2021 CPG Supply Chain & Procurement Outlook

CPG INDUSTRY TRENDS 2021, CHALLENGES IN CONSUMER BEHAVIOR

During the COVID-19 lockdown, consumers turned to their favorite consumer packaged goods (CPG) as a large chunk of consumption shifted from outside the home to inside. Consequently, CPG revenue in 2020 was strong. However, this at-home revenue growth will not last forever. Buying behaviors are expected to stabilize as vaccine rollout reaches its peak.

To keep momentum in 2021, CPG leaders need to adjust their supply chain, procurement and digital strategies to improve financials and meet consumers wherever and however they choose to buy.

The Food and Beverage (F&B) industry should expect more travel and more in-store shopping from consumers, but will spending in these areas return to pre-pandemic levels? Even as the pandemic’s curve begins to flatten in the North America, new problems are emerging including rising commodity prices, fluctuations in shipping and freight costs, and expanding economic inflation.¹ And to add insult to injury, not everyone that can receive a vaccine in the U.S. is choosing to do so.²

Source: GEP

Rising commodity and raw material prices mark a fundamental shift for the CPG industry towards higher inflation which will increase revenue costs and put CPG operating margins under increased pressure.³ Consequently, 2020’s CPG revenue expansion is expected to taper off this year with many leading CPG companies announcing price increases to be passed on to consumers.⁴ Consumer spending will mainly be driven by economic factors, such as the alteration in consumption habits — and improving disposable incomes.

Sources: Macrotrends, The U.S. Federal Reserve of St. Louis

So, where should the focus be for the remainder of 2021? GEP believes CPG leaders should:

• Continue to focus on cash flow management
• Expand e-commerce and direct to consumer models
• Meet growing consumer demand for wellness products and sustainable packaging

LIQUIDITY MANAGEMENT

Similar to GEP’s advice for 2020, cash flow management continues to be a priority through the remainder of the year. Here’s why: There is uncertainty and vulnerability around consumption levels. Volatile currency exchange rates¹⁰, high logistics rates and commodity pricing are putting profitability at risk. CPGs also feel exposed to risk with higher liquidity and susceptible credit terms.

Deferring of overall promotional spend and effective spend bifurcations along with ROI tracking – for each investment – can help manage rate changes and volatility. Re-prioritization of capital projects with streamlined assignments can help manage risky liquidity and credit terms. This re-prioritization ensures that any non-essential expenditures remain off financial statements, as companies seek cash coming in the door. Having this cash on hand will allow CPGs to be more responsive to challenges and best grow high potential brands and solutions in the short term.

COMPANY TREND EXAMPLES AND MITIGATION

Source: GEP Market Intelligence

E-COMMERCE AND DTC

Last year was a strong year for e-commerce and grocery delivery companies with the ‘ease’ of buying online and direct. During the H2 2020, consumers limited their in-store shopping resulting in an uptick in the sale of online groceries and the use of delivery models. In fact, just over half (50.1%) of consumers polled by PYMNTS stated they were buying direct from CPG eCommerce sites.¹¹

Consequently, e-commerce penetration saw a steep increase from 15% at the end of 2019 to 44% by the end of Q2 2020.¹² For example, Instacart’s subscription grew 10 to 20 times in the U.S. after the regulatory-mandated ‘shelter-in-home’ orders occurred.

Source: GEP Market Intelligence

But not every CPG brand was ready for the digital shift and took significant effort to get some products directly in the hands of consumers. Direct-to-consumer (DTC) trends are likely to persist post-pandemic as consumers continue to embrace frictionless shopping.

Relying on a single, brick-and-mortar distribution channel anymore, however, is no longer feasible or profitable. To establish the model, F&B leaders are investing in DTC websites, mobile apps, pop-up stores — and are acquiring DTC start-ups to utilize their logistical infrastructure for existing product lines.

To expand longer-term customer relationships, CPG brands are connecting with consumers not only at the point of sale, but also through continued online interaction, via content delivery — and most importantly, through exceptional customer service. Companies like PepsiCo, Heinz and others have established DTC channels to get their brands directly in the hands of consumers.

PepsiCo drives engagement with consumers through its recently launched DTC websites, Snacks.com and PantryShop. com. Heinz created its first-ever DTC business line, ‘Heinz to Home,’ to distribute shelf-stable items, such as beans, condiments, spaghetti and soup for home deliveries.

HEALTH AND SUSTAINABILITY

The U.S. market has witnessed drastic changes in CPG purchasing behaviors with a unique focus on health and sustainability amid COVID-19. Purchases are becoming more need specific. Consumers are buying more environmentally conscious, sustainable and local products, all while embracing digital platforms.

There has been a growing demand for wellness products and services at home. Home-fitness leaders such as Peloton saw a 66% YOY increase in revenue in Q1 2020. The use of telehealth rose from 11% in 2019 to 46% in 2020.¹³ The current market condition has created a surge in demand for healthy food products and this demand is projected to remain high in the coming years as consumers look to invest more in their health. In response to the consumer trend, CPG brands are paying close attention on launching healthy products that can attract consumers.

RYZE Superfoods, an emerging challenger brand, is introducing mushroom-based coffee as a healthier alternative to regular coffee.¹⁴ Innocent, a smoothie brand, launched an Innocent Plus line that focuses on using real fruits and vegetables with added vitamins.¹⁵ Brami, Lupii and other brands are introducing a new superfood to the snack category called the Lupini bean which is high in protein, fiber and amino acids.¹⁶

Companies have also started to comply with increasing demand from consumers to be more responsible and sustainable in their production, marketing and other business. Many brands are committed to reducing plastic in packaging, invest in new sustainable packaging technologies and develop biodegradable solutions.

Coca-Cola, for example, has committed to sell 100% recycled bottled in the U.S.¹⁷ Others, such as Diageo, are partnering with Pilot Lite and launched a new sustainable packaging technology company, Pulpex. It developed the world’s first scalable 100% plastic-free paper-based spirit bottle made entirely from sustainably sourced wood. This new packaging will be first used on Johnnie Walker Black Label and is expected to hit the market in early 2021. Other CPG giants like Unilever, Nestlé and PepsiCo have agreed to adopt compostable and biodegradable packaging by 2025.

IMPLICATIONS FOR PROCUREMENT

Taking lessons from COVID, CPG brands should proactively reevaluate supply chains and further optimize to accommodate for any similar future surges in demand caused by the similar extreme buying behaviors exhibited by consumers in Q3 of 2020. CPG companies will employ high plant utilization for at least the first half of 2021, paired with improved forecasting and constant touch with live market updates, as a strategy to mitigate the risks of product shortages and distribution delays. Brands are also likely to invest more in high growth areas, such as convenience foods, breads and cereal products as they attempt to capture more revenue and grow their market share.

In terms of maintaining cash flow and managing liquidity, procurement can help properly source materials and partners to ensure optimal budgeting and lower expenses. Negotiating or renegotiating contracts to include favorable credit terms can bolster this exercise and hedge risk. Moreover, procurement teams can assist in inventory management; minimizing inventory excess or shortages keeps cash in the hands of the business. Procurement can also use analytics to track ROI, helping to combat seasonal challenges and compare budgets to spend.

The expansion of e-commerce and DTC channel model comes with a set of challenges. Success in e-commerce requires addressing consumer expectations in price, experience and delivery — and investing in the right digital infrastructure. CPG brands are no longer shipping products in a large quantity on a pallet to retailers, but rather shipping individually packed, sometimes personalized products to end consumers. The changes require brands to develop a highly complex, sophisticated supply chain and packaging systems — and may require a new set of partners to support the effort. CPG brands will need to rely on procurement functions to proactively address the challenges in a costeffective way.

Sustainability initiatives are multifaceted and require cooperation from various functions within an organization. It can touch on responsible sourcing of ingredients, renewable energy, waste management, water stewardship, land use, transparency and measurement, packaging, recycling management, etc. Procurement, in this situation, can help bring different stakeholders together, coordinate among the different work streams, and eventually drive changes.

CONTRIBUTORS

Mudit Kumar, Yixue Li, Ryan Creeser, Felton Hatcher, Katie Jarek

References

1. Usamah Bhatti, “Supply Delays and Commodity Price Hikes Stoke Inflation Concerns,” IHS Markit, 26 April 2021 | https://ihsmarkit.com/research-analysis/supply-delays-and-commodity-price-hikes-stoke-inflation-concerns-Apr21.html
2. “One in Five Still Shun Vaccine,” Monmouth University Poll, 14 April 2020 | https://www.monmouth.edu/polling-institute/reports/monmouthpoll_us_041421/
3. Ryan Dezember “Raw Materials Prices Have Surged. Corporate Profits Are Likely Next,” The Wall Street Journal, 12 April 2021 | https://www.wsj.com/articles/raw-materials-prices-have-surged-corporate-profits-are-likely-next-11618219801
4. Michael Baudendistel “The Stockout: CPG Companies Highlight Forthcoming Price Increases” FreightWaves, 27 April 2021 | https://www.freightwaves.com/news/the-stockout-cpg-companies-highlight-forthcoming-price-increases
5. Soybean Historic Commodity Price https://www.macrotrends.net/2531/soybean-prices-historical-chart-data
6. Soybean Oil Historic Commodity Price https://www.macrotrends.net/2538/soybean-oil-prices-historical-chart-data
7. Sugar Historic Commodity Price https://www.macrotrends.net/2537/sugar-prices-historical-chart-data
8. Plastics Material & Resins Manufacturing PPI https://fred.stlouisfed.org/series/PCU325211325211
9. Pulp, Paper, & Allied Products PPI https://fred.stlouisfed.org/series/WPU0911
10. “What Is Expected in the Foreign Exchange Market in 2021?” Forex Live, 26 April 2021 | https://www.forexlive.com/Education/!/what-is-expected-in-the-foreign-exchange-market-in-2021-20210426
11. “Direct-to-Consumer CPG Sales Are Going Mainstream” PYMNTS, 18 August 2020 | https://www.pymnts.com/news/retail/2020/direct-to-consumer-cpg-sales-going-mainstream/
12. Fareeha Ali “U.S. Ecommerce Grows 44.0% in 2020” Digital Commerce 360, 29 January 2021 | https://www.digitalcommerce360.com/article/us-ecommerce-sales/
13. Nicole Dunn, “How The Wellness Industry Has Changed During the Pandemic,” Forbes, 28 September 2020 | https://www.forbes.com/sites/forbesbusinesscouncil/2020/09/28/how-the-wellness-industry-has-changed-during-the-pandemic/?sh=48c526469386
14. “RYZE Superfoods launches with Mushroom Keto Coffee” Tea & Coffee Trade Journal, 26 June 2020 | https://www.teaandcoffee.net/news/24798/ryze-superfoods-launches-with-mushroom-keto-coffee/
15. Charlotte Rogers “Innocent Prioritises ‘Thoughtful Innovation’ As It Launches Juice Shots” MarketingWeek, 31 March 2020 | https://www.marketingweek.com/innocent-innovation-juice-shots/
16. Megan Poinski “Are Lupini Beans Set to Conquer the Plant-Based Protein Market?” Food Dive, 16 January 2020 | https://www.fooddive.com/news/are-lupini-beans-set-to-conquer-the-plant-based-protein-market/569083/
17. Reuters Staff, “Coca-Cola turns to 100% recycled plastic bottles in U.S.” Reuters, 9 February 2021 | https://www.reuters.com/article/usenvironment-plastic-coca-cola/coca-cola-turns-to-100-recycled-plastic-bottles-in-u-s-idUSKBN2A921L
18. Kathryn Lundstrom “Johnnie Walker Whisky Will Come in Paper Bottles Next Year” AdWeek, 13 July 2020 | https://www.adweek.com/brandmarketing/diageo-pulpex-limited-johnnie-walker-whisky-paper-bottles/
19. Anni Schleicher “’The Burning Question’: Nestlé, Coca-Cola, PepsiCo and Unilever Respond to Plastic Pollution Criticism” Packaging Insights, 14 April 2020 | https://www.packaginginsights.com/news/the-burning-question-nestle-coca-cola-pepsico-and-unilever-respond-to-plastic-pollution-criticism.html