The Trade-Down Economy: 3 Investable Industries to Watch

Oct 23, 2022

From fast-food restaurants to liquor stores, recent headlines show that consumers are fed up with high prices and are seeking out cheaper alternatives to what they normally purchase.

But this new “trading down” for cheaper alternatives trend isn’t cut and dry.

The trade-down economy is benefitting certain value-centric companies at the expense of less budget-friendly competitors.

And brands that offer more bang for their buck are winning.
With the Federal Reserve bracing for a lengthy rate hike battle and recession probabilities rising, these bargain businesses could be stealing market share for months to come…

Fast-Food Restaurants

An early summer survey found that one-third of survey respondents were choosing less expensive restaurants and meal options to offset higher prices.

LikeFolio data suggests that trend has accelerated.

People watching their spending habits are not feeling the urge to go to Texas Roadhouse, pay $21.99 for its 16-ounce prime rib, and include a tip on top of that.

This is playing right into the hands of fast-food restaurants. Consumer mentions of hitting a fast-food restaurant are up 20% year-over-year (YoY) on a 30-day average.

McDonald’s Corp. (MCD) says value items are fueling U.S. same-store sales growth, and in general, folks may be taking some of the money they would usually use at the grocery store and spending it on fast food.

Regardless of the reason, mentions of McDonald’s and Jack in the Box (JACK) are up 17% YoY and 16% YoY, respectively.

Even the pricier Shake Shack Inc. (SHAK) is also attracting more buzz.

At the other end of the spectrum, full-service and premium fast-casual restaurants are falling behind.

A sharp slowdown in sales growth at Bloomin’ Brands and LikeFolio data reveals that places like Outback Steakhouse and Bonefish Grill are off the menu for more households.

Comprehensive demand for Chipotle is also fading, even with a consumer base that CEO Brian Niccol says has higher incomes.

But after hiking menu prices 4% in August to cover higher input costs, there may be cracks forming in the burrito bowl. Consumers (of all income levels) are discussing Chipotle less often these days, with mentions down 27% YoY.

We are also seeing some interesting developments in the retail space.

Discount Retailers

Certain discount retailers are separating themselves from the pack.

Purchase Intent mentions are up more than 30% YoY at both Ollie’s Bargain Outlet Holdings Inc. (OLLI) and Five Below Inc. (FIVE).

When we plot this with consumer happiness, our outlier grid shows a sizeable gap between these companies and the big box stores and warehouse clubs.

Both Ollie’s and Five Below offer a no-frills retail experience, and consumers are more focused on buying just the essentials.

Five Below caters to teens and young parents that often have lower incomes and find the items selling between $1 to $5 a great fit for their budgets (especially when a gallon of gas isn’t much below $4).

And retailers like Five Below and Ollie’s may not just be quick stops for stocking stuffers in the upcoming holiday shopping season.

They could be trade-down winners as folks skip purchasing expensive electronics at Walmart Inc. (WMT) and Target Corp. (TGT) in favor of buying Bluetooth speakers for $7 at Five Below.

Cheap Airlines

If only airline ticket prices fell as fast as the leaves this time of year.

Pent-up travel demand, pilot shortages, and increased fuel costs have made it impractical for airlines to keep fares grounded.

That may mean we see a switch to people seeking out more discounted airlines.

If true, this puts airlines with low fares in a strong position.

One company to keep an eye on is Allegiant Travel Co. (ALGT).

As of May, its airfares are less than half the cost of the average domestic roundtrip ticket.

The Las Vegas-based airline shuttles travelers to and from smaller cities as well as larger vacation destinations via non-stop flights, and its Purchase Intent mentions are up 43% YoY.

LikeFolio data suggests that the discount challengers are already taking business from the big dogs. Consumer discussions around booking a flight with Delta Air Lines Inc. (DAL), American Airlines Group Inc. (AAL), or United Airlines Holdings Inc. (UAL) are all down YoY.

The airlines attracting customers are those that have had lower fares to begin with and those that don’t plan to significantly hike plane ticket costs.

JetBlue Airways Corp. (JBLU) looks to be a beneficiary, with revenue jumping 16.1% in Q2 2022 and JetBlue Purchase Intent mentions up 16% YoY.

Bottom line: Inflation is impacting consumer decisions, with shoppers becoming indifferent to buying something or using a service because it is a brand name. Businesses that adjust their models to appeal to value-minded consumers will be the biggest winners in this trade-down economy.