for more households.

Comprehensive demand for Chipotle is fading as well. CEO Brian Niccol recently stated, “The low-income consumer definitely has pulled back their purchase frequency” but asserted that “the majority of our customers are a higher household income consumer”.

Yes, Chipotle’s customer base is less price sensitive. But after hiking menu prices by 4% to cover higher input costs, there may be cracks forming in the burrito bowl. Consumers (of all income levels) are discussing Chipotle less often these days with mentions down -27% YoY.

Are loyal Chipotle customers sour about paying up for sour-cream-laden quesadillas? Are they switching to Taco Bell and Del Taco?

Keenly aware of the pain lower-income families are feeling, fast-food restaurants are adjusting their playbooks to stay ahead. Menus and portions are getting trimmed and digital channels are promoted. Yes, prices are being raised too, but not by much. Some examples:

  • Burger King ditched the Whopper and made the 10-piece nugget item an 8-piecer.
  • Domino’s Pizza is pushing a $7.99 carry-out deal to avoid delivery costs
  • McDonald’s has its $1, $2, and $3 menu and continues to promote its app and rewards program to drive digital sales (which are now one-third of total sales)
When it comes to these types of moves, budget-conscious consumers are ‘lovin’ it’. 

2. Deep Discount Retailers 

We are also seeing some interesting developments in the retail space.

Differentiated discount names are separating themselves from the pack.

Purchase Intent mentions are up more than 30% YoY at both Ollie’s Bargain Outlet and Five Below. When we plot this with consumer happiness, our outlier grid shows a sizeable gap between these companies and the big box stores and warehouse clubs.

The dollar stores presumably get a lot of attention in a trade-down economy, but for now, they are hanging out with the rest of the competition. Dollar Tree’s abandonment of the $1 price tag could be turning shoppers off. And Dollar General has always sold stuff for well above a buck, so to see it losing steam in this environment is no surprise.

But why Ollie’s and Five Below? For starters, both offer a unique, no-frills retail experience. Second, consumers are more focused on buying just the essentials.

PYMNTS’ recent Consumer Inflation Sentiment study found that 7 out of 10 consumers are paring back nonessential retail spending. Roughly half have switched to cheaper merchants.

Great news for a closeout retailer like Ollie’s. Yes, it sells its share of books, toys, and other discretionary items. But it also sells a ton of brand-name household essentials at dirt-cheap prices.

Five Below caters to teens and young parents that often have lower incomes and find the $1 to $5 price range a great fit (especially when a gallon of gas isn’t much below $5). It also sells ‘extreme value’ merchandise priced above $5 like headphones and college dorm room essentials.
The retail industry will be an intriguing one to watch as we enter the holiday season. Social media chatter reveals that shoppers are more selective these days. This has translated to overstock and inventory headaches at places like Target.

Despite holiday deals being rolled out earlier than ever this year, demand at Target and Walmart is flat YoY.

Warehouse clubs are also drawing less of a crowd as consumers shift from bulk order habits to smaller purchases to help stave off inflation. Purchase Intent at Costco and BJ’s Wholesale are trending slightly lower.

Demand for expensive electronics and other gifts will likely be down in an inflationary economy. Ditto for holiday decorations and wrapping paper. 

Advantage: ‘Low ticket’ discount retailers.

We expect to learn much about the state of the consumer this holiday season. Retailers like Five Below and Ollie’s may not just be quick stops for stocking stuffers. Brand name and private label goods priced at or below the big guys could make them big trade-down winners. 

3. Low Fare Airlines 

If only airline ticket prices fell as fast as the leaves this time of year.

Pent-up travel demand, pilot shortages, and higher fuel costs have made it impractical for airlines to keep fares grounded.

Some Wall Street firms expect we’ll see a trade down to ‘ultra-low-cost carriers’ heading into the holiday season.

If true, this puts the lowest-fare airlines in a position to take share as strapped consumers seek out the cheapest flights.

One company to keep an eye on is Allegiant Travel (ALGT). Its base airfares are less than half the cost of the average domestic roundtrip ticket. Passenger volume was up 11% over 2019 levels in August 2022.

The Las Vegas-based airline shuttles travelers to and from smaller cities as well as larger vacation destinations via nonstop flights. Low fares and the convenience of no connections is a winning formula for the modern consumer. With deals like 40% off air and travel packages to Universal Orlando Resort, it’s no wonder ALGT PI mentions are up +43% YoY.

The low-fare trade down isn’t just taking off here in the States. Ryanair, Europe’s largest passenger airline, said it hopes to return to pre-pandemic profitability this year because of the traveler trade down. The CEO expects Ryanair’s average fares to be up 3-4% in 2022 but noted:

“There’s every risk the economic situation this winter will cause people to fly less, but they won’t cut flying altogether.”

So, with fare hikes inevitable industry-wide, the airlines attracting customers are those that 1) had lower fares to begin with and/or 2) are hiking by less.

Back at home, Jet Blue looks to be a beneficiary. Revenue jumped 16% last quarter as a record number of customers were served. Jet Blue PI mentions are up +16% YoY.

And with the turbulent Spirit Airlines takeover saga finally over, the Jet Blue-Spirit combo is a formidable low-fare challenger to the Big Four. The $3.8 billion merger gives Jet Blue a 458 aircraft fleet, a 77 million customer base, and a strengthened presence in key travel hubs like Los Angeles, Fort Lauderdale, and San Juan.

LikeFolio data suggests that the discount challengers are already taking business from the big dogs. Consumer discussions around booking a Delta, American, or United flight are all down YoY.

Frankly, most people don’t care how they get from point A to point B, especially with traditional airline perks few and far between nowadays. And with baggage fees crazy, low ticket prices are really all that matters!

Bottom line: Inflation is impacting consumer decisions like never before in the post-pandemic economy. Shoppers are becoming indifferent to brand and in some cases quality to stay afloat. Businesses that adjust their models to appeal to value-minded consumers will be the biggest winners as the trade down unfolds.

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