CPG Optimization Strategies for Companies and Retailers to Reduce Inflationary Pressure

Inflation was a major concern for CPG companies, retailers and consumers in 2022, and it’s likely to be the same in 2023. 

Companies are feeling the pinch from their suppliers, and consumers are getting a price shock.

While there are signs that inflation will peak this year, what can CPG companies and retailers do now to handle the inflationary pressures before prices eventually come down?

Increase Sales or Increase Prices to Offset Higher Production Costs? 

Some CPG companies and retailers are attempting to increase sales or raise prices to offset the higher costs of production in an inflationary environment. 

For example, Walmart is focused on providing value-for-money products to boost sales as consumers opt for low price options in an inflationary environment. 

Coca-Cola increased prices in 2022 and is opting to do so again this year. In Q3 2022, the company witnessed 12% growth in profit margin after increasing prices. However, it is struggling with labor shortages, especially in the trucking industry.

Also Read: COST CONTROL IN CPG: 3 WAYS FOR THE INDUSTRY TO STAY COMPETITIVE IN 2022

However, there are other, better steps CPG companies and retailers should be taking in 2023 to help offset the rise in costs and maintain profitability. These include:

1.    Transforming Working Capital  

It will be essential to sell off underperforming assets to increase financial flexibility. Thus, CPG and retail companies are anticipated to divest their failing assets to help with areas of sourcing, product development, manufacturing and logistics. 

They should also focus on optimizing the cost of goods sold (COGS) by getting insight into the cost drivers in their value chains and taking a more strategic approach to cost management. Under rapidly changing market conditions, strategic cost management can help free up working capital to drive growth.

2.    Should-Cost Modeling Using AI-Based Tools

Lack of visibility into volatile commodity prices and cost drivers can lead to inaccurate pricing for CPG and retail companies. Using AI-powered tools for should-cost modeling helps firms understand the cost drivers in their production process and improve their negotiating power with suppliers. The end result is a greater capability to control costs and price products in line with market fluctuations to maximize profitability. 

3.    Engaging in Strategic Marketing

Amid volatile and unpredictable market conditions, some CPG companies and retailers are increasing their strategic marketing efforts. Increasing the effectiveness of marketing expenditures enables them to invest in strategic growth priorities when others may decide to cut down.

4.    Taking Advantage of E-commerce

CPG companies and retailers have accelerated the adoption of e-commerce and are emphasizing data-driven supply chains to drive profitable omnichannel growth.`

Impact of Inflation and Recession  

The steps discussed above are important to maintaining profitability in what will no doubt be a challenging year for CPG companies and retailers. They will be even more crucial in the event of a potential recession, which would put further pressure on consumers. 

With the cost of borrowing increasing because of interest rate hikes from central banks, CPG companies and retail brands must be creative and adaptable in finding ways to drive growth. 

Stay tuned for more CPG industry insights in GEP’s forthcoming 2023 CPG Outlook.