Consumer spending on food has fallen sharply over the past year, even though food prices increased and restaurant dining declined. The drop in spending for food products likely reflects a major shift in consumer buying habits. Consumers are opting for less expensive options in what they buy and where they shop.

Real Consumer Outlays For Food Are Declining

Real personal consumption expenditures for food items have fallen for three consecutive quarters, marking the longest consecutive string of declines since data became available back in 1990. The declines have been substantial, with spending for food plunging at a 7.3 percent annual rate in the third quarter of 2008, 14.7 percent rate in the fourth quarter, and then a more modest 0.8 percent annual rate in the first quarter. On a year-to-year basis, spending for food, after adjusting for inflation, has fallen 4.9 percent.

Are consumers really buying nearly 5 percent less food then they did a year ago? We doubt it. Population growth alone means there are an additional 2.9 million mouths to feed than there were a year earlier. So what explains the drop? The BEA puts the food outlays data together by measuring food purchases at grocery stores, discount stores, warehouse clubs, convenience stores and other places food is sold. They then adjust the sales figures for price changes, as reported in the Consumer Price Index. The real personal consumption expenditures figure for food thus does not truly measure the volume of food being purchased and is likely being depressed by significant changes in the mix of products consumers are buying as well as changes in where they are buying groceries.

Higher Prices & Slower Income Growth Are Shifting Buying Habits

Consumer food prices have increased 4.3 percent over the past year, with some of the largest increases occurring in cereals and bakery products, fish and seafood products, peanut butter, and margarine. The latter two items saw prices rise faster than just about any time on record. A few items posted price declines, most notably dairy items.

The combination of rising food prices and deteriorating employment conditions produced significant changes in consumer buying habits. One change was that consumers switched to more store brands, which typically sell for lower prices. Consumers also switched to less expensive proteins, substituting lower-priced beef cuts for higher-priced ones, frozen fish for fresh fish, and more poultry for beef in general. Coupon use is also reported to have increased, as producers of name brand products attempt to fight back against less expensive store brands and private label products.

Another important change is that consumers are finding less expensive alternatives to the traditional grocery store. Grocery store sales have fallen 2.0 percent over the past year. Sales have held up better at warehouse clubs and discount stores, both of which have increased the variety and quantity of food products offered for sale. Competition for grocery dollars is expected to remain intense as retailers fight for the declining number of trips consumers are making to stores in general.