Inflation is growing faster today than it has since the Great Recession. Whether it is driven by temporary shocks or longer-term forces is unclear at this point. Regardless, consumer packaged goods (CPG) companies are feeling a hit to the bottom line.
With costs rising across a variety of inputs, ranging from commodities to labor to transportation, the question is not if CPG manufacturers will increase their prices, but when and how. We expect CPG players to offset costs while resetting category price dynamics in a surgical manner so that they can recover margin in the short term even as they establish a foundation for long-term growth.
We’ve spoken with leaders at more than ten of the top North American CPG companies across multiple categories to understand their approach in this challenging inflationary environment.
Revenue management leaders at CPG companies are reporting significant increases in the cost of goods sold, and May brought reports of a 5% year-over-year increase in the Consumer Price Index, the largest 12-month increase since 2008.
While many economists believe that the inflationary shock is likely temporary, the opportunity to reset prices is too important to miss. In fact, prices had already started to rise across categories from April 2020 through March 2021. But much of the price increase in like-for-like goods during this period came from a reduction in promotions as manufacturers pulled back to address pandemic-onset supply shortages. This lever is nearly exhausted for some categories, so CPG leaders are looking at a host of net revenue management (NRM) tactics to effectively improve price realization in 2021.
A different mix of NRM moves will be appropriate for each category, so CPG leaders should ask themselves: “How elastic is the demand for my brand and products? How does this vary across packs and SKUs in a competitive context? What is the degree of exposure to commodities in my cost base?”
Answering these questions will help companies adopt a winning combination of moves:
Given the CPG industry’s success in 2020, retailers may be asking why suppliers can’t just absorb rising input costs, at least for the time being, or until cost trends become clearer. We recommend focusing on execution and retail interactions to ensure that price moves are attractive and successful.
CPG companies can get to work immediately by looking carefully at their portfolios and determining strategic goals, target prices, and tactics. From there, it’s a matter of crafting an execution approach that generates buy-in with retailers. Too much is at stake to overlook this pricing opportunity: rising input costs means diminished profit—and losing out to savvy competitors.