Price Bumps Turn to Brand Marketing for CPG Companies
Introduction
Economic levers being pulled by manufacturing companies in 2024 involve marketing and volume plays. Companies don’t have the power to push prices like they did in 2020 and later. Those margins are now fixed. Unlike a lot of the tech world, Consumer Packaged Goods (CPG) companies don’t have the option really to reduce labor costs in any meaningful way to recoup margins without also compromising production. They have hence turned to investing these price hike profits in marketing to increase brand awareness. Supply chain pressures easing have allowed a lot more flexibility in how these organizations use their profits. Talent strategies and hiring practices reflect these investment priorities as we close out Q1 of 2024.
Background Pricing Trends from 2019 and forward
Companies like Hershey’s, Nestle, and Unilever began pushing prices in the summer of 2019. A food dive article from June 2019 details efforts by Mondelez, Hershey, General Mills, Kellogg, Hostess, and Smucker to actively introduce new or enhanced products to capture consumer attention and encourage them to invest a little more. According to data from Nielsen cited by the Journal, this strategy was proving effective. Premium variations of their products contributed to a 2% increase in dry grocery prices over the year ending in November, even though sales volume remained steady. Encouraged by this promising start, it was anticipated that more companies in the food and beverage industry would adopt a similar approach.
6 months later the COVID-19 Pandemic threw a wrench in everything. Store shelves went bare which created a demand issue for CPG companies. Price realizations helped them to start to meet the demand but the volume requirements outpaced supply. The resulting overcorrection and supply chain disruptions created more of a glut. Lockdown measures, factory closures, and restrictions on movement affected production capacities, leading to sporadic availability of certain goods and driving up prices.
With widespread lockdowns and restrictions prompting consumers to stay at home, there was a surge in demand for essential goods, such as packaged foods, cleaning products, and personal care items. This spike in demand outpaced supply, resulting in scarcity and price increases for many CPG items.
As Pandemic behaviors waned, things began to normalize and margins began showing up in different ways for CPG companies.
So what now?
What’s Happening in Q1 of 2024
If you’re like us, you’re probably a big fan of Bloomberg’s Odd Lots Podcast. On the February 16, 2024 episode entitled “Lots More on What Earnings Are Telling Us About Prices Now.”
In recent analyses of supply chain dynamics, a notable shift has been observed in companies’ pricing strategies, particularly in response to fluctuating volumes. Traditionally, companies would adjust prices to compensate for lower volumes, but this trend is changing. There’s a growing reluctance to raise prices further because price increases have already been pushed through the system. Also, concerns about consumer backlash, especially amidst discussions surrounding shrinkflation and price gouging create further reluctance.
Despite some alleviation of supply chain pressures, there remains uncertainty regarding its impact on prices. However, experts suggest that companies are unlikely to reduce prices unless it’s strategically advantageous for them. Rather, they are focusing on maintaining prices while redirecting gross margin dollars towards brand-building efforts to stimulate demand and bolster volumes.
Major companies like Unilever and Kimberly-Clark have emphasized significant investments in brand marketing to regain lost volumes, even as they keep prices steady. This shift towards prioritizing price and margin, along with marketing investments, is reshaping the landscape of competitive strategies, with notable implications for platforms like Meta and Amazon, which stand to benefit from increased advertising spending. Moreover, the booming market conditions present opportunities for substantial AI investments, potentially transforming the dynamics of consumer behavior and market trends.
Amidst these developments, the question arises: what could prompt companies to consider lowering prices? While factors such as reduced overall consumption or underwhelming returns on advertising spending may influence such decisions, the immediate impetus for a price cut remains uncertain. Thus, while the paradigm of price over volume appears to be evolving towards a more nuanced approach centered on price, margin, and marketing (PAM), the specific triggers for price adjustments in the future remain complex and multifaceted.
The Future of Supply Chain Talent Management
Election Year Pressures Not Likely to Impact Prices
Samuel Rines remarked to Odd Lots that political pressure and admonishments typically don’t result in companies lowering their prices. There’s no enforcement mechanism and no financial incentive to do so. “You’re only going to lower prices if it’s advantageous to you in some way,” says Rines.
CPG companies aren’t really raising prices all that much and you’ve told people that you’re not going to.
Even in an election year when there’s political capital to be gained by harping on things like CPG prices, it’s unlikely to impact prices. If anything, the volatility of an election year makes everyone nervous. Big changes typically don’t happen during these periods as everyone tends to just ride out the storm. However, being in an unexpectedly robust economic climate, some companies may be willing to tempt fate.
Talent Strategies Reflect Smaller Margins
Given these pricing maneuvers and dynamics, what does that mean for labor costs in the supply chain?
Numerous articles by Chris Gaffney in 2023 outlined the success of companies that take a measured approach to talent and market responses. This allowed for more agility and the increased ability to weather supply chain and market disruptions. Just because the economy is good doesn’t mean you should go out and hire hire hire. Why? Because then you will have to fire fire fire when the eventual sugar high normalizes.
Supply chain talent continues to come at a premium, and this likely won’t change with the slow growth economy. With companies unable to put more pressure on prices to increase margins, they’re more focused on labor costs and brand awareness. Still, the doughnuts need to be made and consumer demand likely will remain at current levels.
Specialized supply chain talent pros can be an essential tool for hard to fill positions to help bridge the supply chain talent gap. Companies also are encouraged to maintain and boost onboarding practices so existing employees experience enhanced learning and development protocols. This can help with retention and ensure that margins aren’t as negatively influenced by the need to acquire expensive talent.
Goldman Sachs Increases 2024 Growth Estimate
On March 18th, Goldman Sachs revised up their economic growth projections for 2024 to 2.1%, up from 1.8% in November. These projections come after strong immigration numbers which should bolster the labor force moving into the height of the Agriculture season.
Hiring remains strong with 275,000 jobs added in February and more economists are confident that the US should avoid a recession this year. These numbers and forecasts are a far cry from the doom and gloom of 2023 when the recession was right around the corner. Companies ran lean despite increased consumer demand for their products. Recession fears tamped down hiring, so profits were likely lost.
Conclusion
CPG companies that pushed price indexes from 2019 on have been able to realize enough profits to invest into brand awareness campaigns in attempts to ease the criticism of increased consumer costs. Shrinkflation is making noises in the political arena as well but those pressures are highly unlikely to result in price lowering. These realized profits and brand investments have shown up on the bottom lines of companies like META, Alphabet, and even Amazon. These margins are allowing for huge investments in AI as ways to further decrease labor costs. CPG companies talent strategies show that they are not able to make further workforce reductions without sacrificing production levels. These levels will maintain supply chain stability. Supply chain organizations are encouraged to assume a measured growth strategy during these robust economic times in an election year. The organizations that don’t overhire won’t have to overfire. Of course this is only Q1 and as we all know, A LOT can change, quickly.
