Will we see a depression in Russia, a recession in western Europe and slower positive economic growth in North America, or some other scenario? It’s not yet clear whether the Russia-Ukraine conflict will be impactful enough to drive a global recession, but the consensus is that the further rising prices of energy and agriculture as a result of the war is likely to, at a minimum, slow the rate of U.S. economic growth. A CNBC survey of 14 economists saw that, on average, economists cut their 2022 U.S. GDP forecasts by 0.3% to 3.2% growth. Goldman Sachs economists expect the rise in oil prices to hit GDP growth by 0.2 percentage points and rising food commodity prices by 0.1 percentage point, with the potential for those impacts to increase if prices rise further.
If those latest economic forecasts end up roughly correct, I wouldn’t expect that to be enough to derail the healthy consumer spending that most CPG companies have experienced the past two years. The risk is that recent cuts to economic forecasts could be just the first in a series of cuts as forecasters’ initial revisions often don’t fully reflect changes coming in the economy. Therefore, I believe, the risk of a major change in consumer behavior has intensified. Last year, CPG unit sales volume (excludes pricing) was down 2%, but remained up 4.3% above 2019. That 2% volume decline last year came as CPG prices, on average, increased in the mid-single digits. Most CPG companies have said that they have seen elasticity patterns that are below historical levels, but that could be tested in the coming months.
Rising prices could cause lower-priced private label brands to regain some of the market share they lost during the pandemic to the national brands and could cause some consumers to forgo purchases of nonessential CPG items, such as soft drinks and snacks. Multinational CPG companies are likely to see a greater impact on their European (economies more closely linked to Russia) and emerging markets (food/essentials represent ~50% of consumers’ budgets) segments.
Food Dive describes how ingredient maker Ingredion’s relationships with its CPG partners have changed. In short, changing consumer tastes have required faster times to get new products to market, which has required closer collaboration with ingredient suppliers and has led to less diversification across suppliers. Ingredion faced transportation cost pressure not just from higher freight rates, but also from necessary shifts to most costly transportation modes in order to meet customer commitments. For example, the company moved tapioca from Thailand via airfreight to help a customer be ready for a new product launch.
Chart: FreightWaves SONAR.
Food Processing’s takeaways from the Consumer Analyst Group of New York investor conference highlight major challenges facing the CPG industry. Most CPG companies faced cost pressure that intensified throughout last year that has not yet been fully passed on to their customers, and thus, has led to margin contraction. Most publicly traded CPG companies are looking to recover most, if not all, of last year’s margin pressure this year, but the latest round of inflation in agricultural commodities and energy resulting from the Russia-Ukraine war is likely to extend their margin recovery timelines. Meanwhile, many CPG companies are midway through a process of rebalancing their product portfolios toward brands in high-growth and higher-margin categories, such as those that cater to health-conscious consumers who shop in premium-priced categories. Coffee and pet foods are also considered attractive, higher-growth segments.
I encourage readers of The Stockout to join us at The Future of Supply Chain event, which takes place May 9-10 at the Rogers Convention Centers in northwest Arkansas. Keynote speakers include Arkansas Gov. Asa Hutchinson and Jonathan Hoffman, former chief Pentagon spokesman. The CPG industry will be well represented with speakers from Nestle (Greg Kessman, senior director of supply chain) and Tyson (Ildefsonso Silva, EVP of business services). Click here to purchase tickets.
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