This article is an excerpt from the March edition of our thought leadership series; “Innovatively Speaking”, written by Catalyx CEO & Founder Guy White.
47% of top FMCGs missed their net revenue expectations in the second half of ’23, up from just 9% three quarters earlier. A worrying trend, but not unexpected. By us, at least. And while this trend is not (yet) reaching their bottom line, it will.
As we all know and feel, consumer pricing across most of the world has jumped. Triggered initially by big post-COVID, post-Ukraine-war commodity price increases, CPG companies increased their prices in an unprecedented fashion, which retailers largely passed on to the consumer.
How these top FMCGs ended up here
Initial price elasticity data suggested consumers were happy to absorb this. With 2023 price elasticity at about 50% less than the historical average for the industry – if everyone increases their prices at the same time, brands remain comparatively equal on this metric. So, as commodity prices eased off but consumer prices stuck, the industry celebrated widening profit margins… at least for the last 12 months.
After the consumer price hike is where the trouble starts.
The first problem: with pricing now baked into their base, but expectations for top and bottom-line growth remaining and further pricing very much off the table, firms only have two levers to pull. Organic volume growth or cost-cutting. I fear we will see much of the latter, particularly from those struggling to enable the former.
The second problem: global wage inflation has not kept pace with consumer goods price inflation. People are relatively poorer. Household goods are more expensive. Choices are harder.
At the end of the day, it comes down to the value equation. The sub-conscious calculation a consumer makes with every single purchase they make. Value = Price + Equity.
A brand better have the equity to back its position up or suddenly that equation is all out of whack. And guess what? The consumer will make a change.
– Is your brand known?
– Does your brand perform (functionally and emotionally) in comparison to others?
– Does your brand elicit positive emotions for consumers?
– Does your brand resonate with the consumer? Do they feel it is their brand?
When the price hike overstays
Was pricing a collective own goal? At the time, it was a necessity. Brands had to navigate some very difficult short-term commodity fluctuations.
Its aftermath is simply going to sort the wheat from the chaff. I think consumers and retailers will be brutal. But exciting new products and propositions will emerge at an accelerated rate – as the best brands innovate around this. New entrants are going to emerge to solve unmet needs, underserved consumers and occasions more completely within the context of their competition.
For those with the systems and processes to consistently create the consumer centric innovation funnel to back up their revised consumer value equation, big wins lie ahead. For those that don’t, it’s time to dust off the drawing board.
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