Buckle up: Pricing CPG brands is about to get bumpy
This is a year where profit will be tougher to find for the consumer packaged goods (CPG) industry as a whole. 2020 was a bumper year with pandemic-driven sales pushing topline total revenue numbers to record highs, but that won’t be the case in 2021 as spending comes in below last year’s numbers. This will also impact the bottom line, but not necessarily in the way one might expect, according to NielsenIQ’s Scott McKenzie.
The profitability dynamic has always been hard to navigate, but rapid changes in how, when and where consumers spend are forcing a rethink of managing the pressure. The first stop for brands was to optimize their product portfolios and reduce their cost of goods. They worked hard on this in the early days of COVID-19 in the face of record demand from consumers stocking up their homes with everything from frozen French fries to paper towels. They also worked hard to support their retail partners with supply guarantees. But remember, for most of last year, consumers were less focused on the price of the products they bought and more focused on availability.
Fast forward to today. Supply chain issues have been largely overcome, but brands now face increased costs in commodities, raw ingredients and the like as the world drags itself out of the worst of the pandemic. The same brands that have often done well on Wall Street are recognizing that the shift to more at-home consumption could have some staying power post-pandemic. NielsenIQ already sees that to be true as we look to markets in east Asia that are further ahead in the COVID recovery cycle.
On the other side of the fence, retailers were also confronted with expanding costs despite the top-line growth they enjoyed. Store sanitation, staff training, supply management and limited operating conditions all placed pressure on their bottom line. But the new and perhaps more lasting dynamic was the shift in buyer behavior from offline to online.
Almost overnight, the dollar share of US CPG sales coming from e-commerce leapt from 7% to a steady 13%. And in terms of sheer dollar growth, the sector saw a lift of almost 60%. This represents a channel shift that was expected to take years happening in mere months.
On the surface, this online growth might appear to be nothing but good news, but for many retailers, that has not been the case. Why? Online sales are often less profitable than in-store sales for traditional retailers because of fulfilment, warehousing, and inventory costs. It is the reality of growing the online arm of a primarily offline business.
Can brands actually raise prices?
Ok, so if big brands had additional costs, big retailers had extra costs and less profitable online customers flooding to them, what about the third component: consumers? The good news is they have generally continued to spend more on consumer goods than in pre-COVID circumstances. The slightly more challenging news is they will be pushing retailers and brands to keep their prices low.
Retailers now find themselves in the middle of a tricky profitability equation. Brands, who also need to find more profitable dollars, are calling on them to increase prices. Faced with rising numbers of less profitable sales thanks to online growth, retailers would also like to boost prices. The problem is that consumers are telling them there will be clear consequences.
NielsenIQ indicates that globally, 66% of consumers have changed how they buy categories and brands, which has significant implications for brands and retailers. Inside of this, we see large numbers of consumers employing new coping mechanisms to manage household budgets: 46% say they buy products based solely on promotions, irrespective of brand, 42% say they’re driven by lowest price and 45% always seek private label/store brands to save money.
More positively, 55% of consumers say they are brand loyal, but clearly, their loyalties will be tested as economic conditions remain tough in the months and years ahead, even with the helping hand of stimulus packages. But that doesn’t mean smart brands and smart retailers can’t navigate towards price increases. We see examples every day of brands finding price elasticity in the market. Consumers can still be convinced to spend — particularly those who have been financially insulated during the pandemic: those who have kept their jobs, saved money and spent less than they would in a normal year.
It's safe to say there is no one, clear answer when it comes to pricing. This year will, more than ever, be about recognizing and reacting to consumer signals and quickly. Buckle up.
Scott McKenzie is the global head of the NielsenIQ Intelligence Unit.