Headlines are raging about sky-high gas prices and grocery costs—and experts say this isn’t even the tip of the iceberg. Unfortunately, we haven’t seen inflation peak just yet, which is unfortunate news for both consumers and CPG brands.
Thanks to a combination of unprecedented factors, inflation reached a 41-year high in March 2022 at 8.5%. This means that just about every commodity that brands rely on to sell their products has experienced a surge in prices. With no end in sight, CPG companies are wondering: are we reaching an inflection point with consumer purchasing?
It’s already difficult to absorb higher costs in your margins—at what point will consumers say, “Enough”?
Rising costs, waning savings, and service-based spending outside of the home are changing consumer behavior for the long haul. Learn why inflation is so high, how it’s changing consumer behavior, and how CPGs can fight inflation with intelligent changes to their model.
Why is inflation so high?
We’re truly living through a historical time right now. There was an incredible leap in inflation as a result of the pandemic. In 2020, inflation was at 1.4%. That jumped to 7% in 2021 and 8.5% (so far) in 2022.
While the pandemic certainly kicked off this increase in inflation, other factors have an impact on inflation as well:
- The Russian invasion of Ukraine: As we enter the second month of Russia’s invasion of Ukraine, the world is beginning to feel the effects in their pocketbook. Ukraine is known as the breadbasket of Europe because it exports a tremendous amount of wheat globally. Ukraine also exports fertilizer to farmers in the United States, which will have an effect on our crop yields for years to come. As a result of sanctions, Russia isn’t able to export the plant oils that CPGs rely on to make their products, either. And with Russian oil embargoes, the Bureau of Labor Statistics noted a 40% increase in the price of energy.
- Labor market conditions: Unemployment is down 2.4 percentage points, but companies are still feeling the sting of a competitive labor market that favors workers. CPG jobs are open, but they aren’t filling nearly fast enough to keep up with consumer demand. Truck drivers, in particular, are needed to transport goods, but the driver shortage leads to significant transportation delays. All in all, this leads to stock-outs that drive up demand (and prices) for CPG goods on retail shelves.
- Pandemic supply chain issues: COVID-19 caused unprecedented labor shortage problems, but it also revealed how fragile our international supply chains truly are. Shipping capacity is still a tremendous issue for brands. There’s increased demand for shipping containers, but we’ve reached the limit of what we can reasonably transport. This means even more delays, as well as increased prices due to greater demand for shipping.
The consumer response to inflation
Inflation is careening towards 9%, with no relief in sight. It’s no wonder why consumers have started to ask themselves, “How can I save money?” Unfortunately, CPG brands are on the difficult end of this equation.
With prices increasing, consumers are more cost-conscious, which means they’re minimizing what they buy and changing their habits. CPG brands work hard to encourage shopper loyalty, but in this economy, loyalty only goes so far. In fact, there’s a noticeable trend of consumers opting for cheaper, private label goods in lieu of CPGs.
Beef, chicken, dairy, fruits, and vegetables have all soared in cost. This has led consumers to seek out cheaper alternatives, like store-brand private label goods. Grocery stores are already reporting big changes in consumer behavior, too:
- Frozen food sales grew 21% in 2021.
- Private label refrigerated goods increased by 23%.
- Shelf-stable egg substitutes grew by a staggering 289%.
Although private label goods currently own 20% of the market, this shift suggests that CPGs will face more competition from private label brands as inflation increases.
How CPG brands can respond to high inflation with prediction software
Inflation has already reached an inflection point where it’s having a direct impact on CPG companies. With market share narrowing, it’s critical for CPGs to keep their customers.
If your brand is looking for innovative ways to combat price increases, try these approaches:
- Warehousing: Are you sick of supply chain and shipping issues? Instead of following a JTL model, many CPGs are now stockpiling inventory in warehouses. This can work in some circumstances, but with the costs of storage increasing, it isn’t always feasible to prevent stock-outs with storage alone.
- Marketing and promotions: Consumers are extra responsive to promotions today, so CPG marketing needs to address this reality and seize the moment. With brand loyalty being tested, it is a great opportunity for emerging brands to introduce themselves to consumers. For those seeking to keep their loyal customers, knowing when, where, and at which price point to reach them is critical. In both cases, a Predictive Trade Optimization solution like Wise Athena can help to set the right strategy to avoid overspending and ensure CPG companies meet their desired outcomes.
- SKU management: In an environment where costs are high and margins are slim, it’s essential to manage costs wherever possible. It’s time to bring out your high-performing, high-margin products. Some CPG brands are testing out new options to boost sales. For example, with the influx of remote work, some CPG food brands are selling readymade meals instead of disparate goods or ingredients. Other brands are opting to streamline their SKUs, selling only products that fit their strict margin requirements.
- Market testing: Sometimes it doesn’t make sense to have your product in all stores. Analyze your data to see which retailers account for the bulk of your sales. To minimize transportation costs and staffing issues, it might be wise to limit where your products are available.
- Intelligent pricing: The past two years have been very challenging from a pricing perspective. With solutions like WiseAthena, it’s possible for CPG brands to get the data they need to make agile pricing decisions. Use an AI for CPG pricing tool like WiseAthena to improve your margins with pricing that won’t overwhelm your consumers.
Inflation-friendly pricing for CPG
Although initial projections predicted that the spike in inflation would end in 2022, recent events mean that there’s no end in sight. Consumers are seeing the differences in their wallet and changing their buying patterns accordingly. Brand loyalty is a relic of the past, so CPGs need to change how they do business to get ahead.
Careful pricing is the best way to appease customers while maintaining your CPG brand’s position. WiseAthena is an AI-driven machine learning platform that helps CPGs make these agile pricing decisions. The platform uses dynamic data to help CPGs adapt to the times, taking the guesswork out of pricing in a tricky economy.
See WiseAthena in action: schedule your demo now.