Understanding the Impact of Inflation on CPG Brands

American consumers have been dealing with the impact of inflation on CPG products since April 2020. While recent NIQ data suggests some relief, high prices continue to affect shoppers. In response, many have begun tightening their belts and purchasing products in bulk, from value retailers, or switching to private label. In April, value retailers experienced a remarkable 7% surge in sales, constituting 42.5% of CPG sales. At the same time, private label sales continued to grow as consumers sought better value for their money, with an 8% increase compared to the previous year. In response, many CPG brands are revising their pricing models to compete. Unfortunately, very few CPG departments are immune to rising prices as it continues to hit all areas of the store.

But inflation impacts more than just a brand’s pricing model and consumers’ shopping habits. Production costs are high for many industries as suppliers grapple with their own inflation. This is the same for the whole supply chain, as shipping costs are still high. Put together, this means CPG brands are faced with rising prices across the board and they must pass some of it along to consumers to avoid losing their margins. Unsurprisingly, this means maintaining profitability is more difficult.

5 Strategies for Revenue Optimization

With so many factors impacting demand and consumers in a state of uncertainty, revenue optimization is taking center stage. But, not every strategy is effective and investing in the wrong one can leave you behind the pack.

With that in mind, here are 5 strategies for revenue optimization that CPG brands should consider:

1. Rethinking Pricing and Promotions

The most common method CPG brands use to overcome the impact of inflation is to rethink their pricing and promotion strategies. Pricing is the most critical lever impacting the commercial results, above fixed, variable costs, or even volume sales. Indeed a 1% improvement in price equals an 11% improvement in margins.​ But, many brands are making ill-informed choices.

Optimizing pricing and promotion has never been an easy task, but 2023 has brought with it a range of issues causing chaos in the markets and making this an even greater challenge. Understanding consumer behavior and future demand are essential elements of an effective pricing and promotion strategy. Look at your existing pricing model, the competition, and consumer needs before making any changes. Dropping your prices may provide short-term gains, but harm you in the long run.

2. Enhancing Operational Efficiency

Another area worth considering is your operational efficiency. That is, optimizing processes and resources to achieve better productivity, reduced costs, and improved overall performance. Enhancing operational efficiency is an ongoing process that requires commitment, adaptability, and a willingness to embrace change. Perhaps this means limiting the staff in your warehouse, or investing in cheaper, easier-to-use packaging.

You need to regularly review and monitor operational processes and metrics to identify areas that require improvement. Implement feedback loops and establish a culture of continuous improvement to ensure ongoing efficiency gains. Then allocate resources effectively by analyzing demand patterns, capacity, and utilization rates. Ensure that your workforce, equipment, and inventory are optimized to meet demand while minimizing excess or idle resources. This can save you valuable money and resources to overcome shifts in demand and maintain margins during inflationary periods.

3. Product Assortment Analysis

When sales are slumping and prices are rising, looking at your product assortment is a smart idea. But, assortment optimization is never an easy task, even when the markets aren’t under enormous pressure. If you want to get the most out of your assortment, you can’t just set it and forget it. Especially not when so many factors are at play. You need to set aside the time to delve into the data by channel if you’re going to have a chance against the competition.

While maintaining consistency, it’s also important to tailor your assortment to each channel. For example, your online store may offer a larger selection of products than your physical store, while your mobile app may highlight popular items or new arrivals.​ This is a good way to avoid wasting retail shelf space on less-popular products without cutting them entirely. It also allows you to personalize product offering more easily. With eCommerce expected to reach $36 billion in 2023 — a 20% projected increase from 2022, every optimization can lead to big gains.

4. Customer Segmentation and Targeting

Meeting the shifting demands of the market is impossible if you don’t understand what your consumers are doing and why. NIQ research confirms that shoppers intend to change their spending habits to combat growing economic insecurity. Nearly two in five global consumers (39%) feel they are in a worse financial position this year.​ Breaking down your unique customers into segments and targeting them by individual needs is a good way to ensure they aren’t left feeling unnoticed.

Additionally, in 2023, older generations will continue to be the largest spenders and most frequent shoppers. But, as Gen Z becomes a larger portion of the consumer market, CPG brands will need to understand their unique perspectives and demand if they want to keep up. 32% of Gen Z say a product must be high quality for them to make a purchase and 28% seek a recommendation from friends and family first. Unfortunately, many brands still aren’t able to connect with this emerging market and are leaving money on the table.

5. Investing in Technology and Data Analytics

Above all else, you need to be acting on up-to-date and reliable data if you expect to optimize your revenue. From consumer panel data to product attribute tracking, there’s a lot to be gained from taking a close look at data. For example, nearly 50% of all promotional sales are sales that would have occurred regardless of the promotion. If you’re using reliable and up-to-date data, you can avoid this pitfall by strategically planning your promotions.

Investing in syndicated data is also a smart move. It gives you insight into your particular category, product, and retailer performance. It also offers you some insight into consumer behavior and preferences not found in general retail data. You can look at your competition, category, retailers and more to pinpoint the right levers to pull to optimize your revenue.

Building CPG Brand Resilience and Adaptability

When facing uncertain economic times, the most important thing for any CPG brand is to stay agile and flexible. You should start by putting the consumer at the center of your strategies. Invest in consumer research and data analysis to gain insights into their needs, preferences, and pain points. Use these insights to tailor your products, packaging, and marketing efforts to meet consumer demands.

Another way that CPG brands can build a stable foundation for the future is to focus on experimentation and innovation to stay ahead of the competition. Our data shows that when innovation sales grow, a company is 1.8X more likely to grow overall sales compared with companies whose innovation sales are stagnant or declining. To determine the true impact of innovations, we propose a shift from measuring their “success” and “failure” to their vitality. This can help drive more revenue over time as you aren’t overly reactive and abandoning innovative products that haven’t seen fast growth.