11 Jul 2022 4 min read

Cost of living crisis: what it means for essential spending

By Ilana Elbim

As consumers feel the pinch amid the highest rates of inflation for decades, LGIM's Consumer Global Research and Engagement Group (GREG) members gathered to share their views on what we can expect in the months ahead. This series of blogs will summarise the conclusions from our debate, starting with the outlook for essential spending.


‘The crunch is not going to be now, it is going to be in the autumn after people have come back from their holidays, spent their money and there is nothing left in the kitty.’

This May statement from Marks & Spencer chairman Archie Norman encapsulates the zeitgeist: we may not have seen big changes in consumer habits just yet, but the temperature inside the pressure cooker is rising fast.

Below are our key insights from the latest quarterly updates of food suppliers and retailers in both Europe and the US. 

Europe: hard discounters stand to gain as inflation bites

Cost inflation, pricing power and volume elasticity (meaning how much volumes are impacted by pricing) were the key topics discussed in the first-quarter earnings season of European-based food suppliers and retailers. The key messages included:

  1. Most companies reported very robust performance in the first quarter, with strong pricing and volumes not (or barely) impacted so far, supported by innovation and premiumisation
  2. Cost pressure will intensify in the second half of the year, with most suppliers guiding for higher cost pressure than initially expected when they reported their full-year results in February
  3. Pricing and cost-cutting initiatives will remain the main ways of mitigating cost pressures, but using them will become increasingly complicated

The focus for food retailers is unchanged: market share and protecting customers’ purchasing power with low prices in stores. The competitive environment remains rational, and all players are actively monitoring what others are doing in terms of pricing to match hard discounters as fast as possible. 

On customer behaviour, apart from Tesco very recently, food retailers said they haven’t noticed a change yet: no downtrading; no faster shift towards private label; and continued high demand for healthy, premium products. But there are a lot of uncertainties about how customers will react to inflation. All suppliers said pricing will continue to increase, and pressure from higher utility bills on customers’ wallets could lead to a shift to hard discounters. Retailers emphasised their own brands and their in-store and multi-channel offerings as important ways to meet customers’ evolving needs.

In this environment, suppliers will see their margins impacted while having to invest, while retailers must remain agile and rational when it comes to pricing. Suppliers with the ability to innovate, premiumisation capabilities and exposure to low-elasticity products could be better placed to outperform. Retailers with scale and a strong private label offering could also do well.

US: consumers beginning to trade down

In the US, companies have seen varied responses from inflation-hit consumers. Several management teams nonetheless reiterated their ability to pass costs on to consumers, with elasticities remaining constant quarter-on-quarter.

Released in April, Procter & Gamble’s third-quarter results showed 10% organic sales growth. The company has yet to see any reduction in elasticities, which are currently 20-30% higher than historic levels. Contrary to what one might expect, Procter & Gamble has continued to see consumers trade into brands and trade up to premium products.

Kraft Heinz also reported its quarterly results in April and reaffirmed its financial year earnings guidance of $5.8-$6 billion despite the tougher cost of goods sold backdrop, which it now projects to be in the mid-teens versus low teens previously. It has already announced price actions that will start to take effect in the second quarter and did not rule out further moves. The company expects headwinds in volume and mix and is assuming conservative levels of consumption as stimulus and government support fades.

In contrast, Walmart’s May earnings update saw a large earnings per share miss that led to a share-price fall of almost 20%. The miss was largely driven by rapidly rising fuel costs, scheduling inefficiencies and higher supply chain costs. The US gross margin was down 38 basis points, driven by higher-than-expected supply chain and fulfilment costs. Management has reiterated their focus on affordability as consumers begin to trade down to private-label products, especially in categories such as deli and dairy products.

So, while lower prices exert a certain pull, across the board, the picture is uneven, and not everyone is scaling down just yet.


In part two of this blog series, we will examine the impact of the cost of living crisis on discretionary spending, focusing on the leisure, lodging and airlines sectors.

Ilana Elbim

Senior Credit Analyst

Ilana is responsible for LGIM's consumer and retail sector credit coverage for euro, sterling, emerging markets and global credit portfolios. Ilana joined LGIM in 2021 from Federated Hermes where she held the title of Senior Credit Analyst. During her five years there, she covered various global investment grade and high yield sectors including consumer, retail, automotive, and gaming. Prior to that, she was a consumer and retail analyst at Fitch Ratings for three years. Ilana graduated from ESCP Europe and achieved a Specialized Master in Finance degree. She has also passed the CFA Certificate in ESG investing.

Ilana Elbim