Consumer-packaged-goods companies (CPGs) are operating in a highly volatile environment that presents unique challenges and opportunities. After experiencing major commercial and operational disruptions from COVID-19 lockdowns and supply chain challenges, CPGs must now respond to heightened inflation and fears of recession while the timing of an economic recovery is uncertain.
Yet perhaps the biggest, most urgent challenge is determining how this volatility affects consumer behavior, which is evolving in a highly dynamic and nuanced way. While total real consumer spending in the United States is trending downward, some groups have increased their real spending, and some categories are still seeing growth.
Understanding the details of these shifts is critical to making the best strategic decisions. With the right set of actions, CPGs can build operational resilience, drive top- and bottom-line value, and lay the foundation today to put significant distance between themselves and the rest of the pack as the economy gains a firmer, more predictable footing.
The evolving consumer: What we know
Our most recent Consumer Pulse Survey made one thing clear: inflation is the top concern for consumers.1 In June, US consumer prices increased by 9.1 percent compared with the previous year—a 40-year high. While the rate eased to 8.3 percent in August, the effects of inflation and economic concerns on consumer behavior reverberated across income levels and consumer groups. Our survey findings include the following:
Inflation is the top concern among consumers, with older generations most worried. Inflation ranks above COVID-19, climate change, abortion laws, and gun violence in top-of-mind concerns for consumers. This sentiment is even more pronounced among baby boomers and Generation X. As a result, consumers were twice as pessimistic about the state of the economy in July 2022 as they were four months earlier.
Consumers are actively managing their finances, some more aggressively than others. Two-thirds of consumers are finding new ways to meet their spending needs through tactics such as reducing savings, increasing credit card balances, and paying less than the minimum due on bills. Defensive finance management is particularly a focus for Gen Zers and millennials (who together made up 80 percent of respondents). Yet while households with less than $50,000 a year in income started to dip into savings to cover expenses, medium- and high-income consumers were able to increase savings during the first quarter of this year.
Trading down is a key strategy. Three-quarters of consumers are trading down across categories: 50 percent of respondents cited inflation as the reason for seeking less expensive alternatives, while 43 percent cited concerns about the economy. Yet while awareness of recent price increases is almost universal, some perceptions are skewed. For instance, consumers believe electronics, footwear, personal care, vitamins, and over-the-counter medicine have seen “significant price increases,” when, in reality, these categories have tracked below the broad consumer price index. Grocery is one category in which consumers have more accurate readings of higher inflation. For CPGs, understanding how consumers are perceiving price changes is critical to pricing strategies and communications.
An uneven impact on consumer spending
These survey findings add up to a mixed picture for consumer spending, with some categories slowing and others maintaining growth. While real spending has increased since the beginning of the COVID-19 pandemic, growth rates remain lower than prepandemic levels, with inflation now driving greater spending growth in most categories (Exhibit 1).
Not surprisingly, spending on essential items is showing more resilience than discretionary spending: consumers’ net intent to spend is 22 percent positive for essentials (such as groceries, gasoline, and pet food and supplies) but negative 21 percent for discretionary goods (including travel, sports equipment, consumer electrics, apparel, and jewelry) and negative 3 percent for semi-discretionary items (such as household supplies, personal care, and skin care and makeup). Items in discount stores and wholesale clubs are also showing year-over-year growth. Yet while low- and middle-income earners are cutting back in discretionary categories, among higher-income consumers, spending on those products is growing.
Spending shifts also differ significantly by generation and income. Higher-income millennials, for example, stand out for their intent to increase spending across consumption categories, including on discretionary goods. Yet millennials and Gen Z, for instance, are shifting spending away from discretionary goods much more rapidly than Gen X and baby boomers.
One thing to note is that, despite its slowing upward trajectory, net intent to purchase remains higher than in the early days of the COVID-19 pandemic. Overall net purchase intent remains 20 percentage points higher compared with the second quarter of 2020, with intent for nondiscretionary items such as groceries and pet food staying particularly strong. Semi-discretionary product categories and discretionary products—notably travel-related products, out-of-home entertainment, and personal-care services—are also strong.
How consumer goods companies can respond
While understanding and navigating these consumer shifts is critical, there’s no shortage of other issues facing CPGs. Input costs remain elevated, supply chain pressures are easing but are still challenging, and tight labor markets are continuing to disrupt the value chain. While there appears to be some consensus in public markets that we are likely heading toward a recession, there is less certainty about its severity and duration.
Against this backdrop, there are several actions CPGs can take to build resilience and maintain the ability to grow amid volatility. A look at past recessions makes one thing clear: companies can’t just sit and wait. Companies that outperformed their peers through and beyond the 2008 recession moved harder and faster on productivity, took action to preserve growth capacity, divested more heading into downturns, acquired more as the recovery started, and created operational and financial buffers (Exhibit 2).
The uneven nature and high degree of uncertainty surrounding the current economic downturn call for a nuanced approach. With the following actions—investing in growth, building the supply chain of the future, and adapting with new ways of working—we believe CPGs can set themselves up to thrive, rather than just survive, in this dynamic environment.
The uneven nature and high degree of uncertainty surrounding the current economic downturn call for a nuanced approach.
Investing in growth
The following investment strategies can give CPGs the edge they need to succeed.
- Invest purposefully and assertively. Our research shows that just one in four CPGs manages to grow significantly while expanding margins, and only 6 percent manage to do so consistently. Companies that achieve sustained accretive growth expand their core portfolios to meet shifting consumer needs; innovate into adjacent categories, segments, and geographies; and make big bets to ignite breakout businesses. Doing these things requires CPGs to have a strong read on their consumers’ shifting wants and preferences.
- Make the commercial strategy inflation-proof. Consumer goods leaders are going beyond segmented price increases by updating bracket pricing, assessing the evolving value equation to adapt to consumers trading down, and shifting toward value channels. CPGs are also reshaping their promotion and discount strategies by scaling back on low-value events, improving promotion effectiveness using advanced analytics, and tightening guardrails on rebates and discretionary allowances. In addition, leaders are adjusting the retailer relationship by streamlining payment terms to reflect the current cost of capital and scrutinizing returns to identify product opportunities. Addressing the impact of inflation is particularly important—and sensitive—for semi-discretionary and discretionary categories where consumers may be more hesitant to spend.
- Boost programmatic marketing and sales. It’s a time of volatility and uncertainty in media markets. CPG leaders are embracing the uncertainty by building scenario-based marketing plans with clear triggers for when key decisions need to be made. They are also optimizing the efficiency of marketing spending to enable them to invest in strategic growth priorities at a time when others may choose to pull back. They are leaning into new media channels such as retail media networks, increasing their buys more than they typically would to drive strategic priorities, and prioritizing agility and measurability. In addition, leaders are building data-driven marketing capabilities, both as a long-term priority and to enable them to rapidly take advantage of granular shifts in the needs of specific consumer groups.
- Continue to develop the e-commerce strategy. The past two years have accelerated the adoption of e-commerce, and many of these behaviors show staying power. While consumer goods companies have made some adaptations to the channel, resilient players are active across the spectrum of e-commerce channels with differentiated approaches based on which consumers they are engaging. Furthermore, focusing on continuous, data-driven improvement and rethinking the end-to-end supply chain will be crucial in supporting profitable omnichannel growth.
Building the supply chain of the future
Focusing on innovation is integral for CPGs to thrive in a changing landscape.
- Reimagine the supply chain. The urgency to balance the demands of continuity, resilience, cost, and service levels in this unique environment presents an opportunity for organizations to take a step back and design their supply chain of the future. This requires prioritizing the needs and identifying enablers to fulfill the requirements of customers, suppliers, and ecosystem partners. Employing a mix of traditional and more prescient and tech-enabled levers is critical.
- Develop robust ways to identify and quantify risks. While many organizations struggle to determine where risks exist and the potential impact of unfavorable events, leaders have a clear sense of these factors. They embed transparent risk-sensing and mitigation practices into core supply chain functions. CPG leaders understand how to proactively mitigate market and supplier-driven risks by managing their own choices and enacting resilience-boosting requirements with supply chain partners.
- Reimagine product design. The combination of shifting consumer needs, rising input costs, and availability challenges provides fertile ground to reshape product designs. A design-to-value approach that triangulates a deep understanding of customer needs, competitive intelligence, design thinking, and insights into production inputs and processes can simultaneously unlock growth and productivity. Defining a differentiated value proposition for premium-priced branded products will be especially important in a trade-down environment. For discretionary and semi-discretionary products that will have longer replacement cycles, companies are developing services and accessories that can enhance the value of purchased products and continue to engage consumers. Particularly for margin enhancement, design for manufacturing and assembly and design for logistics can have a powerful impact.
- Accelerate investments in digital and automation in the supply chain. According to a recent McKinsey survey, supply chain digitalization is a priority for more than 75 percent of supply chain leaders. Not only are digital and automation driving improvements in EBIT, sales uplift, cash release, and cost reduction, but they are also improving resilience and agility. Leading CPGs are improving forecasting, planning, delivery, and responsiveness through digital and analytics to strengthen relationships with vendors and ultimately satisfy end users. Data-driven should-cost modeling and advanced analytics–driven management of commodity purchases protect against volatile input prices and availability. Automation efforts are being accelerated across manufacturing and warehousing to optimize cost and service. Autonomous planning technologies are being deployed to enhance service and working-capital performance.
- Free up capital to fund growth and operational excellence. Unlocking the balance sheet becomes critical in strengthening resilience, with leaders decisively divesting underperforming assets to increase financial flexibility. Furthermore, aggressively driving cost efficiencies where needed across the sales, general, and administrative functions; sourcing; product development; manufacturing; and logistics frees operating capital to fund portfolio shifts, product enhancements, and commercial strategies.
- Enhance the employee value proposition and workforce management. CPGs are still experiencing 1.5 to 2.0 times higher attrition in their frontline workforce than before the pandemic. Structural factors—including changing immigration flows, an aging workforce, and shifting worker preferences—are likely to make labor retention a continuing challenge. Resilient companies are reimagining worker experiences and enhancing their workforce management capabilities with analytics.
- Enable the sustainability agenda. CPG leaders remain committed to their sustainability goals. They are building their supply chains to be enablers, taking an end-to-end perspective to identify changes to the processes, partners, and tools required to drive sustainable impact. This includes creating transparency into the sources and practices of suppliers and building resiliency into procuring new inputs, driving efficiencies in logistics, and changing product materials and packaging to be more environmentally friendly.
Adapting with new ways of working
Remaining adaptable will allow CPGs to overcome potential hurdles and stay relevant.
- Enhance cross-functional collaboration and stakeholder communication. Many resilient organizations manage major business shifts by centralizing problem solving as well as the implementation and tracking of initiatives. Building a cadence across functions to communicate and coordinate changes can increase understanding and support root-cause problem solving, driving accountability to develop resilience—which has been a differentiator for organizations. Some CPGs have also enhanced the quality and frequency of proactive communication with supply chain and channel partners, investors, and consumers. This can strengthen relationships, improve coordination, and build trust during uncertain times.
- Focus on key priorities. While there is much that can be done, it’s critical to reduce the number of corporate priorities and double down on actions that will have the greatest impact on the business. Leading consumer goods companies are taking a hard look at what is being done today to ensure that the organization is on a solid footing by prioritizing items of the highest impact and feasibility.
- Shift toward scenario-based action plans. In this highly uncertain time, it is critical to assess growth and operational strategies against multiple scenarios of macroeconomic development. Understanding how these bets will fare in different economic outcomes is foundational to quantifying and mitigating risk in decision making.
While consumer behavior and macroeconomic conditions are at a unique inflection point, there are a range of actions consumer goods companies can take to build operational resilience and drive top- and bottom-line value. Those who act swiftly and decisively can seize opportunities that will help them weather the current storm and recover more strongly.