How Can CPG Companies Weather the Economic Storm?

The 2020 pandemic’s shadow continues to hang over the economy even as we approach the three-year mark, and the horizon is further darkened by hints of an impending recession, caused by supply chain issues, global conflicts, and a shrinking workforce in many regions. Its effects are already being felt across the world, especially in the US where inflation levels are at a 40-year high ^[1]. However, the Consumer Packaged Goods (CPG) industry has been known to exhibit resilience in certain areas during recessions. Even in inflationary periods, consumers continue to purchase essentials and for businesses, surviving the recession may be a matter of understanding which products to focus on. Lessons from The Great Recession of 2008 ^[2] could help us create a viable model to weather the coming storm.

The Great Recession and CPG

The Great Recession, which lasted from late 2007 to 2009 in the US, triggered by the crash of the housing market, had widespread global repercussions, and created major economic crises in multiple countries. Just over a decade since then, the US and global economies face the chance of yet another recessionary period. However, unlike 2008, the coming recession will not be “shock-oriented”. It has been building up slowly over a couple of years, manifesting as unusually high prices and rising unemployment rates ^[4]. Yet there are lessons learned in 2008 that may come in handy in the coming year, especially for CPG companies, which have been described as the “winners” of the last downturn ^[4].

While other industries struggled during the recession, it was found that the CPG industry fared much better in 2008. Experts attribute this to the CPG industry’s focus on delivering value, innovating, and investing in the future ^[4]. The fact that consumers continue to buy essentials even in a recession also contributes to the industry’s comparatively better performance ^[2]. Of these essentials, the food sector saw the most growth in sales at 10.2%, followed by beverages at 9.9%, and household products at 9.1% ^[4]. Food products such as frozen food, ready-made meals, shelf-stable meal kits, and groceries all did quite well in 2008 ^[2]. This points towards a trend where consumers increasingly choose to cook and eat at home during inflationary periods. However, in the same category, products like organic vegetables, which were perceived as not worth the price, saw significant drops in sales, suggesting that consumers grow more conscious of product value in a recession. Although comfort and luxury goods also took a back seat, people continued to buy these products in a limited manner—they spent money on products or services that provided an “escape” or chose to downgrade to a less expensive version of these products, often within the same brand ^[4].

What this shows is that in a recession, not all markets and products begin to sell less—there are some products that emerge successful. Data also shows that the spending for companies, relative to their sales, remained steady through 2007–08 ^[4], meaning they had continued to market and innovate within their existing product lines. This is why the CPG industry has been often considered recession-proof.

Recession in 2023?

As we enter 2023, CPG companies are preparing themselves for a period of uncertainty. The US GDP growth saw a significant slowdown, dropping from 2-6% in 2021 to -0.6% in the second quarter of 2022 ^[6]. This has since picked up in the following quarter ^[7] but, combined with a 40-year high inflation rate and a big hike in interest on the horizon, there is cause for businesses to be concerned. Bloomberg reports that economists predict a serious drop in economic growth, placing about 70% chance for the US to sink into recession this year ^[8]. Industries are also facing severe labor shortages in many crucial areas due to lower employment figures and retention rates. In addition, global factors like supply chain disruptions, the Russia-Ukraine conflict, and a possible spike in global COVID cases due to the easing of restrictions in China all contribute to instability of the economic climate ^{[1] [6]}. The pandemic had also ushered in important changes in consumer expectations and preferences, causing businesses to have to play catch up in order to survive. Companies will have to continue adapting to shifting consumer tastes, innovating, and implementing new technologies.

So how can lessons learned in the 2008 recession help CPG companies in the upcoming year? Businesses must shift their focus to three major areas: consumers, growth, and supply chain.

Understanding the consumers:

Understanding the consumer is vital in formulating a CPG company’s future strategies. Businesses must take stock of how the past few years have changed the public’s shopping habits and, at the same time, anticipate how it could change in the coming recession.

Inflation in the US is causing consumers to cut down on their general purchases, shifting to value-tier brands or discount stores. They have also reduced impulse purchases and are instead looking out for promotions and discount offers ^[1]. The rise of a value-seeking shopper is the first thing companies must keep in mind for the coming year. CPG companies must accordingly adjust their marketing and pricing strategies to accommodate this change ^[6].

CPG products can be divided into three main categories—Necessity, Comfort and Luxury. Each of these categories requires a different approach. Necessity products, primarily food and household objects, need to be marketed in a way that foregrounds how the brand offers value to the consumer. These products do well if sold in bulk and when its incomparable quality is highlighted on the packaging. Comfort products may see some decrease in sales during a recession, but its effects can be assuaged by creating smaller or less-expensive versions of existing products. Package redesign could also focus on how these products affordably fulfill a desire or provide an escape during an economic crisis. Luxury products do not show as much of a downturn as its target consumers are usually well-off and not as noticeably affected by inflation. However, these products can still be marketed better by emphasizing qualities of timelessness, prudence, quality, and long-term value. Consumers may still purchase products that they view as an investment for the future. ^[2]

The pandemic has created a consumer base that expects digital means of purchase—for both convenience and safety. CPG companies can gain an advantage over their competition by paying attention to delivering a satisfying digital experience ^[6]. Understanding the motivations of shoppers and adapting to meet their needs through branding, package redesigns, and altered product offerings is key in surviving periods of economic downturn.

Investing in growth:

It would be a mistake for CPG companies to take their focus off overall growth during recessionary periods. Businesses may think it a good idea to offset the potential losses incurred by reducing their spending on growth, marketing, and future investments. However, such an approach may hurt the brand in the long term. We can see examples from 2008 where companies that continued to invest and promote during a recession emerged successful at the end of it. A multi-national beverage company, during the crisis in 2008–09, doubled down on investing in digital offerings, consumer insights, and personalization. When the recessionary period was over and consumers began spending again, they were sufficiently prepared ^[4]. Continuing to spend on advertising and in-store promotions during a recession helps in keeping the brand fresh in the mind of consumers, and in maintaining the brand’s share of shelf-space in stores ^[6]. Brands can also grow their consumer base during economic downturns by focusing on emotional marketing, and addressing the immediate health, wellness, and nutrition concerns of consumers ^[4].

The way forward for CPG companies in the coming year is to continue purposefully investing in their growth and creating an inflation-proof commercial strategy by diversifying their product offerings. Brands must also begin to look at Revenue Growth Management (RGM) as more than a reactive tactic. Today, it is important to be able to foresee disruptions and adapt in advance. AI- and analytics-powered RGM can work pre-emptively, generating crucial industry insights, and aiding in pricing, promotions, forecasting, assortment, and distribution. Brands must also invest in diversifying their sales channels, since recessionary periods are often accompanied by consumer shifts to newer channels. This has been especially true during the pandemic, which saw a sharp increase in the popularity of online retail. Businesses should look into adopting an omnichannel approach, to maintain a balance between older and newer channels, catering to wherever the need arises.

Strengthening the supply chain:

An important distinction between The Great Recession and the recessionary period predicted for 2023 is that supply chain disruptions are now a major contributing factor. Beginning during the pandemic and fueled by unexpected, uneven demands and health regulations, issues with the supply chain have been steadily brewing over the past couple of years. Almost every single industry has been affected by this. However, supply chain disruption is not a new thing, and it will continue to be a hurdle for businesses in the future ^[9]. CPG companies must address supply chain issues and create a resilient system in the coming year—by identifying and quantifying risks, introducing automation to the chain, etc.—in order to stay afloat during the economic downturn. Supply chain risk management is set to be a crucial focus area that many businesses are already developing a dedicated function for, and Gartner predicts that, by 2025, it will turn out to be a key success driver for more than 50% of organizations ^[9].

An effective strategy for minimizing supply chain risk involves well-designed processes and dedicated resources to tackle any unexpected disruptions that may arise. These systems work to make the company more resilient and robust, easily transitioning from regular to irregular operations and vice-versa. The technology utilized must enable increased visibility of the supply chain, gather sufficient information, implement analytics, and aid in decision-making ^[9].

Experts advise businesses to take an end-to-end approach for their supply chain management. Establishing a more direct relationship with suppliers and assigning a single logistics provider for the entire chain can help in reducing the risk of disruptions, and the ability to produce at short notice aids in keeping the supply chain flexible. Experts also recommend incremental investments when preparing for supply chain disruptions as it makes it easier to make changes, while mitigating its financial effects. ^[9]

Surviving a recession requires having one’s finger on the pulse of the market and adapting quickly to the changes. Looking back to the last major recession can offer some important lessons about paying attention to shifting consumer habits, making sure not to forgo on growth and investments during this time, etc. But 2023 will also bring with it its own unique set of challenges, and qualities like flexibility, adaptability, and diversity will become key to staying afloat.

This is part of a series of articles on how CPG companies can drive profits during economic downturns. Check out our other articles in the series to learn how Omnichannel strategies and RGM can play key roles to help companies navigate recessionary periods.

Bibliography

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6. Buker, Maile, and Simon Waters. “How CPG Brands Can Survive Recession in 2023.” Western Grocer, December 19, 2022. http://westerngrocer.com/how-cpg-brands-can-survive-recession-in-2023/.

7. “Gross Domestic Product.” Gross Domestic Product | U.S. Bureau of Economic Analysis (BEA). Accessed March 3, 2023. https://www.bea.gov/data/gdp/gross-domestic-product.

8. Golle, Vince, and Kyungjin Yoo. “Economists Place 70% Chance for Us Recession in 2023.” Bloomberg.com, December 20, 2022. https://www.bloomberg.com/news/articles/2022-12-20/economists-place-70-chance-for-us-recession-in-2023.

9. Eastwood, Brian. “Supply Chain Resilience in a State of Steady Disruption.” MIT Sloan, April 28, 2022. https://mitsloan.mit.edu/ideas-made-to-matter/supply-chain-resilience-a-state-steady-disruption.

10. Turner, Jordan. “How Supply Chain Leaders Can Prepare for Disruption.” Gartner, June 8, 2022. https://www.gartner.com/en/articles/how-supply-chain-leaders-can-prepare-for-the-next-big-disruption.