CPG companies expect WFH trends to continue. There has been an undeniable shift in consumer purchasing behavior due to the coronavirus pandemic. As more workers are either working from home or on a more serious note, unemployed, CPG goods have experienced a surge in sales.
According to Nielson, CPG sales have grown by ~15% y/y, astounding growth for an industry typically thought of as ‘mature.’ More specifically, paper towel sales have soared ~28% y/y while frozen prepared food sales are higher by ~22% y/y. Forecasting CPG sales growth now requires a view of the evolution of workplace dynamics.
It is my belief that for companies that have adopted a more WFH workstyle, it is unlikely that this plan will be reversed back to a more traditional workplace environment once the pandemic is over. Global Workplace Analytics estimates that roughly 25% of U.S. workers will be home at least several days a week at the end of 2021, compared to just 4% before the pandemic.
So what does this mean for the supply chain? First, CPG companies should make more goods that are easiest for consumers to prepare. Companies producing goods for both industrial and consumer usage should focus more efforts on the consumer since it is more likely to be in higher demand in the future.
On the carrier side, if the current WFH trends play out through next year, then it appears that there will be increased demand around companies that make frozen foods and other easy and quick meals that can be prepared with minimal instructions. Reefer truckload tenders have rocketed higher by 47.21% y/y. Starting next March, y/y comparables will be difficult but volumes will likely remain strong.
Apart from my own view of CPG demand, we can look at specific steps taken by companies telegraphing their expectations. Conagra and Kraft Heinz both announced initiatives to purchase and improve existing equipment to make more lunch foods. General Mills is adding an additional line to produce more Cinnamon Toast Crunch, which the company notes will be one of the priciest projects in its history.
Kimberly-Clark is in the process of converting a plant in Mobile, Alabama from commercial to consumer toilet paper. Converting an existing commercial toilet paper line to make consumer toilet paper is complex, since it is manufactured with different ingredients and a different process than toilet paper that is sold to businesses. Procter & Gamble is adding beard care products alongside their razors sold under the Gillette brand. Announcements from these two companies signifies that CPG companies outside of food & beverage are expecting new consumer trends to stick in the coming years.
Lumber Prices are back near all-time highs. A few weeks ago I wrote about surging corn prices’ impact on input costs across a wide range of CPG goods. Food producers endured some supply shocks this year, but so have paper and packaging companies with the price of timber soaring ~200% since the beginning of April.
Source: Nasdaq.com; Lumber Prices
The price of timber has been squeezed by a multitude of reasons such as sawmill workers being sick or required to be home which limits production of logs, increasing economic activity, and natural disasters such as the wildfires in California which have dramatically reduced supply.
Wood isn’t used in as many CPG goods as many other commodities, but CPG companies that produce paper and packaging products, including toilet paper and paper towels, are likely to experience a rise in import costs as we head into the new year. As is the case with General Mills and other food & beverage companies hedging their corn exposure, companies that use lumber are likely hedged against rising prices. Procter & Gamble, producer of Charmin toilet paper, note in their annual filings that futures are used to hedge against input costs. These hedges will eventually have to be rolled out to higher levels if prices are elevated for an extended period which will in turn affect the bottom line.
