The Great “Trade-Down” Behind The Consumer Spending Paradox

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“Everything’s gotten so expensive!” That’s been a universal lament over the past couple of years, lately made dramatic in foot-high digits on more than 150,000 gas station reader boards across the US.

Inflation is back. Driven in large part by the surge in energy costs, the April Consumer Price Index notched a year-over-year spike of 3.8%. That dispiriting news, coupled with consumer sentiment plunging to the lowest point ever recorded, should be enough to set off alarm bells and trigger talk of the economy flirting with recession.

Instead, the latest Census Bureau report showed retail sales up 0.5% in April from March, and 4.9% higher than a year ago.

Even the data for dining out, which experts consider a good indicator of the relative health of the economy, rose 0.6%.

“Households would not be going out to dinner regularly if they were in serious financial trouble,” according to Stephen Stanley, chief U.S. economist at Santander, as reported by Barron’s. “The decent gains in this category are, in my view, a telltale sign that the consumer feels OK.”

How to explain this K-shaped paradox between how consumers perceive the world versus how they continue to spend? An intriguing answer appears in a recent deep-dive report by Chicago-based management consultant Kearney, which challenges how some consumer and retail brands respond to the ebb and flow of economic stresses.

The report begins by debunking the notion of the “average” consumer. No argument there. You cannot lump Boomer 401-K millionaires in with Gen Zers living in their parents’ basements, job prospects eroded by AI, and no hope of ever being able to buy a home.

Beyond those broad categories, the Kearney researchers argue that, “Two consumers with identical earnings can react in fundamentally different ways to the same price increase, promotion, or product launch. Some consumers—and an increasing number at that—are forgoing long-term security (housing downpayment) for short-term satisfaction (booking a vacation).” Call it the YOLO effect—you only live once.

This trading behavior is not limited to any particular income group or age demographic, as we recently reported here. A First Insight survey revealed that six out of 10 Gen Z consumers are switching to cheaper private label brands for household staples so they can afford to splurge on looking and feeling good—“glowing up.”

Meanwhile, at the other end of the economic scale, big box discount retailers like Walmart and Costco have been reporting for the past year or so that households with robust incomes have become a growing (and profitable) slice of their businesses. “House” or private label brands are growing fast, like Costco’s Kirkland and Walmart’s Great Value.

It appears both the haves and the have-nots are trading down, often for the same reason.

As the Kearney report notes, a household earning more than $160,000 a year is about as likely to be “on thin ice” as a household earning $50,000 due to “lack of budgeting and profligate spending.” Kearney estimates that nearly half of those in the high-income bracket may be so over-extended that they are dangerously exposed to rising interest rates, stock market gyrations, and a wobbly jobs market.

Rarely mentioned but perhaps the most important element in consumer behavior today is how radical the change has been in what constitutes a comfortable life. As a culture, we’ve been trading up our expectations for decades.

Today’s new home is about twice the size of the average house 50 years ago. According to the Kearney report, a propensity for take-out has contributed to doubling what the average family used to spend on food.

We buy twice as many articles of clothing a year as we did in the 1990s. We travel farther and spend more than we used to on discretionary travel. Practically everyone has a mobile phone, a car, and a computer.

In other words, there is plenty of room for trading down, which is one reason consumer spending can hold up even as sentiment craters.

The Kearney report notes that, “Many brands have responded to perceived pressure by racing to the bottom on price or quietly degrading quality. Others have doubled down on premiumization, assuming insulation at the top. Both approaches miss the same reality: consumers across the spectrum are increasingly sensitive to value mismatches, not just price points.”

Kearney says brands should focus on trade-offs as opposed to trade-ups or trade-downs. “Consumers are selectively reallocating. Winning brands make it easier to justify meaningful spend where it makes sense rather than asking for loyalty everywhere.”