Budget-conscious consumers and the implications for the dairy industry

In 2023, a key trend impacting many regions and industries, including dairy, is ‘budgeteers’.

Inflation, economic uncertainty, higher interest rates and increasing mortgage and rental costs are forcing consumers to think carefully about how they spend and save, channeling behaviours learned during the pandemic. Consumers are once again feeling uncertain about the future and are reacting in different ways. Some consumers are budgeting to live well, trading down on everyday goods to spend occasionally on accessible luxuries; many others are budgeting out of necessity and are struggling.

Euromonitor anticipates that consumers will move to cheaper brands, private label products and discount channels to spend less on everyday necessities. Therefore, brands should be both providing more affordable options, whilst expanding their product ranges to target different consumer groups. Highlighting the value of existing products will also be key, as many consumers will remain willing to spend if they feel it is worth it.

Source: Euromonitor International Voice of the Consumer: Lifestyles Survey, 2022

Within the dairy market, this is playing out in a number of ways.

Pricing and private label products

Supply and production issues, as well as the strong US dollar, has distorted milk prices globally. Prices have risen and peaked at different times in different regions, leading to high market volatility and different reactions from retailers and brand owners¹. In the UK, retailer Asda took the unusual step of adding security tags to butter and cheese packets due to high prices² and in Germany, discounter Aldi instigated price wars for butter, as butter prices fell dramatically in the 6 months from September 2022³.

Private label products are performing well in the United States, with both Walmart and Kroger reporting strong growth in 2022⁴.

Milk, butter and cheese are seen as commodity products by consumers, where private label is of high-quality and can therefore compete with branded alternatives. This provides a unique opportunity for suppliers of private label products, while branded products need to communicate their value and their story to keep consumers engaged.

Changes in pack types

Shrinkflation – the practice of reducing the size of the product whilst maintaining its price - is a common and often controversial reaction to price pressures. In Germany, Upfield has kept the same packaging size for its Rama brand of spreadable fats but has reduced the contents from 500g to 400g⁵.

In Latin America, the region with the highest inflation, under-pressure consumers in Ecuador are shifting from UHT milk products packaged in tetrabrik to funda plastic bags, which have a lower shelf-life but are cheaper⁶. In Colombia, Campi launched a new creamier margarine product in a stand-up pouch which is more affordable than other packaging formats⁷.

In the UAE, anecdotally our analysts report that milk formula packaging has become lighter and less sturdy. Therefore, it is likely that some manufacturers are reducing the quality of their packaging to protect their profit margins as they feel they cannot cut the quality of their products or ingredients to achieve this.

Packaging is a key area where brands can cut costs without changing the core value of their products. However, brands need to be mindful of creating the wrong impression amongst consumers.

Adding value and widening portfolios

As well as swallowing costs on regular products, manufacturers are looking for strategies to add value to their portfolio in a clear and meaningful way to justify higher prices. In Argentina, Danone widened its dairy portfolio, launching products under the brand La Serenisima Clasico, which were positioned at a lower price segment than its established brands; Yogurisimo (yoghurt) and Casacrem (spreadable cheese)⁸.

In India, Parle Smoodh saw great success when launching smaller, value for money packs of 85ml compared to the more usual 180-200ml packs, targeting children, especially in rural areas⁹. Whereas in Brazil, larger 1kg pack sizes of margarine were made available by Clayboom, Qualy and Delicia through the cash and carry channel.

This demonstrates the value for brands in widening one’s potential consumer base through a strategy of more packaging formats and more affordable alternatives.

Communicating value to remain relevant

As consumers struggle with higher prices and constraints on spending, and businesses feel the crunch of higher costs and shrinking profit margins, it is safe to assume that 2023/2024 will have its fair share of challenges. Therefore, communicating value will become even more important for brands. Consumers remain willing to pay for products they can both afford and that add value to their lives, and brands that communicate their value can find ways to stand out and remain relevant.

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The views expressed above are the opinion of the author, not those of Fonterra, and Fonterra is not responsible for any decisions taken in reliance on the same.