Innovatively Speaking: March Edition
Catalyx’s Founder & CEO, Guy White, shares his viewpoint of this month’s CPG landscape.
50% of top FMCGs missed their net revenue expectations for Q4 ’23. Up from just 9% just three quarters earlier. A worrying trend, but not unexpected. By us, at least. ?
And while this trend is not (yet) reaching their bottom line, it will.
As we all know and feel, consumer pricing across most of the world has jumped. Triggered initially by big post-COVID, post-Ukraine-war commodity price increases, CPG companies increased their prices in an unprecedented fashion, which retailers largely passed on to the consumer.
Initial price elasticity data suggested consumers were happy to absorb this. With 2023 price elasticity at about 50% less than the historical average for the industry - if everyone increases their prices at the same time, brands remain comparatively equal on this metric.
So, as commodity prices eased off but consumer prices stuck, the industry celebrated widening profit margins… at least for the last 12 months.
After the consumer price hike is where the trouble starts.
The first problem - with pricing now baked into their base, but expectations for top and bottom-line growth remaining and further pricing very much off the table, firms only have two levers to pull. Organic volume growth or cost-cutting. I fear we will see much of the latter, particularly from those struggling to enable the former.
The second problem – global wage inflation has not kept pace with consumer goods price inflation. People are relatively poorer. Household goods are more expensive. Choices are harder.
It is no surprise that Private Label goods are booming. Exploding to over 40% market share in Europe and 22% globally according to Kantar, with much of the growth coming from above average income earners – the backbone to branded consumer goods.
Retailers need forward-thinking, branded players with the internal capabilities and depth of experience to innovate. With innovation comes value creation and category penetration growth.
So, was the unprecedented pricing a collective own goal that will lead to dramatic trade down, reduction in consumption frequency, re-adjustment to a private label controlled high-street? If so, some brands have a serious issue on their hands.
Private label versus category brand champions
It’s certainly true that historically when it comes to Private Label, what goes up, doesn’t come back down. All previous private label growth periods have stuck, even when economy picks up. If retailers are making better margins from these products, that can start to make the future very uncertain for the branded players.
If consumers are, consciously or not, making choices to purchase and use less often to save money, growth will drop even if they are loyal to branded players. This creates a double whammy of headwinds that spell difficult times for brands caught in this position.
But this is a dramatic over-simplification of what is and will continue to happen.
First of all, we know that private label gets stronger where private label is already strong. And these tend to be in more price elastic categories where brands haven’t been able to innovate sufficiently to justify their price premium. However, there are plenty of categories where this isn’t the case (not many people brush their teeth with private label toothpaste or remove body hair with a bargain basement razor).
Secondly, retailers need forward-thinking, branded players with the internal capabilities and depth of experience to innovate. With innovation comes value creation and category penetration growth. Which resets consumer expectations. Look at how spice kits or microwavable rice or prechopped garlic have totally re-invented both the product and price expectation for their respective categories.
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What this means for CPG brands
For those that have the consumer-centricity, R&D backbone, risk appetite and executional excellence to innovate this will be an incredible time. In times of relative hardship consumers are far more open to making a change, trying something new.
It’s those left in the middle that will suffer. And they will suffer badly. As retailers push margin-accretive private label onto more shelf space, they are simplifying categories to support navigation in front-of-house and logistics in back-of-house. While retaining the category brand champions that drive innovation and long-term value growth and every now and then introducing NPD with exciting disruptive offers - those on neither end of the spectrum will be overlooked.
I think consumers and retailers will be brutal. But exciting new products and propositions will emerge at an accelerated rate as the best brands innovate around this.
This has always been the case, but the last 12 months have accelerated it. Volume growth is the only option available to sustainably meet growth expectations, meaning developing consumer-centric product, pack and commercial innovation is right back in the dead centre of the spotlight. It is the only way to win in this market. And it will remain that way for the foreseeable future. ???
At the end of the day, it comes down to the value equation. The sub-conscious calculation a consumer makes with every single purchase they make. Value = Price + Equity.
A brand better have the equity to back its position up or suddenly that equation is all out of whack. And guess what? The consumer will make a change.
-????????? Is your brand known?
-????????? Does your brand perform (functionally, emotionally) against competitors?
-????????? Does your brand elicit positive emotions for consumers?
-????????? Does your brand resonate with the consumer? Do they feel it is their brand?
When the price hike overstays
Was pricing a collective own goal? At the time, it was a necessity. Brands had to navigate some very difficult short-term commodity fluctuations.
Its aftermath is simply going to sort the wheat from the chaff. I think consumers and retailers will be brutal. But exciting new products and propositions will emerge at an accelerated rate as the best brands innovate around this. New entrants are going to emerge to solve unmet needs, underserved consumers and occasions more completely within the context of their competition.
For those with the systems and processes to consistently create the consumer centric innovation funnel to back up their revised consumer value equation, big wins lie ahead. For those that don’t, it’s time to dust off the drawing board.
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Catalyx is a Consumer-centric Innovation Consultancy. We help the world’s most forward-thinking consumer product companies unlock progress through more effective innovation.