Frugality is defined by the Oxford Dictionary as the quality of being economical with money or food and it is often associated with times of economic distress. High frugality may signal that consumers are struggling financially and with affordability. It has important strategic implications for retailers and consumer packaged goods (CPG) companies, impacting their pricing strategies, marketing, promotions, product mixes, and volume expectations. On the other hand, frugality may precede, and with time, contribute to decreased retail food inflation.

The macroeconomic environment is weighing heavily on the South African psyche. Slow economic growth, rising food prices, and retail sales trending downwards continue to dominate the environment.

For ten consecutive months, until a respite in June 2023, interest rates have been rising. The repo rate reached 8.25 percent in June (where it remains) – a high last seen in 2009 during the global financial crisis and persistent inflationary pressures continue. While the Reserve Bank paused the interest rate hikes in July, for the first time since November 2021,  it does not necessarily indicate an end to the hiking cycle.

In South Africa, inflation hits the poorest households (decile 1, spending less than R20,140/annum) hardest due to their disproportionally high spending on food (50%).

(SourceStatsSA)

It is no surprise that consumer confidence is in the doldrums; the FNB/BER Consumer Confidence Index released in June shows that consumer confidence slumped to -25 points, down from -23 points on a quarter-on-quarter review, the second lowest reading since
the dawn of democracy. Aligned to this, Deloitte’s State of the Consumer tracker (South Africa), identifies that personal finances and the direction of the economy are top anxiety drivers for consumers.

Retail sales reflect the country’s mood. The latest available data from Statistics South Africa show that retail trade sales decreased by 1.4 percent year-on-year in May 2023, marking the sixth consecutive month of drops in retail activity. The decline in retail sales is the result of historically high prices reflected in the stubbornly high inflation rate as well as other macroeconomic issues, such as low growth and declining real income, and the prolonged power crisis. The largest negative contributors to the decrease came from general dealers, retailers in food, beverages and tobacco in specialised stores, and all other retailers.

As the cost-of-living spirals, consumers are adapting their shopping behaviour to cope. As mentioned earlier, the Deloitte Food Frugality Index shows that consumers are making several trade-offs in their purchasing decisions when under pressure, and they are also increasingly trying to economise. The trade-offs bucket represents strategies consumers use to keep the cart full and grocery bills down, be it by purchasing lower cost products and ingredients, whereas ‘economise’ refers to behaviours such as only buying what is needed and avoiding waste.

The most frequently utilised strategy by consumers fell into the economise bucket. Rising prices are making consumers more diligent about what ends up in the trash, the Food Frugality Index indicates that this behaviour is persisting, more than half (58%) of respondents surveyed in June 2023 saved by reducing waste at home. While there may be environmental benefits to reducing waste, the desire to reduce waste in this instance is related to economising, and this behaviour could impact the type of products that consumers look to buy. For example, consumers being extra cautious about food waste may choose to buy fewer fresh products and more shelf-stable foods. When shopping for fresh produce, they may likely do so within the strict confines of planned meals and may consider both pricing and portion size at this point. This is a behaviour something that retailers will need to respond to.

Another economising strategy is only buying essentials. In May, more than half of respondents (51%) only bought essentials. However, perhaps the most startling finding is that a third of respondents (35%) said they bought less than they wanted, this behaviour of buying less than wanted goes beyond mere food frugality and could hint at the presence of food insecurity. 

For some consumers, food frugality isn’t just about how much they buy, but what. The Food Frugality Index trade-offs bucket represents strategies consumers use to keep the cart full and grocery bills down. Perhaps not surprisingly, trade-offs often centre around expensive items like meat.

Nearly half of Food Frugality Index respondents (39%) cited switching to  cheaper cuts of meat as a trade-off tactic. More than a third (34%) purchased lower cost ingredients, such as dried beans, rice, and lentils, over more expensive alternatives. High trade-off rates may point to potential opportunities for value priced offerings.

Interestingly a third (32%) of participants surveyed continue to purchase store and private label brands.  Whilst there is some resilience on the part of South African consumers to remain brand loyal, there seems to be a willingness and trend toward adding private label brands into the shopping basket, particularly for certain categories.

Compared to May 2023, there was a slight improvement in sentiment across the trade-offs, possibly buoyed by inflation showing signs of cooling for a second month. Frugality in the survey also dropped below the September 2022 baseline across most underlying behaviours; however, it is important to note that South Africa still ranks the highest for frugality in the survey.

The latest data from the IMF shows that the global economy continues to face persistent challenges. Global growth is projected to fall from an estimated 3.5% in 2022 to 3.0% in 2023 and 2024. The rise in central bank policy interest rates to fight inflation continues to weigh heavily on economic activity.

The IMF expects that South African GDP growth will slow even to 0.3% in 2023 (1.9% in 2022), before picking up to a lacklustre 1.7% in 2024. South Africa continues to face multiple headwinds and although inflation has started to ease, we are not out of the woods, yet.  

(Source IMF)

In this low-growth and high-inflation environment, consumer sentiment is likely to remain subdued. Further, most Food Frugality Index respondents (80%) indicate that they are expecting higher grocery prices in the next month, across major categories.

Consumers in South Africa continue to express financial concern and consumer confidence shows no signs of improvement in the near term. This may translate into weaker spending intentions, which remain subdued and signal caution.

Deloitte’s latest State of the Consumer Tracker (May-Jun 23) shows that total spending intentions, which were tracking in the lower range since December 2021 (bar a peak in July 2022), and were at their lowest rate since September 2022, are showing some signs of improvement.  

However, with consumers facing ongoing pressure, and persistently high interest rates adding to this, spending intentions for most of the non-essentials are likely to remain on a downward trend. Already consumers are cutting back on purchasing items such as electronics (4%), eating out at restaurants (4%), and buying everyday household goods (5%) to make it through the month.

In this lacklustre environment, retailers and suppliers will need to continue to manage their costs tightly and operational considerations would benefit by taking into account the heightened frugal behaviours of stressed consumers. As such, an opportunity exists for retailers to show consumers how they are trying to share the burden of rising prices through discounting, this may translate into consumer loyalty in the long run, and in doing so benefit the retailer. 

With inflation cooling there is a glimmer of hope on the horizon, however, the road ahead remains challenging and somewhat unpredictable. Retail sales still face a long path to recovery however, history shows that events like pandemics and inflation spikes will pass. But what is more difficult to predict is how long consumers will continue with their frugality behaviours and what it will take to improve sentiment.