Inflation has taken center stage over the past few months. With the current price hikes affecting daily spending, shoppers are increasingly considering "trading down" – substituting their regular brands with lower-priced alternatives. But while some retailers are feeling the crunch, other brands are finding ways to thrive despite the wider economic headwinds.
While some retailers are feeling the crunch, other brands are finding ways to thrive despite the wider economic headwinds.
Overall, foot traffic data indicates that brick and mortar retail is once again demonstrating its resilience in the face of challenges. Unsurprisingly, segments that emphasize their value-pricing or market are seeing the most success – but even within these well-positioned segments, certain brands are pulling ahead of the pack.
This white paper analyzes retail leaders in various categories that are continuing to attract consumers – and even grow their visitor base – despite the wider economic uncertainty. Some dollar and discount brands have expanded at just the right time, while one off-price apparel retailer is growing significantly faster than the wider apparel sector. A fast food giant is reaping the benefits of consumers’ bargain-seeking, and a beauty leader is drawing on its merchandising strategy to beat inflation. The six brands featured in this report demonstrate, each in its own way, that consumers will continue visiting retailers that provide real value despite tightening budgets.
Although consumers are adopting a more value-conscious behavior, foot traffic data indicates that the true state of retail is not as bleak as may be expected. A recent Mastercard report revealed that retail spending grew 11.7% year-over-year (YoY) as of July 2022 – significantly more than July’s 8.5% YoY inflation rate, indicating that the increase in retail spending is not just due to higher consumer prices.
And while year-over-year (YoY) retail visits over the summer were down slightly due to the difficult comparison to a strong 2021 back to school season, year-over-three-year (Yo3Y) monthly visits indicate a positive trend. For half the months between January and August 2022, nationwide retail visits were higher than in the equivalent months in 2019, and only two months showed clear Yo3Y declines. So while consumers may be looking to stretch their budgets, the retail sector is still in relatively good health.
While consumers may be trading down and looking for ways to stretch their budgets, the wider retail sector is still in relatively good health.
The discount and dollar store sector outperformed several comparable retail categories throughout the pandemic, and that momentum is now ramping up even further as more shoppers are now considering low-cost options.
The success of the category has led to significant expansions for Dollar General, Dollar Tree, and Five Below in recent years– just in time to cater to the increasing number of customers now looking to save on groceries and basic household items.
The expansions led to significant Yo3Y growth – and monthly foot traffic to the discount and dollar store sector has continued to significantly outperform other retail segments such as grocery stores and superstores on a YoY basis.
In August 2022, discount and dollar store visits remained on par with last year’s August foot traffic, posting only a 0.7% decrease despite the comparisons to a particularly strong summer 2021. Meanwhile, that same month, YoY foot traffic to grocery and superstores dropped 6.2% and 5.2%, respectively.
Monthly foot traffic to discount and dollar stores has continued to significantly outperform other retail segments such as grocery stores and superstores.
Dollar and discount stores’ expansion success highlights the value of low-cost brands in the current retail climate – but diving into the data shows that the category’s success is not just due to an increase in store count. Analyzing overall monthly visitors (how many unique visitors visit a chain’s stores) and visits per venue (how many visits each location receives on average) showcases just how popular Five Below and Dollar General are right now.
For both brands, monthly visits per venue and overall visitor count have exceeded 2019 levels every month since the start of 2022. The increase in visits per venue means that Five Below and Dollar General’s expansion has not led to demonstrable cannibalization, while the increase in visitors shows that the expansion is allowing Dollar General and Five Below to reach a wider audience.
Both Five Below and Dollar General announced their physical growth plan long before anyone knew that inflation – or COVID – would have such a dramatic impact on brick-and-mortar consumer behavior. But the timing of the expansion has been impeccable, and both brands are now well positioned to reach old and new customers looking for bargains.
QSR has been attracting consumers looking to trade down since the mid-March jump in fuel prices. And recent data indicates that the category is still performing well, with one brand in particular seeing impressive growth.
Value-priced fast food chains typically fare well during economic downturns. And with grocery costs rising faster than restaurant prices, some consumers may be turning to QSR as an increasingly budget-friendly alternative to eating at home. But while QSR may be doing better than full-service restaurants, McDonald’s is emerging as a clear inflation winner within the QSR space.
The company was a major winner during the 2008 recession, and the current inflation is giving the chain’s nationwide foot traffic a similar boost. In April 2022 – as inflation-related headlines became increasingly prominent – McDonald’s ended its negative Yo3Y visit streak, and between April and August 2022 nationwide visits consistently outpaced 2019 levels. In August 2022, McDonald’s Yo3Y monthly visits were up 3.1%, while the overall fast food & QSR space saw a 6.9% decrease.
McDonald’s has increased its prices somewhat to cope with the rising cost of goods, and the chain has announced plans to customize its value offers based on regionality. Still, the QSR giant is significantly more affordable than most sit-down restaurants – and its low prices may be attracting diners looking to trade down.
Some current McDonald’s consumers are coming to the chain in search of more affordable fare than that typically found at full-service restaurants. Others are trading down within the McDonald’s menu – in July, McDonald’s then-CFO Kevin Ozan stated that some diners were now purchasing cheaper options or ordering fewer combo meals. Thanks to the brand’s plentiful value-priced options, McDonald's is well positioned to meet the needs of a wide spectrum of consumers looking to make a more fiscally responsible dining choice.
Thanks to the brand’s plentiful value-priced options, McDonald's is well positioned to meet the needs of a wide spectrum of consumers.
The increase in grocery prices are not just pushing consumers to replace their home cooked lunch or dinner with fast food. Recent foot traffic data McDonald’s breakfast visits – the percentage of visits to McDonald’s between 5 AM and 11 AM out of total daily visits – are also on the rise. In January 2022, only 16.2% of daily visits to McDonald’s occurred between 5 AM and 11 AM. But by August 2022, that percentage had climbed to 17.7% – a 1.5% increase.
While some of the increase may be due to the slow but steady workplace recovery, inflation is likely also playing a role. By some estimates, egg prices surged 46.8% between July 2021 and July 2022, while retail bacon prices jumped over 30%, on average, between July 2020 and July 2022. Since breakfast is becoming increasingly expensive to prepare at home – and the meal is also often relatively cheap to consume outside the home – the rising retail costs of breakfast foods may be pushing more consumers to visit McDonald’s for the most important meal of the day.
The rising retail costs of breakfast foods may be driving more consumers to McDonald’s for the most important meal of the day.
With grocery prices still high despite the slow-down in inflation, QSR brands will likely continue to attract consumers looking for an affordable luxury amidst the challenging economic reality.
The off-price apparel segment saw impressive growth over the pandemic even as the overall apparel category struggled. And within the off-price space, Citi Trends is pulling ahead of the pack.
Citi Trends owes much of its success to an aggressive expansion and remodeling strategy. In 2021 the chain opened 27 new stores and remodeled 25 others, and in 2022, Citi Trends plans for approximately 15 new stores and 50 remodels – just in time to serve the increasing number of customers looking to save on apparel, accessories, and home goods. And although the off-price space is relatively crowded, the brand has opened new stores in areas underserved by other off-price retailers, which means that Citi Trends stores may be facing less competition than their peers.
The company’s expansion has also helped Citi Trends cultivate customer loyalty – according to Citi Trends CEO David Makuen, 70% of stores serve as “represent the primary neighborhood destination for apparel, non-apparel, and home needs” for its customers, with 50% of Citi Trends shoppers live within three miles of the store. Although fuel prices have come down from their spring and summer peaks, some consumers are still cutting back on driving – so a neighborhood off-price apparel store seems particularly well positioned to thrive in this current climate.
Citi Trends, a neighborhood off-price apparel store, seems particularly well positioned to thrive in this current climate.
Like for McDonald’s, data for Citi Trends indicates that the company’s visits pulled ahead of the wider category foot traffic in April 2022, when inflation-related headlines became increasingly frequent. In August 2022, YoY visits for Citi Trends were up 6.5%, while YoY foot traffic to the off-price category as a whole was down 7.9%.
One surprising aspect of Citi Trends’ current success is that, although the company is growing faster than its off-price peers, it caters to a significantly lower-income population that has been disproportionately impacted by inflation. Citi Trends’ success demonstrates that even companies targeting low-income populations can thrive in inflationary times – so long as these retailers offer real value to their customers.
Ulta has seen immense growth over the past few years, with over 1,300 stores across the U.S. as of January 2022. Now, the lipstick effect along with the brand’s ability to cater to a wide array of consumer incomes appears to be boosting visits to the beauty leader even further.
Ulta’s brick-and-mortar channels have been on a strong growth trajectory since the beginning of the offline retail recovery in spring 2021, and inflation doesn’t seem to be impacting the company’s nationwide success.
In Q2 2022, Yo3Y nationwide visits to the brand were up 27.9%, on average, with the brand seeing foot traffic growth from Colorado to Texas to Illinois and Yo3Y increases as high as 41.9% in New York and 43.5% in North Carolina.
One key to Ulta’s success is the brand’s strategy of housing both affordable drugstore makeup brands such as e.l.f. Cosmetics and luxury lines like Chanel under one roof.
Ulta’s consumer demographics vary quite significantly by region – so offering a broad spectrum of beauty products at different price points means that Ulta can adjust the merchandise selection in each store based on local shopping habits.
Offering a range of price points means that Ulta can adapt the merchandise selection to local shopping habits.
As a result, in Q2 2022, Ulta has grown its presence in states such as Florida, where the median HHI in the trade areas of Ulta stores was approximately $57.5K, while also seeing success in Illinois, where the median trade area HHI reached apx. $71.7K.
Now, Ulta can draw on its varied product mix and adjust its in-store merchandise to continue attracting consumers in times of inflation. Shoppers can enjoy a high-end shopping experience while picking up more budget-accessible items – and Ulta’s varied product mix means that consumers looking to save can trade down without leaving the Ulta ecosystem.
Ulta’s varied product mix means that consumers looking to save can trade down without leaving the Ulta ecosystem.
Ulta (like fellow brand beating inflation Dollar General) is also one of the latest companies to jump on the retail media bandwagon, unveiling UB Media in May 2022 with the goal of leveraging its consumer data to efficiently target ads. As of now, the network is online only. But Ulta is constantly innovating in its brick and mortar channels – as demonstrated by the company piloting a new store format – so the company may well expand its retail media network in-store.
Given Ulta’s success in appealing to a wide variety of consumers, advertising partners may want to tap into UB Media to reach consumers that are still engaging in discretionary spending despite the ongoing inflationary pressures.
Following its pandemic difficulties, the offline fitness category grew rapidly in 2022 – and low-cost fitness chains are leading the surge.
While the onset of the fitness recovery can be traced back to late 2021, the recent inflation seems to have given visits to the category a major boost. In August 2022, nationwide fitness visits were up 22.8% relative to August 2019.
As consumers cut back on entertainment, gyms offer an opportunity to engage in affordable and productive leisure activities.
Many gyms require a year-long commitment, which means that customers that joined gyms in early 2022 may feel increased pressure to actually go workout in order to justify the monthly expense. And as inflation-strapped consumers cut back on entertainment expenses, gyms offer members an opportunity to blow off steam while engaging in affordable and productive leisure activities.
Planet Fitness’ value-priced option has remained one of the few constants at a time when prices for everything from used cars to dental services. Although the company has increased the price of its “Black Card” premium package, the chain still offers the same $10/month membership option it offered back in 2012. And in April and July 2022, Planet Fitness announced promotions offering commitment-free memberships, which may be particularly attractive during these times of economic uncertainty.
Foot traffic data indicates that Planet Fitness’ budget-friendly pricing strategy is helping the chain pull ahead of the pack. Visits to the chain increased by 49.0% between November 2021 and August 2022, compared to a 39.0% increase during the same period for the fitness category as a whole.
The success of the fitness space in general, and of Planet Fitness in particular, suggests two insights. First, the COVID-induced interest for health and wellness products and services is still high. Second, consumers are still ready and able to spend on recreation – as long as the price tag isn’t too steep.
Consumers are still ready and able to spend on recreation – as long as the price tag isn’t too steep.
The past few years have been particularly eventful, and the brick and mortar retail space has felt the impact. Following an impressive post-lockdown comeback in the second half of 2021, Omicron brought visits down again in early 2022. Then, just as the retail space was beginning to rally, the double blow of high gas prices and inflation sent retailers scrambling once more.
But the brick and mortar retail space is now demonstrating its resilience once more. From Dollar General and Five Below expanding just in time to welcome consumers looking to trade down to McDonald’s and Ulta offering differently-priced products for every budget, these inflation winners demonstrate that, with the right strategy, companies can thrive even during challenging economic times.
The wider retail sector is still in relatively good health, with nationwide retail visits in July 2022 higher than in the equivalent month in 2019. So while consumers may be trading down and looking for ways to stretch their budgets, foot traffic data indicates that the true state of retail is not as bleak as may be expected.
With budgets tightening around the country, many are looking for lower-cost options such as discount and dollar stores. Recent expansions mean that these chains now have larger store fleets and can reach more shoppers looking to trade down on everyday essentials. If these brands prove capable of taking advantage of this increased interest, the result could be a longer term boost.
Fitness subscriptions tend to come with some sort of commitment, so consumers who joined gyms before inflation hit the headlines may be trying to get the most out of their monthly membership fee and hitting the gym for budget-friendly recreation. And as consumers look to stretch their budgets wherever possible, low-cost chains such as Planet Fitness are seeing the fastest growth.
Companies that offer lower-cost alternatives to traditional dining and retail are seeing a visit boost. Brands such as McDonald’s, which can welcome diners trading down from full-service restaurants, or Citi Trends, which can attract shoppers trading down in the apparel space, are particularly well positioned in the current climate.
Ulta’s combination of high-end and drugstore beauty products invites a variety of shoppers to make their next purchase at their local Ulta. Similarly, consumers can visit McDonald’s for pricier combo meals or choose to order from the chain’s dollar menu. The range of price points offered under one roof has allowed these brands to beat inflation by giving visitors the opportunity to trade down within the same store.
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