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11/29/2021

Higher Prices and Fewer Deals: Low-Income Customers Face Post-Pandemic Disparities

Here are some ways to benefit not only low-income shoppers but also brands and retailers
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Higher Prices and Fewer Deals: A Post-Pandemic Double Whammy for Low-Income Customers
Even before the pandemic, low-income customers paid significantly higher prices on items they purchased compared with prices paid by high-income customers.

The COVID-19 pandemic remains a source of disproportionate distress for low-income Americans. Already hit with more cases and deaths than higher-income customers, they again face disparity amid persistent inflation. This is particularly true with food inflation, which reflects the shortage and rising prices of commodities, lack of available labor and greater transportation costs. Food companies generally respond to inflation by, among other things, raising consumer prices, but there are ways to lessen the pain for low-income consumers.

We looked at data on sales of groceries in the United States for the past two years obtained from Information Resources, Inc. (IRI). We defined households with annual income below $35,000 as low-income, $35,000 to $70,000 as mid-income and more than $70,000 as high-income. Our analysis found that low-income shoppers suffered disproportionately for two key reasons:

  1. Low-income customers paid relatively higher prices. Fears of inflation arose as the economy started opening up amidst a national decrease in COVID-19 cases. However, even before the pandemic, low-income customers paid significantly higher prices on items they purchased compared with prices paid by high-income customers. In April 2020, when the pandemic started spreading widely in the United States, the average price per unit on products purchased was up 3.2% over May 2019 for low-income customers, but just 2.3% for high-income customers. This disproportionate price difference worsened over the next year, increasing 6.3% for low-income customers compared with only 2.7% for high-income buyers.  
    Low-income customers in general pay more for food for various reasons. First, stores in their neighborhoods are relatively smaller and don’t have economies of scale compared with supermarkets and other national chains. Moreover, they face relatively less competition than stores in high-income neighborhoods and, as such, have less incentive to offer lower prices. Second, low-income customers purchase items in small packages due to limited affordability and limited storage space, which implies they pay more per unit. Third, these shoppers are less likely to purchase online, given their relatively poor access to broadband. Also, although more internet retailers have started accepting SNAP (Supplemental Nutrition Assistance Program) benefits, it is not yet widespread to reduce their continued dependence on neighborhood stores.
    The pandemic worsened their situation further. Due to disproportionate financial distress, they are more likely to purchase essentials, which have less price elasticity of demand.  Hence, manufacturers have less incentive to keep prices low. Also, manufacturers have been reducing the size of packages to avoid increasing prices, which also may have contributed to the rise in effective prices for low-income customers. Their access to stores outside of their neighborhoods has been affected, too, because of restrictions in public transport.
  2. Low-income customers got relatively fewer deals. Demand soared at the beginning of the pandemic, leaving little reason for manufacturers and retailers to offer deals. Gradually the buying frenzy waned, and discounts returned; however, their numbers or amounts have not yet returned to pre-pandemic levels.
    Low-income customers faced disparity here too. Taking May 2019 as the reference, purchases made on any sort of deal dipped by about the same amount – 42% for high-income customers and 43% for low-income shoppers – in April 2020, when the pandemic was taking hold. In the following year, however, the dollar share of discounted items in their purchases rose by 42% for high-income customers, but only by 33% for low-income consumers. Put together, this is 18% below the pre-pandemic level for high-income customers, but 24% lower for low-income customers.
    It is conventional wisdom that manufacturers use coupons to attract price-sensitive customers. But low-income consumers again lost out – they have relatively fewer coupons to avail. From May 2019 to April 2020, purchases of products with manufacturer coupons decreased by 63% for high-income customers and by 57% for low-income customers. Those numbers have since recovered remarkably for high-income customers, rising by 70%; however, the same comparison for low-income consumers reveals an increase of just 37%.
    There could be several reasons for this disparity. First, products purchased by low-income customers have lower margins, so there is not enough room to offer discounts. Second, the fact that a majority of their purchases are essential in nature acts as a force for both price increase and discount reduction. Third, in an effort to cut costs and streamline their deal structure, retailers may have structured deals based on quantity purchased or bulk packages, which again shortchange low-income customers.

Changing the Trends

Price increases tend to be sticky, and while the low-income customers may start availing more deals gradually, the gap between them and high-income shoppers is likely to remain even if inflation comes back to the long-term average. How can industry and government collaborate to provide them relief and correct persistent disparities? Here are some ways to benefit not only low-income shoppers but also the brands and retailers.

First, low-income neighborhoods need greater access to broadband internet to price-shop across offline and online stores. In 2020, the U.S. Federal Communications Commission (FCC) launched the Emergency Broadband Benefit program, which offers one-time discounts for equipment like tablets or laptops and up to $50 per month toward broadband service. FCC should measure the effectiveness of the program and improve it further.

Second, customers in so-called “food deserts” need more grocery shopping options. The “Healthy Food Access for All Americans” act, currently under consideration, would create tax credits for new grocery store construction and for retrofitting the health-food sections of existing stores in food deserts. These types of incentives are a good starting point.

Third, more online retailers need to support the SNAP program. Walmart and Amazon were among firms that participated in a pilot program that allowed SNAP participants to select and pay for groceries online. The program, which allows shoppers to use electronic benefits transfer (EBT) cards to pay for groceries, now has participating retailers in 46 states and the District of Columbia. It needs to bring in more retailers.

Fourth, low-income customers need better access to supermarkets and chain stores. Access to public transportation is almost nonexistent in rural areas, and many services in urban areas are cutting back. Around $25 billion in COVID relief funds went to transit agencies but many of these agencies remain in financial distress. 

For retailers and brands, the solutions to these challenges don’t have to be only an expense – they can be investments in opportunities. For instance, enabling EBT card payments may increase sales of private labels at retailers’ websites. They also can employ some creative strategies, such as aggregating orders from a community to ensure their orders qualify for free home delivery. Savvy entrepreneurs can serve these markets profitably too. For example, similar to food trucks, they can deploy grocery trucks (stores-on-wheels) to sell fresh produce, meats and packaged goods. 

To conclude, the governments and industry (as well as non-profits) have to work together to ease the disproportionate burden on lower socioeconomic classes. Poverty costs society billions of dollars annually in lost economic productivity and increased costs for health care. Closing gaps in prices for low-income customers, therefore, not only figures to benefit brands and retailers by lifting overall sales but deliver greater good as well.

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