COVID in Numbers - part II

COVID didn’t just disrupt supply chains. It rearranged power. In Part I, we showed how CPGs ran the price game pre-COVID, then retailers grabbed the wheel during the chaos, and now we’re in a post-pandemic tug-of-war. Retail consolidation gave grocers more muscle. This is no longer manufacturer-dominated pricing. It’s a negotiated battlefield.

Now we shift from price to people. From supply to demand. From dollars to units. And here’s where it gets interesting. The lines in the chart below represent the weights or importance of each variable in driving grocery volumes in the U.S.

The model says grocery units move with three things: food inflation (CPI FAH), real disposable income, and home prices. Income and prices are obvious. Home prices? That feels like it wandered in from a housing conference. But it didn’t.

That’s the wealth effect. When your house price rises, your brain quietly marks you up as “richer.” Even if you don’t sell. Even if nothing changed in your checking account. We are weird like that. Balance sheets influence behavior. We saw it before the Great Recession. Housing ripped higher. Consumption followed. Then 2008 happened and everyone discovered that “home equity” can evaporate faster than ice in Phoenix.

Fast forward to today. Housing is the amplifier. Real disposable income (the green line) dominated grocery volume pre-COVID. Makes sense. When wages beat inflation, people buy more. Classic textbook economics. That driver is still strong, but it’s no longer the only star of the show.

CPI FAH (the orange line) gives you elasticity. Tracking the line over time, we see price sensitivity dropped signicantly during the first two years of COVID which is due to Government subsides but increased again when inflation increased. And despite 30% cumulative food inflation, the model says elasticity isn’t wildly different from pre-COVID. That sounds insane to people because sticker shock is real. But elasticity isn’t emotion. It’s observed behavior. And behavior, in aggregate, is stubborn.

Then there’s housing (the red line). Before COVID it mattered. After COVID, it matters more. This is where the K-economy stops being a buzzword and starts being measurable.

Housing is ~30% of the average household budget. But that average hides everything. High-income households might spend 10% of income on housing. Lower-income households can spend 50%. That’s not a rounding error. That’s a different economic universe.

Now layer in interest rates. If you bought 10 years ago at 2.5%, your housing cost is frozen in time. Meanwhile wages rose. Your housing share of income fell. Your discretionary income expanded. You are quietly winning.

If you bought recently at 6–7%, or you rent in a market where rents exploded, housing is eating your paycheck. You are squeezed. Same country. Same inflation. Very different lived experiences. That’s the K.

And it shows up in grocery channels. Premium natural grocery chains running double-digit comps? That’s the upper branch of the K flexing. Warehouse clubs and Walmart growing strongly? That’s the lower branch optimizing for value. Middle-of-the-road supermarkets stuck at ~0%? That’s the middle getting pinched.

The model doesn’t “believe” in narratives. It just weights drivers. And housing weights got heavier post-COVID. That tells you the wealth gap isn’t just philosophical. It’s embedded in unit movement.

Now let’s talk about the reversal mechanism. Housing is frozen because rates are high and nobody wants to swap a 3% mortgage for 6%. Supply is tight. Demand is constrained. Affordability is stressed. That keeps the K structure rigid. Lower rates would unlock mobility. More listings. Slower price growth. Refinancing for recent buyers. Marginal improvement in affordability. That compresses the gap a bit. Not a utopia — just less distortion.

Tariffs and policy uncertainty matter here because rates don’t move in a vacuum. If trade policy lifts inflation expectations or injects volatility, lenders demand higher yields. Housing feels that immediately. A one-point move in mortgage rates is enormous for affordability math. This isn’t political theater — it’s cash-flow arithmetic.

The deeper point:

1. Grocery units are not just about milk and cereal prices. They’re about balance sheets, asset inflation, and household leverage. If you ignore housing, you miss half the demand story.

2. And here’s the nerdy twist I love: housing didn’t just affect how much people bought. It affected where they bought.

3. When macro drivers fragment consumers, the middle suffers. Differentiation wins. Either premium experience or extreme value. Being “fine” is dangerous.

4. The data isn’t just describing the K-economy. It’s showing how asset inflation translated into channel share shifts.

   
   

Markets are messy. Humans are irrational. Balance sheets leak into shopping carts. It is harder than ever to make sense of the myriad of input impacting grocery sales. If you are looking for a way to harness that uncertainty for your advantage, ping me - www.derivzero.com