Knowing Customer Preferences is Key to CPG Success

With inflation shredding consumers’ budgets, consumer packaged goods (CPG) manufacturers and retailers are feeling the impact. A year ago, food writer Simon Harvey predicted things were going to get worse before they got better. He wrote, “Decades-high inflation rates in the western world are likely to get worse before they peak, presenting operational challenges right across the supply chain.”[1] He was correct. Even as inflationary pressures eased in other categories, high prices still rule in grocery aisles. CPG manufacturers are caught in this inflationary maelstrom. Harvey explained, “Inputs have gone up so much that some industry executives and managers have never faced such a taxing environment during their working lives, and the era of cheap money is coming to an end as central banks raise borrowing costs to temper price increases. …?Retailers, manufacturers, ingredients suppliers, packaging makers and logistics providers are all feeling the pinch from higher commodity, energy, fuel and labor costs.”

As bad as things are on the supply side, consumers are the greatest victims of the inflationary maelstrom. “Ultimately,” Harvey explained, “it’s the consumer taking the brunt.” The big question for brands is: How will consumer behavior change as a result of inflationary pressures? Harvey noted, “Analysts agree the effect of inflation on household spending will vary depending on budgets and disposable incomes.” On the CPG front, however, the news has not been all bad. Grocery journalist Christine LaFave Grace noted that the combination of hybrid work schemes, a still-strong home cooking trend, and low unemployment rates creates conditions for cautious optimism tempered by informed pessimism.[2] She reports that the Consumer Brands Association (CBA) predicts, “Demand for consumer packaged goods is likely to remain elevated over pre-pandemic levels.” Nevertheless, brands need to monitor consumer behavior if they want to optimize performance over the next few months and years.

Understanding Consumer Behavior

Gerry Szatvanyi , CEO of OSF Digital, insists inflation is not the only reason brands need to monitor consumer behavior. He explains, “It’s no secret that consumer behavior is rapidly evolving in response to e-commerce acceleration and omnichannel adoption. In a digital-centric world, how customers interact and align with brands is far different — meaning CPG companies can no longer rely on retailers alone for sales and customer feedback.”[3] Szatvanyi continues, “While [changing consumer behavior] may be out of their control, what CPG companies can still control is how they react to it.” Of course, in order to react to change, brands need to know how things are changing. Szatvanyi explains, “This societal shift requires a new, hyper-focused approach to engagement and forecasting only attainable through customer predictability modeling — a subset of interconnected digital transformation that leverages artificial intelligence and machine learning to generate actionable data insights on the probability of future outcomes relative to consumer behavior.”

I agree with Szatvanyi. Customer predictability models, like the?Enterra Shopper Marketing and Consumer Insights Intelligence System?, can leverage all types of consumer data to provide high-dimensional consumer, retailer, and marketing insights. Szatvanyi concludes, “Those insights can then be applied across multi-cloud integrations to deliver personalized customer experiences, meet evolving buyer expectations, and weather demand volatility. Above all, it empowers enterprises with the flexibility and foresight to pave new pathways for sustained success.”

The Consumer Brands Association hints that it might be wise to monitor consumer moods as well as actual behavior. After all, the thought often precedes the action. And, McKinsey & Company analysts report, "More consumers are feeling optimistic about the economy — but they’re also spending more cautiously.[4] Cautious spending means less spending. The McKinsey analysts explain, "As we head into the summer months, temperatures may be going up across the United States — but consumer spending is going in the opposite direction. In fact, across all age and income groups, consumer spending is lower than it was a year ago."

According to journalists Rachel Wolfe and Sharon Terlep , one thing brands shouldn’t underestimate is the resilience of the American consumer. They write, “In early 2020, many companies said the pandemic would change everything for consumers. And it did — for a while. Now many Americans are resuming their pre-pandemic habits.”[5] Americans are eager to put the pandemic behind them and are changing what they are buying. Wolfe and Terlep note, “In the first year of the pandemic, Americans bought a record amount of household mainstays such as paper towels, toilet paper, flour and spices. … [Since the beginning of 2022], American consumer tastes have changed rapidly, again, and companies are scrambling to catch up. … With people primping to go out in public, they are spending more on deodorant, teeth whiteners, razors and cosmetics, according to IRI. They’re less enthusiastic about cooking and baking at home.”

McKinsey & Company analysts are seeing the same changes in consumer behavior. They report, “The latest Consumer Pulse survey shows that, across America, people have simultaneously embraced new behaviors and reverted to old ones.”[6] They then ask, “What will they do next?” It’s a question for which they have no ready answer. They explain, “It remains to be seen how — and how intensely — recent geopolitical and economic developments will affect US consumers’ outlook. What’s clear is that, more than ever, companies must stay on top of consumers’ fast-changing attitudes and behaviors.” The analysts believe the most important variable will continue to be inflation. CFRA Research analyst Arun Sundaram agrees. He explains, “At least for the past [few years], CPG companies have been able to raise prices without seeing any meaningful dips to demand. That was an unusual operating environment for them but that’s unlikely to last. At some point we’ll see a meaningful shift in consumer behavior.”[7]

One of those “meaningful shifts” is likely to be a loss of brand loyalty. McKinsey analysts explain, “More US consumers reported switching to different brands and retailers in 2022 than at any time since the beginning of the pandemic — and most of them say they intend to incorporate that behavior into their routines. Their reasons? With inflation at a record high, more people are looking for value; price is at the top of the list of consumers’ motivations for switching.”[8] Sudeep Rao , a senior pre-sales manager at Sigmoid, believes customer predictability modeling can help maintain brand loyalty. He explains, “Consumers are constantly researching, shopping, inquiring, or otherwise interacting with brands online, creating humongous amounts of data every second. Companies have the opportunity to capitalize on this massive repository of data to understand customer journeys and deliver personalized experiences that appeal to the unique demand of the consumers. By better understanding factors such as economic condition, product preferences, purchase behaviors, and consumption patterns, companies can … win their loyalty while capitalizing on opportunities to collate, analyze, and turn data into actionable insights.”[9]

Concluding Thoughts

Szatvanyi concludes, “In today’s digital age, customer predictability modeling is a brand’s most valuable asset. However, their data is only as strong as their ability to act on it. Embracing the full potential of customer predictability modeling will be a fundamental aspect of capitalizing on digital transformation. By leveraging the enormous amounts of data at their disposal, CPG companies can achieve business outcomes that separate themselves from industry competitors for years to come.” Consumer behavior will continue to evolve as world conditions change. Brands that keep up with those changes have the best chance of adapting to them in time to make a difference to their bottom line.

Footnotes

[1] Simon Harvey, “Predicting the unpredictable: The inflationary trickle-down on the food supply chain ,” Just Food, 10 February 2022.

[2] Christine LaFave Grace, “Consumer Brands’ 2022 Outlook: Cautious Optimism and Informed Pessimism ,” Winsight Grocery Business, 5 May 2022.

[3] Gerry Szatvanyi, “Why Customer Predictability Modeling Will Dictate CPG’s Winners in 2022 ,” Consumer Goods Technology, 17 May 2022.

[4] Christina Adams, Kari Alldredge, and Andrew Pitakos, "A monthly update on the state of the US consumer: June 2023 ," McKinsey & Company, 22 June 2023.

[5] Rachel Wolfe and Sharon Terlep, “American Consumers Are Shopping, Traveling and Working Out Like It’s 2019 ,” The Wall Street Journal, 4 May 2022.

[6] Kari Alldredge, Tamara Charm, Eric Falardeau, and Kelsey Robinson, “How US consumers are feeling, shopping, and spending—and what it means for companies ,” McKinsey & Company, 4 May 2022.

[7] Uday Sampath Kumar, “U.S. consumer sector braces for slowing demand as inflation bites ,” Reuters, 29 April 2022.

[8] Alldredge et al., op. cit.

[9] Sudeep Rao, “Win More Loyal Customers with Consumer Insights and CPG Analytics ,” Consumer Goods Technology, 10 March 2022.