Why ALDI, Lidl & Greggs Thrive in a Downturn | Income Elasticity Explained

Why do ALDI, Lidl, and Greggs boom when everyone else struggles? Let’s talk about Income Elasticity of Demand — or YED for short! This measures how demand changes as real income rises or falls. And during a cost-of-living crisis, something fascinating happens…

🔍 What is Income Elasticity of Demand?

Income elasticity of demand (YED) measures how the quantity demanded of a good responds to changes in real income. The formula is:

YED = % change in quantity demanded / % change in real income​

YED helps categorize goods based on how demand shifts as consumer income rises or falls.

📊 Types of Goods Based on YED Values

• Normal Goods: Positive YED (> 0)
  • Demand increases as income rises.
  • Includes both:
    • Necessities: YED between 0 and 1 (e.g., milk, fruit).
    • Luxuries: YED > 1 (e.g., holidays, designer clothing)​
• Inferior Goods: Negative YED (< 0)
  • Demand increases when income falls.
  • Often counter-cyclical—popular during recessions or cost-of-living crises​.

🏪 Inferior Goods in Real Life

Inferior goods are central to understanding consumer behaviour during economic downturns. When real incomes fall, consumers often substitute away from premium products toward more affordable options. This was evident in recent years during the UK’s cost-of-living crisis.

• Discount supermarkets (e.g., ALDI, Lidl) gained market share as households traded down from premium retailers. ALDI overtook Morrisons in 2023 to become the UK’s 4th largest supermarket​.
• Fast food chains (e.g., Greggs, McDonald’s) and budget retailers (e.g., B&M, Poundland) benefited from consumers cutting back on restaurant meals and branded goods​.
• Second-hand markets and repair services also grew, with platforms like Vinted and Facebook Marketplace becoming more popular.

📈 Why YED Matters for Businesses

Understanding YED helps firms to:

• Predict how sales will respond to economic booms or downturns.
• Identify which goods are income elastic (luxuries) and which are income inelastic (necessities).
• Diversify product lines to balance risk—especially by offering both high-YED and low-YED goods.
• Position themselves strategically in response to macroeconomic shifts, like falling real wages​