In this blog, we hear from Guy White, Catalyx’s Founder and CEO, as he shares insights on the CPG industry and its future amidst evolving brand and consumer needs. Read on to explore the challenges and strategies for success as our landscape shifts; from competition and category penetration to the growing demand for consumer-centric innovation, and why looking back at where we’ve been is vital to forecast exactly where we’re going.
How did we get here?
2022 was the year of the price increase. The entire industry used commodity price inflation and broader pricing pressures to drive through a once-in-a-generation hike across the board. Sometimes as much as 20%. What began as a nervous experiment soon became an industry trend, as it became increasingly apparent that short-term price elasticity was almost zero. As commodity prices settled back down, this ensured strong profit growth; as a result, all but two major listed CPG companies met or exceeded investor expectations.
However, we’ve seen this become a double-edged sword that may well come to bite all but the very best, going forward. Leading CPG executives have come out with a fairly consistent message that no more price inflation will be taken. So, this price and profit bump is now firmly baked into base numbers and will need to deliver top and bottom-line expectations through volume-led sales growth instead.
There are only two ways to do this; steal share from your competition, or drive category penetration. The first has winners and losers by definition. The second is notoriously difficult to do. Both require successful innovation – be it creative, commercial or product-based.
Problem is; in all but very rare cases – successful innovation takes time to build.
The challenge
What we are seeing is that the “Covid gap” (including the rise in remote working reducing innovation creation efficiency and unsettled consumer needs) has now meant a whole lot of innovation funnels are a whole lot emptier than they need to be. Firms that have powerful consumer-centric innovation processes, strong retailer ties to push optimised sales fundamentals, or excellent abilities to create resonant creative approaches will win. Of course, a few will simply get lucky with right place, right time bets. Unfortunately, however, the rest will fall short, and from what I’ve been noticing in the industry, I don’t think that many are expecting it.
For instance, we can already see in some recent earnings reports a fairly gung-ho messaging backed up by shaky numbers. Just one example is the recent earnings report from Bayer that shows volume sales decline being masked entirely by pricing. In my experience, that’s the start of a slippery slope. And they are not the only one.
“I think we will see an exodus to quality and to equity.”
Compound this with interest rate rises and suddenly you have a whole sector of mortgage-owning, premium brand-buying families that are having to make fairly dramatic changes to their spending patterns… with a huge wave of CPG products now as much as 20% more expensive than they were 12 months ago.
You only have to look as far as the weaker than expected US retailer results and the significant uptick in shoplifting being reporting in multiple markets to recognise the situation out there right now.
Adapting on the move
Based on these changes in the atmosphere, we expect things to bite in 2024/25, especially for those not taking action now. I think we will see an exodus to quality and to equity.
“Our clients are looking to find weak links in the competition’s armour that are frustrating their consumers.”
Price promotions will be used to plug gaps for struggling products in the near term, weakening the value offered within their categories. But strong innovators will ultimately steal the share and find ways of getting new users into their categories – and retailers will, of course, favour brands that maintain or grow value.
At Catalyx, we are starting to see many more briefs coming our way asking for support specifically in how to drive category penetration. Our clients want to know; what are the levers to get more people to use products on more occasions? Where are the new consumer groups that could be persuaded to enter into a category? Coupled with this, we’re seeing a significant uptick in work on demand spaces and unmet needs. Our clients are looking to find weak links in the competition’s armour that are frustrating their consumers.
It’s fascinating to see this trend in clients wanting far more consumer-centricity. It’s showing up from the start of the innovation process all the way to creative briefs. The very best are migrating away from the more traditional (and dangerously limited) approaches such as focus groups, to more modern ways of crafting innovation and creative briefs. We’re seeing it grow, brands’ search for approaches that will help guide their creative partners to manifest results that truly speak to consumers.
We are working hand in glove with our own partnerships to embed the consumer voice into the creative optimisation process. We’re continuing to help forward-thinking brands make sure that whatever they create triggers that volume growth. Our entire purpose is to ensure clients are on the side of the winners in the fast-approaching battle for share.
Interesting times ahead.
