In the beginning of 2022, brands struggled with their supply chains and what was thought (at the time) to be temporary inflationary pressures stemming from the war in Ukraine. Now we know that inflation and consumer spending changes will continue to be a challenge going into 2023. So where will the opportunities shift in an economic slowdown?
Consumer Packaged Goods (CPG) brands are not slowing down in terms of growth, but inflation and consumer spending shifts are still major challenges. This combination leaves the industry primed for opportunities to double down on their marketing efforts by leveraging digital, branding, packaging and creative, media and more.
Fear of Downtrading
While headlines have been mixed on where the economy is headed, the softness in the market that people feel is starting to become etched in hard numbers. Noteworthy CPG retailers like Target, Walmart, and Amazon missed their earnings. The fear earlier in the year that consumer behavior would be impacted by inflation is starting to take shape and show in financial reports.
CPG giants like Nestle, Unilever, and Campbells all experienced market share losses to private label brands in consumer staple categories. Strategies to protect against trading down were all prevalent in their reports. Price increases have been steady all year and most reported an additional 5% increase in the last quarter. Balancing price increases with the decline in spending is a top initiative for 2023.
CPG is gaining back most of the lost margins through eCommerce. Digital sales continued to rise another 5% in Q3 bringing the YTD increase to just shy of 40%. This is partially fueled by the consumer behavior shift from in-person shopping to online, due to COVID. This convenience is one that many consumers still enjoy even with the upcharge.
Of all the categories to go after during an expected recession, CPG has the best outlook during the downturn and has fared better than many sectors. While most CPG companies are still down for the year, they continue to see organic growth gains and are not experiencing the declines that other sectors are seeing.
As inflation is here to stay, CPG brands are looking to make a two-pronged approach: Increase prices to adjust overall margin rates while deterring consumers from downtrading.
Increasing prices comes with a risk, and it’s that coveted phrase investors are asking every CPG brand about: Downtrading. Brand equity becomes highly important because brands won’t be able to compete on pricing given inflation challenges. Because of this, marketing and innovation will continue to see investments, skewing toward heavier investments in digital strategies and campaigns as brands aim to increase brand equity or premiumize their brands to offset the consumer perception of increased pricing. If the economy does dip into a recession, then brands will need to combat downtrading even with steady overall growth to their portfolios.
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