How CPG Businesses are Utilizing Data to Mitigate Inflationary Risk

Three data-driven strategies to mitigate inflation risk in the CPG industry

The looming threat of COVID inflation

As the world becomes better prepared to fortify itself against new waves of the pandemic, assessing the long-term impacts of this historic global event remains a necessity, particularly as every industry attempts to bounce back to pre-COVID levels of growth and revenue. Amidst all this, one risk factor has emerged that industry leaders and market experts alike are keeping an eye out for: inflation.

A brief look at the market basket

Consumers and consumer packaged goods (CPG) businesses alike are apprehensive about the latest bout of inflation triggered by the pandemic, which hit a new high in January 2022 ^[1]. Few will be able to avoid the economic difficulties ahead, with the Consumer Price Index (CPI) climbing 5.4% in June ^[2] and inflation being at its highest in 41 years, according to the latest news release from the US Bureau of Labor Statistics ^[3].

From March 2021 to March 2022, consumer goods prices climbed by 8.5% – the greatest rate of inflation since 1981. Moreover, categories including meats, eggs, fruits, vegetables, seafood, dairy products, and ready-made meals have all seen significant price hikes in the past year ^[3].

Firms in the CPG industry are particularly vulnerable to the present inflationary climate compared to other industries due to several unusual market dynamics:

1. A backlog of demand had accumulated throughout the COVID-19 pandemic, leading to supply shortages.

2. Inflationary pressures were further exacerbated by a recovering global economy and unprecedented global supply chain disruptions.

3. The pandemic also triggered a serious shortage of workers ^[4], naturally impacting all industries that are as labor-intensive as the CPG industry.

4. An increase in input costs due to factors such as rising oil and gas prices is directly correlated to increasing inflation ^[5].

5. Manufacturing prices have risen from 5% to 20%^[6], while packaging costs are likely to rise by more than 6% ^[7], posing revenue issues for the CPG sector.

6. A major rise in transportation costs ^[8] has created a ripple effect in the CPG sector, which relies heavily on product freight. For instance, truck transportation costs have risen by 19%, exacerbating existing supply chain challenges.

7. Consumers can also anticipate the supply of several commodities to be impacted as a result of the Russia–Ukraine conflict, including material shortages and price increases in agricultural products, including corn, wheat, and cereals – which is significant as they are the main raw ingredients for many packaged foods.

8. Research has also found that grocery shoppers perceive inflation rates to be considerably higher than they actually are ^[9], leading to cutbacks in consumer spending.

Mitigating the inflation impact using advanced analytics

To hedge against inflation, many CPG businesses have resorted to the expected strategy of raising product prices as well as cutting promotions and discounts ^[10]. However, in the long run, this quick-fix technique may not be enough to sustain profit margins, gain market share, and stay competitive in an inflationary economy. This is because the current wave of inflation is one of the most extreme cost surges in decades, and consequently, increasing costs will inevitably impact consumer behavior and decrease demand. Businesses are, therefore, being forced to go beyond their usual measures, especially as there are no signs of inflation abating any time soon.

To better manage inflation, CPG firms will need to have a comprehensive understanding of and visibility into all costs across the supply chain. A tech-enabled predictive analytics model that can continually monitor any changes in the supply chain and the market will be useful in this regard. CPG businesses will then be able to utilize real-time data and draw lessons from the past to identify the underlying cause of challenges in revenue management, stocking, and so on, and plan accordingly. Considering this, here’s how analytics can specifically help mitigate inflationary pressures:

1. Precision pricing

2. Packaging and distribution operations integration

3. ‘Right-shoring’ options analysis

1. Employ precision pricing using data-driven applications

In an inflationary economy, finding the right pricing will be the primary concern for CPG businesses, particularly as more brands hike prices to hedge against reduced profit margins. Since the commencement of the pandemic, pricing tiers have already altered considerably. However, conventional pricing tools are not agile enough to handle shifting market dynamics and oscillating customer attitudes about the economy, so resorting to the traditional method of across-the-board price increases is unlikely to be effective. Considering this, businesses can use data-driven applications to analyze sales, consumer behavior, and market data to estimate the impact of regular or advertised price adjustments at both the market and the store levels ^[11]. These models make use of analytical methods and tools, which take into account in real time a wide range of important factors in a dynamic environment to optimize prices for all products at every point of the lifecycle, modified by area, channel, consumer, and more. As an example, building an AI-based price optimization model helped a leading plumbing supplies company access a potential annual profit of $15.6 million by personalizing pricing for 100,000 customers across a portfolio of about 7000 products. Thus, CPG firms will be able to generate higher returns in an inflationary market by using data-driven pricing models rather than depending on traditional tactics.

2. Integrate packaging with warehouse distribution operations

Packaging is no longer simply considered a byproduct of the production process; it has evolved into an important part of a product’s success. This is because packaging has a significant influence on consumer purchase decisions, being the first point of physical contact between a buyer and the product.

The most efficient packaging operations are those that are the most flexible in an inflationary economy. A considerably more efficient and adaptive supply chain can be built by moving secondary packaging as close to the final distribution location as possible. Various market drivers, such as the growth of SKUs and margin pressure, are causing more CPG organizations to merge secondary packaging (the additional layer of packaging after primary packaging) and warehouse distribution operations ^[12]. This is due to the fact that the overall cost savings from this step could be as high as 30%. Other benefits include lower freight charges, a more flexible supply chain, a shorter cash cycle, and increased sales.

This method can be implemented by leveraging integrated analytics to automate as many warehouse and packaging activities as possible, allowing CPG companies to develop different packaging configurations, lower operational costs, manage price-sensitive areas better, and streamline their supply chain control throughout the network.

3. Analyze ‘right-shoring’ options to prevent localized supply chain disruptions

CPG businesses, particularly based in Western countries, have traditionally focused on outsourcing manufacturing due to cheap labor and low overhead costs. However, changes in market dynamics, owing to inflation and supply chain disruptions due to the aforementioned factors, have businesses reviewing local supply touchpoints and nearshoring to increase supply chain resilience. The strategy of “right-shoring” entails supplier-based diversification based on a comprehensive analysis of the manufacturing, transportation, sales, and other costs across the entire network. Analyzing available data on the role of technology in documented cases of re- and nearshoring, in conjunction with company and market data, will provide businesses with actionable insights, helping determine locations that offer maximum production and distribution efficiency. For instance, the sudden surge in demand for medical equipment prompted by the COVID-19 pandemic prompted the Chinese government to restrict medical exports so that domestic requirements were met. This, in addition to US–China trade tensions, has led to many US medical device companies diversifying production away from China to reduce dependency on it as the primary exporter of medical supplies like N95 masks, surgical gowns, and disposable gloves ^[13]. To combat such supply chain disruptions, the US government has undertaken important measures to expand domestic medical equipment manufacturing as well as relocate production to countries closer to home, such as those in the Indo–Pacific region ^[13].

Real-Time Data Analyses for Future Success

It is clear that CPG businesses cannot continue to rely on static and outdated business models that do not adapt to changing market conditions and, therefore, cannot provide reliable insights to combat price inflation. As with all else in today’s age, technology will undoubtedly play a key role in helping CPG firms estimate demand and assess the effects of their decisions beforehand, allowing them to navigate inflationary pressure more effectively. Analyzing real-time data will help businesses gain more insight into their supply chains, allowing them to make more educated decisions in supply chain and revenue management while taking into account market price dynamics; for e.g., real-time data allows businesses to distinguish between supplier benefits and drawbacks as well as quickly make the required changes when delays, shortages, or other disruptions impede operations. CPG businesses that integrate technology and establish operational models built on trust, transparency, cooperation, adaptability, and responsiveness will, hence, have better inflation defenses and be better equipped to succeed in the long run.