CPGs: Strategy to Navigate Inflation

Welcome to the 21st Century 

The new millennium has been a roller coaster ride for the CPG industry. With success and failure so closely tied to the ups and downs of the economy, the last 20 years have offered  a string of boom and bust cycles instead of opportunities for steady growth.

Other macro trends, like e-commerce, presented opportunities for new and agile brands, while eroding share from big brands that were late to react. Most recently, the pandemic shook the economy, at first spiking demand for consumer goods and later fueling supply chain issues. 

Now, as the data show consumers have put the pandemic behind them, the CPG industry is facing down the highest inflation numbers we’ve seen in over 40 years. It seems that it’s time to write a new marketing playbook before the ink has dried on the last one.

What are Consumers Thinking?

Based on some fresh (July 22) Pulse-of-the-Consumer Research from our friends at Resonate, over a third of Americans (35%) rate the current U.S. economy as “very poor,” a 29% increase from the same poll taken in May. This is largely due to the pain they are experiencing from price increases, with 57% of respondents claiming they have had to start cutting corners or making significant changes to cover their bills. 

What changes are consumers making?   

• Rationing/using less product (37%)
• Cutting out all non-essential purchases (35%)
• Cutting out some (not all) non-essential purchases (27%)
• Delaying large purchases (25%)
• Going out less (25%)
• Changing stores to find better deals/choosing cheaper brands (16%)
• Going into debt or dipping into savings (17%)

Wow, I Need a Drink …

Or that may be what some of these consumers are thinking … but can they afford their current brand? Molson Coors’ U.S. overall sales volume was down 1.7% in Q2, but it did see some bright spots, with three out of four of its lower-priced brands growing market share in the quarter. This represented that “economy” portfolio’s best quarterly performance in three years.  

But during this period of inflation, the alcohol industry has managed to avoid significant price increases. Beer prices rose just 1.9%, and wine prices just 1.1%. Prices for spirits actually decreased 0.6% during the period (according to IRI data).

Contrast this with soft drinks, which increased 10% in price; and energy drinks, which were up 8.3%.

Contrary to the results seen with Molson Coors, over the last year, Premium beer accounted for 35% of all beer sales (up from 31% YoY), and Value beer made up 51% of sales (down from 55% YoY). The Super-Premium beer category also saw increases YoY.  

What can marketers take away from all this data?

One thing is for sure: “Non-essential purchases” are subjective. It’s more important than ever for your brand to have a significant, meaningful connection with your consumers.  I’ll cut back on movies, subscriptions, and vegetables, but I’m not giving up my favorite beer (Victory Monkeys, by the way).

Is Inflation all bad?

Retailers are known to like a little inflation. Kroger’s CEO has said “somewhere between 3%-4% is optimal.” This is just enough to keep the top-line growing without driving away shoppers.  

But that’s not what we’ve been seeing this year. Inflation has crept into double digits in some areas, and as seen in the data above, higher prices are pushing some consumers (16%) to find cheaper stores and cheaper brands. That seems significant, but the big retailers don’t seem to be feeling the squeeze (yet). Ahold Delhaize recently reported a 6.4% comps increase, which followed similar results from Publix (7.8% comps increase) and Albertsons (6.8% comps increase).

The latest Consumer Price Index numbers were overall flat in July, which gave the stock markets a boost, but the Food Index increased 1.1%, its seventh consecutive monthly increase of 1% or more, for a total of 13.1% over the last twelve months. The gasoline index fell 7.7% in July, hopefully putting some money back in consumers’ wallets. Right now, many eyes are glued to these and other data points that will give clues about how consumers are faring, and what lies ahead for the economy.

What can marketers be doing now?

During the chaotic ups and downs of the last few decades, too many companies were left reacting to external forces with no time to slow down and reset their strategy. Most recently, the pandemic threw wrench after wrench into the machine … forget strategy, marketers were dealing with triage and damage control.

Now is a great time to … catch your breath? … but also a great time to be revisiting your marketing goals and strategies with both a long-term and short-term perspective. A time to ask the classic strategic questions like: 

Where Do We Play?

• Who are our best customers?
• What do we know about them?
• Where can we find them?
• What don’t we know, and how do we find out?
• What do these customers think about us?
• What other customer segments are opportunities?
• Which distribution channels best serve us?
• Which channels present growth opportunities?
• How can we improve relationships with our distributors?
• Where are we “playing” now that we shouldn’t be?

How Do We Win?

• Who is competing where we play?
• Why will consumers pick us over them?
• What can we do that they cannot?
• What are our unique value propositions?
• Do they resonate with our best customers?
• How do we bring new customers to the space?
• How can we tighten the bond with our consumer?
• How do we create value for our partners?
• What new partnerships can help us win?

Questions may vary; these are just to get the wheels turning. There are lots of good ways to approach strategy, and we’re always happy to help. Once you have goals in place, and strategies in place to achieve those goals, you can get back to execution.  

Let’s say you are a premium beer company and the economy starts to tank. Yes, you’ll have some triage to do trying to hold onto retail customers and consumers, but it’d be great if you already had some fallback strategies in place. What if you already had a product being tested that was slightly less liquid (8 oz. bottles?), but allowed you to cut prices by 20% while holding margins for you and your retailers? Maybe your loyal customers who were going to have to make a hard choice would gladly accept a slightly smaller portion to be able to continue to enjoy their favorite brand. Or maybe there is a chance to shake up your distribution, or leverage new partnerships. Even working out some of these ideas in theory will keep you prepared for whatever comes next. 

As the last few decades have reminded us, it’s hard to predict the future. Long-term plans are great, and necessary, but don’t give up on strategy because you had to take a detour.  Or several detours. Keep reworking and revisiting your short-term plan. With every downturn, crash, or unexpected challenge there is an opportunity to be uncovered … great opportunities for those prepared to search for it and do the work.