Study: Shoppers turn to dollar stores as payroll tax rises

CHICAGO — Though a 2% increase in payroll tax may seem insignificant for middle- and upper-income families, it can cause a major change in shopping behavior for lower-income families, a new study has found.

According to Symphony Consulting, a division of SymphonyIRI Group, for a consumer with household income of $40,000, the 2% increase in the payroll tax represents $800 in reduced spending power per year. This can be the difference between shopping at a lower-cost dollar store versus a mass merchandiser, increasing purchases of a store brand versus a national brand, or suppressing an impulse to pick up a snack on the spur of the moment while shopping in the store.

“To date, shifts in shopper behavior are subtle, but patterns are emerging that deserve close and ongoing scrutiny,” said managing director of Symphony Consulting, Dr. Krishnakumar Davey. “Our initial analysis offers highly-current data on shopper behavior that will form the basis for ongoing research into the impact of the payroll tax increase.”

The study found that while total dollar sales in food and beverages were nearly the same from the end of 2012 to the start of 2013, discretionary spending was down, private label spending was up and dollar stores were gaining a greater share of consumer spend, all possible outcomes of the higher tax.

Changes in behavior by income group indicate a slow down for a subset of the population. The growth rate among middle-income shoppers decreased slightly (40 basis points). As expected, there was no significant change among high-income shoppers. Contradicting expectations, dollar sales growth among low-income shoppers increased, albeit by a small percentage (50 basis points). This could perhaps be attributed to increased in-home consumption versus eating out.

When examined by category, shopper behavior reveals interesting patterns. Dollar sales growth of several categories exhibited declines, including in snacks (down 230 basis points) and beverages, such as coffee and tea (2-110 basis points). Cooking ingredients and beverages, such as juices and drinks, on the other hand, showed growth. Despite across-the-board over-performance in the first four weeks of 2013, discretionary categories lagged total food and beverage in the last week of January 2013, with dollar sales growth of 1.9 percent compared to 2.5 percent for the category as a whole in the same period. This could be due to the end of month effect when households optimized their grocery spending as a result of shrinking wallets.

“We expect payroll tax increases will impact non-CPG spending (such as gas, clothes, entertainment) potentially more than CPG spending. However, out-of-home consumption will likely drop, and specifically out-of-home breakfast categories will be negatively impacted,” said Davey. “Consumers usually eliminate the out-of-home breakfast meal first when they cut spending. Economic growth is expected to be stagnant due to tax increases and continued high unemployment. Moreover, the recent significant spike in gas prices is going to further squeeze the consumer’s wallet. Some stores, convenience stores in particular, are very sensitive to gas price increases.”

“Our data focuses on the $35 billion food and beverage segment of CPG,” Davey continued. “It is clear it will take time for shopper behavior to more comprehensively reflect the impact of the payroll tax increase. After all, most consumers have received only one paycheck during the time of this analysis. It is possible that the dollar sales declines we observed toward the end of January will continue, and Symphony Consulting will update its analysis continuously to provide quantitative, statistically-significant information on shoppers’ reaction to this tax increase.”