Big brands’ sales slumps: Unprecedented times force global F&B giants to rethink approach

27 Aug 2024 --- The reported downturn in figures came one after the other as a slew of brand giants shared their half-year results for 2024. Diageo recorded its first global sales drop since 2020, and Starbucks’ numbers took a tumble as customers shunned high coffee prices, while McDonald’s saw its first decline in 13 quarters.

Elsewhere, Heineken didn’t fare much better, with poor weather and slow sales in China negatively impacting its performance. Meanwhile, Domino’s has promised to offer customers cheaper prices as it downgraded its full-year profit outlook. The message was clear: Something is brewing.

Diageo’s chief executive, Debra Crew, said the company was operating in an “extraordinary consumer environment,” a place where big names that have always had the lion’s share of market sales now need to rethink their strategies to win weary consumer hearts and minds.

The first quarter of 2024 has seen customers scale back their spending dramatically. According to Himanshu Batra, associate director, corporate finance at Grant Thornton UK LLP, this is due to rising inflation and interest rates up until January 2024, which has reduced consumers' ability to spend on luxury and non-essential items.

Decrease in consumer spending

He tells Food Ingredients First: “In the first quarter of 2024, over 50% of consumers scaled back on discretionary spending, with dining out being the most common area where people were cutting back. The combination of rapidly shifting consumer preferences and intensified competition has created a volatile and unpredictable environment.”

“Brands that can swiftly adapt, innovatePeople are eating and drinking outside of home less and cutting back on non-essential spending. and stay in tune with consumer needs and values are better positioned to navigate the challenges and emerge stronger in the long-term.”

We live in a post-COVID-19 world, during which the dichotomy of product shortages and increased demand became the norm. This, combined with high inflation and conflicts breaking out worldwide, like the war in Ukraine, provides the perfect conditions for dwindling consumer spending.

Suppliers, brands, and customers are feeling the impact far and wide, and all the signs show they are fatigued.

Price increases have resulted in “demand destruction,” Batra explains. This is when consumers scale back on non-essential purchases, opting for cheaper alternatives or avoiding specific categories altogether.

“The decline reported in sales for some premium brands highlights this trend, as consumers are likely reducing their consumption of higher-priced goods in favor of more affordable options. This pattern is especially evident in discretionary spending areas, such as eating out,” he says.

According to a recent YouGov survey, around 23% of consumers plan to spend less on food and beverages this year, with the highest cutbacks in France, Australia and Great Britain. Three in ten consumers (30%) plan to spend less than usual on alcohol over a 12-month period, and just over three in ten of those polled (31%) say they would not buy alcohol altogether.

Changing customer habits

Concern in the industry is understandable; there is a lot at stake. The US food and beverage sector is estimated to be worth over US$1 trillion, while food and drink is the UK’s biggest sector by turnover, valued at £104.4 billion (US$135.8 billion), larger than the automotive and aerospace industries combined.

Kara Nielson, food trend expert, tells Food Ingredients First, that consumer habits have changed significantly in the last few years, especially among the younger Gen Z demographic and big brands will have to continue adapting to this.

Consumers often turn to private labels and lower priced items during difficult economic times.

“We’re seeing younger people are really having a second look at drinking [alcohol.] Many of them feel it’s not helpful at all and there’s a lot more choice of beverages, drinks and cans,” she says.

“Prebiotic sodas and hard seltzers are popular among this demographic. Even though hard seltzers are “hard,” they’re lower in the level of alcohol. So I think that’s another thing to keep track of, as Gen Z consumption is very different from that millennial consumption pattern.”

The rise of weight loss drugs

In the US, there is also a growing trend of weight loss drugs like Ozempic, which alter people’s eating habits, leading them to buy fewer unhealthy products.

“Walmart, which has pharmacies as well as grocery stores at its locations, has talked about seeing people buying fewer snacks as a result of these kinds of drugs. They’re making this causality connection. As the use of medication like Ozempic continues to grow, potentially reaching close to 18% of the adult population, these people won’t want to eat fast food, snacks or consume overpriced high-calorie Starbucks drinks, or beer and wine,” adds Nielsen.

But despite difficult market conditions, there is room for optimism, with embryonic signs of an uptick. The Office for National Statistics (ONS) recently reported that UK food inflation had stabilized, with a similar picture emerging in the US. Companies like Ocado have also reported increased sales, which they attribute to competitive price points.

Sign of the times

Economic cycles and the kind of headwinds some companies are currently experiencing could be seen as a natural trend that will eventually subside. Denise van Wijk, principal in Oliver Wyman’s retail and consumer good practice, tells Food Ingredients First that history shows this moment is likely to pass.

Strengthening brand loyalty will be key for companies to ensure their survival.

“Reporting negative year-on-year growth is never a good thing, so brands, of course, need to be cautious. But considering the uncertainty in the market, consumers are contracting their spend – the only thing retailers can do is play into the evolving consumption trends.”

Brands must ensure they meet ever-changing consumer needs to thrive in uncertain times, and van Wijk says she sees many companies doing this. She also expects private labels to continue flourishing as customers seek value for money.

“In times where people need to make hard decisions from a financial perspective, they may increasingly lean toward those alternatives that are very good substitutes to brand names,” adds van Wijk.

Strengthening brand loyalty will be crucial to businesses’ survival.

Batra concludes: “While price sensitivity is a significant factor in the current environment, brands that can offer strong value, maintain consumer trust, and adapt to changing consumer priorities are more likely to weather this period of volatility successfully.”

By Sade Laja

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