Taking the pulse of the US consumer

Was there ever such a thing as consumer loyalty? “It might be that what was once understood as loyalty was actually just routine-driven inertia,” suggests Eric Falardeau, one of the leaders overseeing McKinsey’s latest survey on US consumer sentiment and behavior. The COVID-19 pandemic upended consumers’ daily routines, leading to a “loyalty shake-up” and forcing companies to think harder about how to win the US consumer. In this episode of the McKinsey on Consumer and Retail podcast, Falardeau—along with fellow McKinsey partners Kari Alldredge and Tamara Charm—describe the many ways US consumers are changing and what companies should do in response. The following is an edited transcript of the conversation with host Monica Toriello. Subscribe to the podcast.

Monica Toriello: If you’re like many people, your daily routines and habits have changed over the past couple of years—and are continuing to change. Some people may have settled into a new rhythm and adopted new preferences that they’ll stick with for a while, but for others, this period that we’re in is still a time of reevaluating, resetting expectations, and trying new things. And it feels like every month or two brings new economic, social, and geopolitical developments that then have an effect on how consumers feel and how they spend their money.

It can be difficult for companies to stay on top of these changes in consumer attitudes and spending. One way that McKinsey has kept its finger on the pulse of the consumer, so to speak, is by conducting regular surveys on consumer sentiment and shopping behavior. Over time, we’ve developed a picture of which behaviors are temporary and which seem to be stickier. With us today are three McKinsey partners who are leaders of Consumer Pulse, the series of surveys I just referred to. They’ll talk us through interesting findings from the most recent US consumer research, and what the findings mean for retailers and consumer companies.

Kari Alldredge is a partner based in Minneapolis. She’s been advising consumer goods companies for more than 20 years on a variety of topics including sales, marketing, and growth strategy. She’s a repeat guest on this podcast: we’ve had her on before to talk about the ever-evolving, always-surprising consumer.

Tamara Charm is another repeat guest. Last time, she came to talk to us about the 2020 holiday shopping season. She is a partner based in Boston, and she has expertise in a range of marketing and sales topics including customer insights and brand strategy.

Eric Falardeau is a partner based in Montreal. Eric spearheads McKinsey’s global work in fitness and wellness. He also works with many companies in consumer packaged goods and retail, helping them leverage consumer insights and advanced analytics. Thanks to all three of you for joining us.

These surveys have been going out regularly since March 2020, so you’ve seen the evolution of the US consumer over that time period, and you’ve identified a number of themes which we’ll talk about in a few minutes. But first, one interesting thing that came out of this most recent survey is that amid record inflation, US consumer spending remains strong. What’s going on there?

Tamara Charm: It’s interesting; we’ve found that consumer behavior has been quite continuous, meaning consumers have been spending—and spending more than in past years—on a range of categories that were made bigger by COVID. Think about software and electronics: we’re all online all the time, so people are buying more of that. They’re buying more sports apparel. They’re buying more cosmetics.

What’s fueling this spending is better consumer balance sheets. Consumers have more money in their bank accounts now from a combination of things. Some people still have savings from the government stimulus, for example. Also, people have been spending less on things that are out of home. They’ve been spending less on travel and on services. Some of those savings have fueled the spending on goods.

Kari Alldredge: One thing I’m hearing from my clients, who are mostly branded consumer-goods manufacturers, is a question about consumer confidence. Despite this incredible continued consumer spending, many branded manufacturers are wondering whether it can possibly continue.

Tamara Charm: To that point, we see confidence actually going down in the beginning of this year after a climb back up since the middle of the COVID-19 pandemic. We also see a lot of consumers switching to lower-priced brands or lower-priced channels.

Monica Toriello: Speaking of channels, obviously some retail channels did better than others these past two years. Grocery stores did very well; clothing stores, not so much. Are you seeing a recovery among all retail channels or are some channels still struggling?

Tamara Charm: One interesting thing is the differences within categories. When you talk about retail apparel, for example, many retail apparel companies did not do so well during COVID, but others did incredibly well. Think about what we all had been wearing as we were on Zoom more, as we have more casual interactions, and as we get out and move more. We’re seeing sports apparel rise dramatically but more formal apparel has not done as well over this period.

Kari Alldredge: It’s also interesting to look at differences within the same channel. For example, even within grocery—which, as a whole, did quite well during COVID—there are real differences between grocers who have an everyday-low-price [EDLP] format and grocers who have historically relied more on promotion. And as inflation has risen, those retailers with a more promotion-oriented, or high/low, strategy are suffering.

At first, during COVID, what we saw was that due to availability and supply chain challenges, a number of branded manufacturers stopped promoting altogether to keep product on shelf. That has reset their promotional strategy. Now, retailers who rely on promotions to bring shoppers into their stores are really struggling. With inflation and consumers’ increased focus on value, EDLP retailers are benefiting. So, even within the same channel, the story can be quite different.

Price, purpose, and private labels

Monica Toriello: On that note, it’s hard not to notice that things have become more expensive. Indeed, the survey says that 90 percent of consumers have noticed higher prices, particularly in gas and groceries. That’s contributing to what you’re calling a “loyalty shake-up”: consumers are switching to different brands and shopping at different retailers. And they’re saying the top reason they’re switching is value or price. That’s not surprising. What’s more interesting to me is that among people’s reasons for switching, brand purpose seems to have become less important and novelty has become more important. What do you make of that? What are the implications for companies? How, in this environment, can brands win customers’ loyalty?

Kari Alldredge: It’s an interesting question. Consumers say that purpose is important to them, and in our recent work with consumers, we do find that certain groups—such as millennials, not so surprisingly—really do vote with their wallets when it comes to purpose. But other groups—in particular, older consumers—are less aware and less interested in a brand’s purpose. As goods have become more expensive and, for some consumers, filling their gas tank or stocking their pantry has become more of a tough reality, it’s not surprising that purpose has fallen in terms of its importance in driving loyalty.

Eric Falardeau: Here’s my thought on consumer loyalty: it might be that what was once understood as loyalty was actually just routine-driven inertia. As people change their routines, different choices become available, and people end up choosing something other than what they historically chose. So maybe we pat ourselves on the back a little too quickly when we say, “We have a loyal consumer.” Maybe it’s just that our brand was at the right place at the right time, and it became a habit for that consumer.

On the question about purpose, we’ve tracked it quite frequently to see how it evolves. We’ve seen generational differences, as Kari said. But, in the end, we’re still small mammals in a world of big mammals: I think you’re seeing fear. As certain important realities predominate in people’s minds, things like value and price become more important. At times of higher security and comfort, higher-level benefits like purpose end up becoming more important. So, in recent months, as we’ve seen consumer confidence get lower and people are potentially a little bit more afraid, purpose has become less important.

Kari Alldredge: Related to loyalty is this question of the value or importance of brands. That’s one thing that my clients have been thinking and asking a lot about: How can they strengthen their brand propositions? Purpose, obviously, is one way to do that but there are other ways as well, whether it’s through innovation or product performance or availability.

One of the interesting things that we’re starting to see is the resurgence of private labels or private brands. That’s something brand owners are watching closely and are quite concerned about. It’s an interesting challenge, too, for retailers. I’ve heard from a number of retailers that they’re having the same kinds of supply chain challenges as brand owners; somebody has to make the stuff that they’re selling under their own retail labels. So, I think that this loyalty shake-up is likely to intensify over the next several months as supply challenges influence the assortment that most consumers will have to choose from in many retail environments.

Monica Toriello: To your point, Kari, approximately one-third of consumers who switched brands switched to private labels. Your research shows that growth in private labels is back to where it was pre-COVID-19. Do you see that continuing? What is the future of private labels in the US? Do you see it reaching European levels?

Kari Alldredge: We did some research a number of years back on what drives the difference between private-label penetration in Europe and in the US. What we found, at that time at least, was that there was really no structural reason from a consumer-perception or consumer-behavior perspective. US consumers at that time reported that they were just as interested in or as accepting of private labels as European consumers were. At the time that we did the research, the thing that was constraining private-label growth in the US was retailers themselves.

US retailers are more reliant on national brands. In Europe, you’ve got many smaller geographies with different languages, different tastes, and different cultural preferences, so retailers there can more easily compete with a private-label offering. In the US, branded offerings had such mass appeal that brands were historically stronger.

We are likely to see private labels continue to grow, particularly if there’s a recession. When we look back 30 years, we’ve seen that during every recession or economic downturn, private-label share ticks up one to three percentage points—and it never fully reverts to a prerecession level. So I think we will see an uptick in private-label penetration. I don’t think we will see the levels that we see in Europe, just because many retailers in the US really rely on branded manufacturers to drive their category growth.

Supply chain excellence as a competitive advantage

Monica Toriello: Another thing you all have mentioned is the supply chain. A big reason for brand switching during the pandemic has been availability, and out of stocks have become more frequent given supply chain disruptions. What are some imperatives for companies when it comes to supply chain volatility? Are there any new must-dos?

Tamara Charm: Companies are starting to create more local redundancy in the supply chain. They’re also doing things like using “dark stores.” Another imperative is to focus on the products that consumers are going to want the most so that you can have your hero products in stock.

Kari Alldredge: Analytics is also crucial. Companies that invested in the analytics to be able to predict, or at least understand, where they’re seeing surges in demand are then able to route production capacity, logistics, and networks toward those high-demand areas. Analytics is a huge differentiator between companies that have been able to stay in stock and those that haven’t.

Tamara Charm: Analytics plays another role, too. When consumers see that a product is out of stock, only 20 percent wait for that item to be in stock later; the rest are just going elsewhere. So the more companies can communicate proactively with their consumers and understand what a particular consumer might want, the better for them. For example, if you’re on a website looking for something that happens to be out of stock, if the company has created the algorithm to understand what you might want instead and can push a notification to you right away that the substitute product is in stock, the company might save a sale in that circumstance.

Eric Falardeau: Another challenge that companies are facing at the same time is where and how to take pricing action in the face of inflation. So, taking analytics as a foundational capability helps you tackle the dual problem of, how do I make sure I have the right product at the right retailers, and how do I use the very same analytics to think about where in my portfolio I should take which pricing actions? It’s a dual challenge, and the companies that have the basic data and are then able to do analytics on top of it are making far better decisions and managing to either maintain or grow share at this challenging time.

Omnichannel customers and the power of social media

Monica Toriello: E-commerce boomed during the pandemic, and your research shows that the growth has kept going. People didn’t shift all their spending back to brick-and-mortar stores. Instead, 75 percent of consumers are shopping both online and offline. What are some interesting nuances that you’ve found about consumers’ omnichannel behavior?

Tamara Charm: Sixty-five percent of the people who say that they were using grocery delivery said that their behavior intensified this past year, and they say it’s going to continue afterward. Grocery delivery is one of the stickiest behaviors we saw of the behaviors that developed over the course of the pandemic.

Eric Falardeau: We forced a grand experiment by locking down the world, which pushed everybody to a predominantly digital model of both discovery in shopping and then afterward fulfillment, for many categories. What we’ve seen since—after this experiment of pushing people to try e-commerce—is that in the categories where the online experience, both in discovery and fulfillment, was well aligned with what people look for in shopping the category, there’s a lot more stickiness in the behavior.

Looking at e-commerce primarily as a fulfillment model, there are big differences between categories. But the other dynamic is discovery: again, with everybody staying inside their homes with less to do, a lot of people spent a lot more time than they usually do looking at social-media channels, blogs, and other ways to discover and learn about products online. In some categories, we’re seeing that online still has very strong stickiness or very strong influence—and there, the role of influencers in social media, in particular, stands out. It’s very difficult to size the industry and to measure its growth but when we take a consumer lens to gauge how important social-media influencers are across categories, we definitely see an increase there.

Monica Toriello: I saw that in your latest survey, around 70 percent of younger consumers said that their purchase decisions are influenced by social media. What are the common mistakes that you’re still seeing consumer companies make when it comes to social-media marketing? On the flip side, what are the most effective ways that you’ve seen brands use social media?

Tamara Charm: We’ve started to see some digitally native brands use social media to create an incredible community. In sports apparel and in cosmetics, companies have been able to create a community over social media, especially among millennials, some Gen Z, and some Gen X consumers—and they’ve been able to grow their brand astronomically. All companies can learn from this. If they are in a category where community is important, social media is a great way to let people share what they like about interacting with a brand and reinforce not only their love for the brand but also their feeling of connection with like-minded folks.

Eric Falardeau: Monica, one of your questions was about the mistakes that we see companies making. I’d say the first one is not taking time to really understand the channel. That starts at the top: the CEO and CMO [chief marketing officer]. There are still some companies and brands, with fairly large marketing budgets, where the top management team simply does not understand social media. Their level of consumer empathy is low: What does social media mean to the generations that use it most, like millennials? Why is it important to them? This lack of understanding leads to confusion about how to interpret the success of investments in the channel. I’d say that’s the number-one mistake: not taking time to really understand the channel, how consumers interact with it, and why it influences their decisions.

Kari Alldredge: That’s a great point, Eric. One of my clients is experimenting with this notion of educating their most senior executives on how to use social media. As part of an initiative loosely called something like, “Eyes on the consumer, hands on the keyboard,” senior executives are charged with using social media to achieve a tangible outcome like building a brand, driving sales, or increasing loyalty. There aren’t very many senior executives who’ve spent a lot of time on TikTok or Snapchat, and how do you get practical adult learning? You need to actually do it. So a number of my clients are thinking about how to build that into their learning and development plans for executives.

Tamara Charm: Some folks might think the influence of social media is contained to a particular consumer group, but our latest work showed that, in certain categories, 45 percent of consumers say that social media is influencing them—and that’s consumers who are saying social media is influencing them. There are probably a lot more who are being influenced without being willing to admit it.

Eric Falardeau: That’s a great point. One company I’m thinking of makes outdoor cooking appliances, and the majority of its customers are in the older age groups. But this company’s understanding of social media and why and how it influences the consumer is as good as any I’ve seen. I think it’s one of the most impressive cases in America of using social media to build brand advocacy and understanding and, as a result, a very, very good business in the past few years.

Monica Toriello: Eric, that’s interesting. Can you share more details about outdoor cooking appliances on social media? What exactly is that company doing well?

Eric Falardeau: A few things: one is they realized that social media gives you the liberty to show people what you really care about, and that can go far beyond your product. At this company, whose products help people cook amazing meals, they spend a great majority of their time on social-media platforms talking about the meals, which is the end goal; it’s the end promise to the consumer. When they think about the use of social media and the frequency at which their messages can be seen by people—especially once people start following the brand and giving it more permission to be with them every day—it gives them leeway to talk about a lot more than just their rational product difference or the emotional attribute that they would like to anchor on their brand.

On social media, you can actually talk to consumers about what they want to do with your products, which reinforces the permission of frequency at which you could be talking with people. It reinforces the likelihood of having a dialogue, a two-way interaction, with your audience.

Tamara Charm: Also, this company not only got their message out into the world, but really listened to what consumers were saying and made changes in the product based on what the community was saying. Social media, when it works the best, is a two-way street where not only are you engaging consumers in what you want to say but you’re listening to what they want to say and then are able to make changes, getting to the heart of what is emotionally resonating with consumers the most.

Advice for CEOs and CMOs

Monica Toriello: We’ve talked about some important themes in consumer sentiment and behavior. What are the one or two biggest takeaways for companies? What should every CEO or CMO be doing in light of these themes?

Kari Alldredge: We may see as much, or maybe even more, disruption and change over the next two years as we’ve seen over the past two years. What that means for CEOs is that the operating model you had in the past isn’t likely to work going forward. There are two places that I think the operating model has been disrupted and may even be more disrupted over the next couple of years: the role of the marketer, given the shift from broadcasting your message to listening and influencing, and the role of your supply chain in becoming much more agile. Those are two major operating model shifts that, as a CEO, you need to be thinking about.

Tamara Charm: One of the things that I think will be most important for companies going forward is the granularity of their understanding of what consumers are doing, how they’re changing, and how to engage them, which in turn means that personalization will become so important. Understanding analytically what consumers want, when they want it, and where they want it will be more important, given the changes in loyalty or perhaps the less-fixed routines that consumers have, and given the omnichannel world we live in, where consumers are going to be shopping in stores, on websites, on their phones, and eventually on social media as well.

Eric Falardeau: I agree. Consumers are as powerful as ever and have more choices in their hands than ever, which means you as a company really need to understand them. Structural incumbency or routine inertia will be tougher to sustain. Therefore, you need to understand what their preferences are and why, and you need to figure out how to play in this changed dynamic. Some companies are very well poised to do this; others have a bit of catching up to do.