Cheapflation: What it means for CPG companies

Cheapflation, a relatively new term, describes the rising prices of lower-cost goods at a faster rate than their premium counterparts.

For consumers relying on budget-friendly options, this phenomenon reshapes purchasing habits and financial predictability.

But while at first glance, cheapflation may seem purely detrimental, it does offer opportunities for innovation and strategic thinking within the food and beverage (F&B) industry.

Emerging from the broader context of inflation, cheapflation is driven by rising production and supply chain costs.

To mitigate these pressures, manufacturers often pass the cost-burden onto consumers, targeting budget items because of their high volume and perceived elasticity in demand. As a result, products once seen as safe havens for cost-conscious shoppers are losing their affordability edge.

A global issue

The effects of cheapflation are not confined to a single market. Across the globe, rising costs have eroded purchasing power, reshaping how consumers spend. In the United States, staples like cooking oil, bread, and packaged snacks have become more expensive, disproportionately affecting lower-income households.

Similarly, in Europe and Asia, similar price hikes are evident, with store-brand and value-for-money items seeing sharper increases compared to premium goods.

Research from Harvard Business School highlights that the prices of lower-cost brands in post-pandemic markets grew 1.3 to 1.9 times faster than premium brands.

This global trend illustrates how cheapflation is not just a local phenomenon but a reflection of economic shifts worldwide. For CPG companies, this underscores the need to adapt strategies to meet the challenges of affordability and accessibility across diverse markets.

The impact on consumers

Consumers, especially those in lower-income brackets, bear the brunt of cheapflation. With essentials becoming more expensive, many households are forced to make difficult choices—reducing their consumption of quality goods, opting for fewer meals, or compromising on nutritional diversity.

Over time, these adjustments can lead to significant lifestyle changes and broader societal impacts, including increased food insecurity and declining public health.

However, consumers are not entirely powerless. In response to cheapflation, many have shifted to store brands, with private-label products seeing significant growth. For instance, U.S. store-brand sales increased by over 6% in 2023, highlighting consumers’ willingness to explore alternatives that balance cost and quality. Additionally, bulk purchasing has become a popular strategy, with retailers like Costco thriving as shoppers look for ways to maximize value.

Turning cheapflation into opportunity

While cheapflation poses challenges, it also presents a unique opportunity for CPG companies to innovate and strengthen their market position. By rethinking product development, pricing strategies, and consumer engagement, brands can navigate this economic trend effectively.

Product innovation

One way CPG companies can address cheapflation is through product innovation. This involves reimagining how goods are produced to keep costs manageable without sacrificing quality.

Some brands are turning to alternative ingredients like plant-based proteins, dynamic packaging or locally sourced materials, to reduce expenses while meeting consumer expectations.

Shrinkflation, or reducing product sizes while maintaining prices, has been another common response. However, transparency is crucial here—brands that openly communicate the reasons for downsizing are more likely to maintain consumer trust.

For instance, a large multi-national CPG recently faced criticism for its initial shrinkflation tactics but regained consumer goodwill by adding more chips to select bags and clearly explaining the changes.

Strategic pricing

Flexible pricing models offer another avenue for navigating cheapflation. Tiered pricing, for example, allows companies to introduce mid-range products that bridge the gap between budget and premium options, ensuring affordability for a wider audience.

Additionally, promotional discounts and loyalty programs can alleviate financial strain for consumers while driving repeat purchases.

Fast-food chains have successfully employed this approach. McDonald’s, for instance, introduced a $5 value meal to address affordability concerns, proving that strategic pricing can help brands retain consumer loyalty even during tough economic times.

Building brand trust

In challenging economic climates, consumer trust becomes a brand’s most valuable asset. Transparent communication about pricing decisions and quality commitments can foster loyalty and goodwill.

Companies highlighting their efforts to absorb rising costs or maintain affordability are more likely to stand out in a competitive market.

For example, General Mills increased coupon distribution by 20%, showcasing a commitment to supporting cost-conscious consumers. By taking similar steps, brands can position themselves as allies in the fight against economic pressures.

Leveraging consumer trends

The rise of cheapflation has also spurred innovation among retailers. Private-label products have gained prominence, with companies like Walmart expanding their offerings to include trendy, health-conscious items.

Amazon’s Saver and Target’s Dealworthy lines exemplify how retailers are stepping up to provide affordable options that do not compromise on quality or appeal.

 For CPG companies, aligning with these retail trends can unlock new opportunities. Partnering with retailers to develop exclusive store-brand products or adopting similar strategies can help brands stay relevant in a rapidly evolving market.

Finding opportunity in adversity

While cheapflation brings significant challenges, it also catalyzes positive change. CPG companies have the chance to rethink their strategies, prioritize innovation, and rebuild trust with consumers.

By responding proactively to the shifting economic landscape, brands can turn this seemingly negative trend into a force for good—delivering value to consumers and the industry.

The F&B industry is uniquely positioned to lead this charge. As companies adapt to cheapflation, those that succeed will not only navigate current challenges but also lay the groundwork for a more inclusive and resilient marketplace. In doing so, they can ensure that affordability and quality go hand in hand, benefiting all stakeholders.