Originally printed in the February 2024 issue of Produce Business.

As we look to the year ahead in produce, cautious optimism is warranted. This outlook is being shaped by larger macroeconomic trends that profoundly affect how consumers shop and what they eat, including some important tailwinds that should carry over this year. The labor market is strong, inflation continues to cool, and consumer sentiment is recovering.

However, the industry has headwinds to overcome, too. CPG prices are now 30% higher than they were in pre-pandemic 2019, and wage growth hasn’t kept pace. This has kept many consumers cash-strapped, especially as the cost of consumer credit rises, average savings decline, housing costs and debt increase, and more government stimulus programs sunset.

FOOD AND BEVERAGE OUTPACES THE PACK

Even as budgets tighten for some consumers, especially lower-income households, food and beverage has significantly outperformed more discretionary categories. Circana data shows that volume sales in the category were down 2% vs. year-ago for the 52 weeks ending Sept. 24, with dollar sales up 1%. In contrast, categories including housewares, apparel, toys, juvenile products, and consumer electronics all experienced unit declines between 8% and 11% over the same period.

While budget tightening hasn’t significantly affected food and beverage consumption, it has likely contributed to ongoing food and beverage share shifts away from the grocery channel and to mass and club merchants.

At the same time, the same Circana data showed retail food and beverage spending overall remains strong. The percentage share of food and beverage dollar sales spent at retail is at 60.1%, vs. 39.9% for foodservice. This represents a 4% share gain for retail vs. foodservice over 2019 — and we don’t expect these share numbers to revert to pre-pandemic levels anytime soon.

PROMOTIONAL EFFECTIVENESS DECLINES

What has declined for retail, however, is promotional effectiveness. Food and beverage promotional levels have returned in retail, with frequency and depth now back to 94% of their 2019 levels, and promotional spending on the rise. As promotional investment continues to increase, however, we’re not seeing the volume lifts we once did.

Part of this could be explained by the fact that grocery stores do the most food and beverage promotions, while some of the most price-sensitive shoppers have shifted to value channels. Another likely factor is that cash-strapped shoppers are doing more just-in-time buying. The number of store trips continues to grow, while the number of promotion-propelled pantry-stocking trips, particularly in the grocery channel, continues to decline.

Beyond these considerations is the simple fact that promotions offering a 20% to 30% depth of discount don’t feel like a great price to consumers right now — because they still remember what everything cost before our recent inflationary spike.

All that said, perimeter categories like produce have seen less erosion in promotion effectiveness compared to center-store categories. Promotions will remain an important piece of the produce puzzle moving forward. But these learnings do reinforce that talking about a 30% discount may work better than listing a promotional price — at least until consumers grow accustomed to this new normal instead of level based on their remembrance of prices gone by.

It’s worth noting there’s also a clear bifurcation in consumer food and beverage buying behaviors. While the increased value-seeking behaviors are real, so is the growing demand for produce and other products in the premium and super-premium tiers.

THE FUTURE LOOKS BRIGHT

Circana believes the four major drivers of food and beverage volume will all trend more positively in 2024 vs. 2023. We expect:

• Mobility will continue to increase, albeit at a slower pace than it has over the past year.

• Food and beverage inflation will moderate further from its pandemic peaks.

• Food and beverage promotional investment will continue to tick up slightly.

• The macroeconomic environment will trend positively, with wage growth and income outpacing CPI inflation.

We believe all these factors will combine to create modest volume growth for food and beverage retail in 2024 — the first such volume increase since Q4 2020.

To make the most of opportunities in the year ahead, manufacturers and retailers should focus on three areas:

• Communicating the benefits of their produce products clearly and often — don’t assume they already know.

• Educating shoppers with recipes, suggested food pairings, and ideas on how produce can fit into keto or other diets.

• Promoting produce whenever possible in a way that prioritizes meeting shopper needs for affordability and value.

By following these approaches, the produce industry can make the most of likely economic headwinds and set a course for ongoing volume growth in 2024 and beyond

Sally Lyons Wyatt is Circana‘s global EVP and chief adviser, Consumer Goods and Foodservice Insights. She is a frequent keynote speaker on a multitude of CPG and foodservice topics, and is frequently quoted in national business media outlets. Lyons Wyatt has more than 25 years of industry expertise in partnering with Fortune 500 clients. She leverages Circana data to explore the complexities of consumer behavior and optimize business strategies.