From My Morning Brew Buddies

When inflation spikes, even high rollers start to consider subbing out Patrón for Cuervo—and that’s good news for businesses selling cheaper goods.

Walmart blew past analysts’ expectations when it reported its quarterly earningsyesterday, with sales growing more than 8% thanks in part to attracting more high-income shoppers. On the grocery side, around 75% of Walmart’s market share gains last quarter came courtesy of customers from households earning $100,000 or more per year.

The value chain’s swanky new clientele reflects a phenomenon that economists call “trading down,” when consumers facing tough times swap high-priced items for cheaper versions.

It’s happened before—during the economic downturn from 2009–2011, the ratio of high- to low-quality goods bought in the US dipped, then increased again when the economy was booming from 2015–2017, according to a recent article in the Chicago Booth Review, the magazine of the University of Chicago’s business school.

So, who else is getting a boost from the rich?

Looks like the wealthy are trading eating endangered species for onion rings and pancakes.

  • Applebee’s and IHOP, both owned by Dine Brands, increased sales 6%–8% among households with $75,000+ in annual income in the second quarter, per CNN. This “suggests to us that guests that often dine at more expensive restaurants are finding Applebee’s and IHOP because of their well-known value position,” the CEO of Dine Brands said.
  • Chipotle also got more love from high-income diners ditching white tablecloth restaurants in Q2. The burrito chain’s CEO said its customers have relatively high household incomes and upped the frequency of their orders despite a recent price hike, Insider reported.

The other side

While trading down might sound like it’s only a problem for luxury watchmakers, it’s not just rich folks choosing generics instead of brand names—lower-income people are also going cheaper or foregoing purchases completely. For Applebee’s and IHOP, sales to households making less than $50,000 a year declined, and Chipotle’s CEO noted that while its high-income customers were buying more, its typical low-income customer “definitely has pulled back their purchase frequency.” The brands are still in good shape financially, but those customers may not be.

Big picture: Trading down is one reason why discount retailers typically do better than other companies during economic downturns. Walmart shares have outperformed the S&P 500 in each of the past five recessions, according to a Bank of America analysis.—AR

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