The following is a guest post from Hans Van Delden, a principal at PwC US.
While the pandemic has wreaked havoc on many industries over the past two years, the CPG sector has held up relatively well. Industry sales increased in 2020 thanks to more people shopping for essential items both in-store and online, while PwC’s December 2021 Global Consumer Insights Pulse Survey found that 76% of respondents plan on spending more money in the coming year.
That doesn’t mean 2022 is going to be a breeze. Rising inflation, supply chain challenges and increased online consumer spending could bring more challenges than the sector has seen in some time.
If companies are going to improve performance, they need to look inward and examine their approaches to pricing, discounting, data analytics and more. Here are four steps CPG operations can take to enhance their performance in the year ahead.
1. Understand inflation’s impact
In December, inflation increased by 7.0% year-over-year, the largest 12-month increase in consumer goods prices since June 1982, according to the Bureau of Labor Statistics. Given how tight margins are in this sector normally, there’s plenty of pressure for CPG operations to raise their rates. However, companies can’t simply push prices higher along with inflation. Instead, they must examine all of their products to see how increases will impact consumer demand.
“Businesses must determine to what extent companies can pass on cost increases to their consumers,” says Penny Boswell, principal and consumer markets specialist at PwC US. “What impact should that have on how they’re thinking about pricing, but also absolute price points and price type architecture design?”
To do this, you need to wargame different scenarios, Boswell explains. You want to see how price changes might influence spending behaviors, but also how reducing the amount of product in a package – selling 10 cookies in a package instead of 12 without changing the price point, for instance – could impact purchasing behaviors.
Understanding how consumer behavior may be shifting, and how your competitors are responding to inflation issues, will be critical.
“Wargame what might happen on the cost side, but also on the competitive side and the customer side,” says Boswell. “Who’s going to do what? What do we think the most likely scenario will be? How do we play our hand to ensure the best success?”
2. Get more strategic with trade promotions
Now is a good time to reexamine promotions. Prices for in-demand food items from cookies to mustard to frozen waffles are expected to rise throughout 2022 with some retailers raising prices by 20%, according The Wall Street Journal. With interest in other items picking up as the economy opens, think about whether it makes sense to promote a product or invest more in marketing it instead.
“As things are becoming more normal, consumers have gotten into a regular buying pattern again,” says Boswell. “There’s a unique opportunity for companies who really did pull back on discounting to take a good hard look at what their promotion strategies are. They should ask themselves, what role does promotion play in their overall portfolio? Should they invest an extra dollar in marketing and brand building? Do they invest an extra dollar in the price?”
This also relates to inflation – and ongoing supply chain issues. If a business discounts an item that’s rising in price, they could quickly find themselves in the red. Boswell advises companies to think twice about increasing demand for an item that can’t be quickly replenished on store shelves.
3. Examine pricing elasticity
Understanding pricing elasticity may become increasingly important in the coming months. While price elasticity — how a change in price can impact demand — relates to how companies deal with inflation, Boswell explains that the factors determining item costs, and how consumers might respond, is much broader. Everything from weather in a particular area of the country to supply chain backups to changing consumer tastes to shifting buying habits from COVID-19 can all have an impact on prices and volumes.
“All of those variables are going to drive that change in volume,” Boswell says, adding that many companies struggle to understand how so many disparate influences impact pricing. “You need to have a model that’s going to be good enough to tell you that 5% of a 10% change in volume was driven by one thing and 2% was driven by another. You can then use these elasticities to competently predict what could happen in the future.”
4. Dig into data
As the CPG industry gets increasingly more competitive, companies need to get better at data analytics. With more businesses trying out direct-to-consumer options and e-commerce making it easier for buyers to purchase almost anything at any time, there’s a lot more work to do than simply managing your items in store.
CPG operations are starting to do more detailed number crunching to see exactly where they can enhance margins and boost revenues, says Boswell, but it’s still early days. They can, in theory, see whether a small shift in pricing, a subtle change of packaging or a bad winter storm can impact the top and bottom lines. But many businesses still aren’t employing the tools they need to get that visibility.
“Data is a blind spot in these organizations,” says Boswell, who says many companies have built data lakes, where information is gathered and stored, but they don’t yet know how to use that information to their advantage. “They need to figure out how they can leverage data in a meaningful way, how to use information to make decisions and act quickly or how to know if their competitors are running low on stock.”
There’s no question that 2022 will be full of surprises and ups and downs, but with the economy moving forward in earnest, now’s the time for companies to take a close look at their operations. If you can dive deep into your data and understand the key economic and industry trends impacting your business, then revenue growth shouldn't be far behind.