Inflation

What will be in our pockets in 2023 and how can brands respond?

Flair Brazil 2023 | Society | Consumers | Marketing | Inflation

Inflation is back 

I am writing this article in June 2022, when the 12-month accumulated inflation is at double digits for the ninth consecutive month, reaching 11.73% in May, according to the IPCA (Broad National Consumer Price Index – IBGE1).[1] The last time Brazil had inflation this high was almost 20 years ago, between November 2002 and November 2003.

In recent years, while we have not had double-digit inflation. However, this hasn’t translated into inflationary stability. Over the last five years the Real has lost 30% of its purchasing power.[2] Add to this the fact that at the end of 2022, for the first time since the Real currency was introduced, the minimum wage will be worth less at the end of the presidency than it was at the beginning. Today, it is estimated that over 33 million Brazilians go hungry, which is 14 million more than in 2020, according to the 2nd National Survey on Food Insecurity within the context of the Covid-19 Pandemic in Brazil.[3]The same survey shows that homes headed up by black people, brown people or women are more susceptible to food insecurity. The truth is that this financial and inflationary situation is not exclusive to Brazil. We are facing a global crisis, based on various factors and to some extent made more serious by the war in Ukraine,[4] which has put pressure on fuel prices, disrupted supply chains and created uncertainty. Our neighbour Argentina’s rate of inflation has already exceeded 60%[5] in the last 12 months.

What makes this crisis unique is that it’s coming after a period of trauma. We are yet to get over the pandemic, when the people were without a leader, lost and not knowing who to trust or what to do to protect themselves against Covid-19.[6] Income and jobs were just starting to recover from the losses suffered by social isolation, reduction in trade, reduction in salaries, firings and so on, and how we’ve been hit with another blow.

How inflation is changing consumer behaviour

Ipsos | Flair Brazil 2023 | InflationOn top of the crisis, Brazilians are particularly pessimistic at the moment. Ipsos research finds 79% of the population calls the country’s financial status bad or very bad, with “poverty and social inequality” being the biggest concern of our people (42%)[7].

Inflation and the loss of purchasing power will significantly impact the finances of Brazilians and, as a consequence, many purchasing and consumer habits, at all levels, are going to change.

A fall in volume and penetration of non-essential categories, the replacement of more expensive products or brands for cheaper options, and more demand for “value for money” products is expected. And, of course, this will affect all social and economic classes in a non-linear way. Inflation is always harsher at the bottom of the pyramid than at the top.

The question is “does Tostines sell more because it is fresh, or is it fresh because it sells more?”

Many changes in behaviour are expected and even anticipated by brands that, in turn, try to react so as not to lose volume, income and penetration. But... will these same brand attitudes not end up feeding back into changes in consumer behaviour?

We see cases of “downsizing” (reducing packaging sizes), a common strategy during a financial crisis, as a way of avoiding increasing prices. These strategies are already seeing success in Brazil and have been proven to work well in many cases. However, it only works in the short-term. There are risks in the medium and long-term that must be considered going forward.

The biggest factors that could directly affect consumer behaviour are:

  • Reduction in the purchasing cycle: With smaller packaging it is possible that consumer will have to buy more frequently, especially for essential categories. As each purchasing opportunity is to some extent independent of the previous purchase, there is always a risk of the consumer choosing a different brand the following time
  • Reduction in volume purchased monthly:In less essential categories, it is not rare to see consumers, especially those on the lower social and economic levels, letting the product run out and then, instead of buying again immediately (as in the previous case), maintaining their normal purchasing cycle. This therefore reduces monthly consumption, producing in the medium and long-term a fall in annual consumption of that product and, of course, of that category. Both changes in behaviour can cause a decrease in the volume sold for a brand (in the second case, this ends up affecting the category in general), highlighting why it is important to do a careful assessment before carrying out any downsizing in opposition to raising the price. Of course, some brands in some categories can benefit from this strategy but, in many cases, there are brands that are resilient at a higher price that do not need such a measure.

Inflation is always harsher at the bottom of the pyramid than at the top


The risks of increasing prices

Ipsos | Flair Brazil 2023 | InflationAnother alternative to price rises tends to be a change in the product formula (replacement with cheaper materials) so that the price of production can be decreased or maintained and consequently the same price is maintained for the end consumer, without denting the brand’s profit margins.

This alternative is great as long as it doesn’t cause (or as long as the consumer doesn’t notice that it has caused) a decrease in product quality. One direct risk is a possible loss of the main asset of a brand: their current consumer!

But in the case of both downsizing and in changing the formula, the brand is exposed to an even greater risk which is that of reputation. If consumers do not approve of a change, this may affect the trust the brand has built up.

The better known the brand is and the closer a relationship it has with the consumer, the bigger the risk. Additionally, even when made by well-known brands, these decisions can often confuse consumers. In fact, we have recently seen negative press about brands that have changed their products and not been open about it. This is true for products aimed across income levels and many different types of consumer, even famous brands who have a reputation to protect.

Innovating during inflation

Ipsos studies on innovations and their price elasticity have looked at creating an inflationresilient portfolio. In our paper Innovation in Inflationary Times we highlighted that differentiation is the most important factor in a price rise.

Differentiation is a key driver in uptake of new products, tending to make them less elastic, which is particularly important in times of crisis. This is obvious to some extent - the more unique the product, the more difficult it is for the consumer to change it for a competitor’s product.

We also know that even in times of crisis, innovating is a requirement for brands and while there is a lot of space for innovation there is very little margin for error.

How brands should respond

Ipsos | Flair Brazil 2023 | InflationEvery brand has to act in order to survive over the next few months or even years. But it’s not enough just to act quickly, we need to think and act carefully and assertively.

There is no “one size fits all” solution. Some common solutions for times of crisis, such as a simple downsizing or a change of formula may be unnecessary risks for some brands. We must assess risks not only for the short-term but also for the medium and long-term.

Brazilian consumers are more aware and more demanding. So we need to understand or predict what the perception will be of any potential change, whether it will be noticed and whether it will be accepted. Trust placed in that brand is at risk. One risk or one breach in brand trust can end up being worse than simply choosing to put the price up.

With the omni-crisis we face today, consumers may be sensitive to prices, but their attitude may change if the situation improves in the future. In which case, perception of the brand’s real identity and the way it behaves during this period of crisis may end up coming back to haunt it.


But in the case of both downsizing as in changing the formula, the brand is exposed to an even greater risk, which is that of reputation, because honesty, commitment and transparency are very important values to today’s consumer.


A less well-worn path may be, for example, to study alternatives that combine a price action (increase or downsizing) with other actions that can help the brand differentiate from its competition and break away from price-focused competition. The less of a “commodity” that a product is, the more it can justify its price by the unique benefits or results it offers in the category, and the more wiggle room consumers will give it to charge more than its competitors.

Brands that innovate will benefit as well as those that maintain their identity, and are transparent with their customers through this period, and do not differentiate between different social and economic categories of consumer.

The storm will pass, but the bounty will be the greatest for brands who know how to navigate the current context.


Table of content

  1. An introduction to Flair Brazil 2023
  2. Inflation
  3. Afro-Brazilian culture
  4. Parallel conversations
  5. Brands without identity
  6. The diversity of beauty in Brazil
  7. Is 60 the new 40?
  8. Conclusion

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Notes

[1] https://www.ibge.gov.br/indicadores#ipca

[2] https://g1.globo.com/economia/noticia/2022/05/04/em-5-anos-real-perdeu- quase-30percent-de-seu-poder-de-compra.html

[3] htttps://pesquisassan.net.br/2o-inquerito-nacional-sobre-inseguranca-alimentar-nocontexto-da-pandemia-da-covid-19-no-brasil/

[4] https://brasilescola.uol.com.br/geografia/ por-que-a-russia-invadiu-a-ucrania-em-2022. htm.

[5] https://www.indec.gob.ar/uploads/ informesdeprensa/ipc_06_22C1D48A9B6E.pdf

[6] https://www.paho.org/pt/covid19/ historico-da-pandemia-covid-19

[7] What Worries the World