America’s pandemic economy: Instant coffee, ketchup, yoga pants
Americans are now shelling out significantly more than a year before for coffee, eggs, sliced ham, ketchup and cheese.
Instant coffee, ketchup, Lululemon yoga pants and Nike Air Max sneakers are all in. Bottled water, pricey diapers and Burberry luxury trench coats are out.
Welcome to America’s pandemic consumer economy. And it is like nothing we have ever seen before.
“Everything we knew about supply and demand, we can essentially throw out the window because consumer behaviour has changed completely,” said Piotr Dworczak, assistant professor of economics at Northwestern University.
A Reuters news agency analysis of a varied basket of goods shows how the COVID-19 crisis has upturned a decades-old consumer model for everything from clothing to food. This has given some companies surprising power to raise prices or withdraw discounts.
Everything we knew about supply and demand, we can essentially throw out the window.
Many of the new trends can be attributed to one factor, according to retail specialists: Working from home.
Americans are now shelling out significantly more than a year before for coffee, eggs, sliced ham, ketchup and cheese, for example, according to the Reuters news analysis of the latest pricing data from Nielsen Co, the Brewers Association and StyleSage Co.
Yet, it is a complex picture, and some of the changes in behaviour seem counterintuitive during a time of deep economic uncertainty.
Demand and prices have also increased for more expensive, or “splurge”, items like $106 men’s Nike Air Max sneakers, $105 Lululemon yoga pants and even a $1,500 Louis Vuitton handbag.
Economists put this apparent discrepancy in behaviour down to the fact that many people, unable to spend outside, have more cash in hand. Even many workers on furlough are receiving jobless benefits that match their wages under a federal stimulus plan.
“If I were to consider the consumer situation right now, in a strange way, they may have more disposable income, if they kept their job,” said Nirupama Rao, an assistant professor of business economics and public policy at the University of Michigan.
‘Unprecedented pressure’
Shoppers paid roughly 8 percent more on average for JM Smucker’s instant coffees, including Folger’s and Dunkin’, at brick-and-mortar stores in the four weeks to August 8 versus a year before, according to Nielsen data analysed by Bernstein.
They shelled out nearly 10 percent more for Kraft Heinz sauces and about 5 percent extra for Tyson Foods’ sliced hams.
Such inflation might make commercial sense, given the bump in demand for home staples. But some consumer experts complain retailers and big brands are cutting back on promotions and using their power to shore up profits during a health crisis that has led to millions losing their livelihoods.
“Brand manufacturers have been fattening their pockets with profits while putting unprecedented pressure on the consumer who has to pay those higher prices,” said Burt Flickinger, retail consultant at Strategic Resource Group.
JM Smucker said it did not raise prices of its instant coffees in the four weeks to August 8, but did cut back on some promotions for in-demand products. Kraft Heinz declined to comment, but said during earnings in July that second-quarter prices went up as it pulled some offers and discounts for scarce products. Tyson did not respond to a request for comment.
Pre-COVID-19, tens of millions of commuters grabbed a coffee-to-go en route to work. Suddenly, instead of 9.1kg (20-pound) bags of coffee for restaurants, or large containers of ketchup, producers have had to switch to smaller, home-use packaging.
Brand manufacturers have been fattening their pockets with profits while putting unprecedented pressure on the consumer who has to pay those higher prices.
As ketchup, mayonnaise and vinegar sales surged, Kraft Heinz diverted resources to running these production lines around the clock, while suspending others. It added extra shifts for factory workers to make grocery-sized bottles.
Egg suppliers, like market leader Cal-Maine Foods Inc, have had to overcome a shortage of cartons.
“If you look at eggs, before they’d be powdered to send to restaurants and now they have to be put in cardboard containers to go to supermarkets,” said Daniel Bachman, senior US economist at Deloitte. “It took a high price to induce the change.”
Yet consumer companies cannot take demand for granted and can be burned by raising prices.
Prices for bottled water and disposable diapers have gone up, while demand has fallen for most of the pandemic. People are unwilling to pay out extra when they can drink their own water at home, and can opt for reusable or cheaper generic diapers at a time when there is a lack of child daycare, some economists say.
“You’re at home anyway so you’re not sending your child off somewhere in a diaper that fails,” said Rao.
A $2,245 coat, anyone?
Lockdowns have meant many Americans do not travel, eat out, or go to movie theatres. As they have not been commuting or taking kids to school, many are using less gas in their cars.
So they can now splash out on other things, perhaps.
Michael Collins, a professor at the University of Wisconsin’s consumer science department, calls this a “substitution effect”.
“It’s pretty clear people behave as if they have different pots of money,” he said. “Now I don’t eat out at all, so I have a couple of hundred dollars of new income not allocated to anything. I can substitute that money away from eating out and treat myself to other things.”
This effect could help explain the rise in demand and prices for the Air Max. Nike sold about 63 percent of their online stocks of the shoes in July, compared with only 10 percent a year earlier, according to apparel data company StyleSage which collects sales information from brand websites.
Air Max prices surged 10.5 percent on average versus a year before.
Prices for Lululemon’s yoga pants rose 7.2 percent, and about 45 percent of stocks were sold in July versus 15 percent the year before.
Meanwhile, the price of a Louis Vuitton’s Neverfull MM Monogram handbag has risen 5 percent on its website since the start of May. In July, Louis Vuitton owner LVMH said sales momentum had picked up since June, even as its star label raised prices for a third time during the pandemic.
There are some limits, though.
Demand for a Burberry woman’s trench coat has declined, with only 3 percent of online stocks sold in July versus 14 percent a year earlier.
It is a snip at $2,245, down 3.5 percent.