This likely will result in tighter margins as companies that have held back from passing the full brunt of inflation through to consumers are pushed to raise prices in the coming months just as government stimulus stockpiled by consumers begins to run out – prompting many shoppers to tighten their purse strings and alter their purchasing habits to account for changing budget constraints, argue Nik Modi, HPC, beverages and tobacco analyst with RBC Capital Markets, and KK Davey, president of client engagement at IRI.
But it isn’t all doom and gloom for the New Year, as increasing mobility likely will lead to increased spending, especially in categories and channels that saw slowdowns during the first waves of the pandemic, they predict.
Inflation slows, but remains elevated
After spiking dramatically last December, the estimated cost of goods is slowly coming down, but it will remain significantly elevated through at least next June, predicts Modi.
According to RBC Capital Markets’ data presented by Modi at a recent webinar, estimated input costs for household and personal care items surged nearly 50% between December 2020 and last September, followed by a roughly 40% increase in packaged food and beverage inputs.
Based on “very, very crude calculations” that hold prices steady at today’s level but leave wiggle room for supply chain issues and other factors, Modi predicts inflation will remain up about 6-7% for food, 7-8% for beverages and in the low-teens for household and personal care goods through 2022.
While these numbers may be lower than in the past year, their impact could be greater as consumers’ ability to absorb higher prices begins to falter, he predicts.
So far, price elasticity has held up well, thanks in part to government stimulus and shifts in consumer shopping patterns that have them sitting on about $2 trillion in “excess savings” that have softened the impact of price increases. But as they draw down those reserves, they likely will become more price sensitive.
Ports likely will remain congested through mid-2022
Supply chain disruptions – especially at the ports where backups are causing significant delays and pushing companies to invest in expensive alternatives – also likely will continue through at least mid-year 2022, Modi predicts.
“If any of you are expecting the ports to clear before Christmas, I’m sorry to tell you that’s not going to happen" based on RBC Elements data, which tracks 22 of the busiest ports in the world with satellite imagery to understand foot traffic and turnaround times at the ports, Modi said.
He predicts a “best case” scenario has the ports “hitting the reset button in early summer of 2022,” at which point the congestion will clear and the supply chain situation will normalize.
He added a less likely, but more bullish scenario bumps up the timeline to the end of February, while a bear case scenario in which labor increases only 15%, which Modi described as “a gigantic increase,” has the ports clearing at the end of 2022.
Gig economy poses labor challenges
As Modi noted, much of the congestion at the ports is due to insufficient labor – a challenge that is impacting multiple sectors at various points in the supply chain.
The struggle to hire sufficient talent is due in part to fears around COVID-19 and government stimulus that some claim gave employees wiggle room to leave their jobs to pursue other options. Top among these is the gig economy, which Modi says has an outsized impact on the labor pool.
“This is the disruption we should be talking about much more frequently,” because it offers workers a flexible work environment and competitive wagers compared to traditional retail and blue collar jobs.
“The amount of gig workers globally is expected to grow by over 80% by 2023,” Modi said. “So, we are just touching the surface of this disruptive nature and I think labor is going to continue to be a big issue – especially for blue collar job openings.”
Macroeconomic indicators suggest challenges ahead
The gig economy cuts both ways though, helping to lower the unemployment rate from 8.1% in 2020 to 5.5% in 2021 and a projected 3.7% in the first half of 2022 and 3.4% in the back half of 2022, Davey noted during the same webinar.
While this will help consumers cover costs and allow them to keep shopping, Davey noted that disposable income in the new year will still drop dramatically in the coming year.
He predicts that disposable income will grow only 0.3% in the first half of 2022 and 3% in the back half of 2022, which is notably lower than the 6.2% increase seen so far in 2021 and the 7.4% increase in 2020.
Another potential headwind for the CPG industry, but possible good news for foodservice, is mobility is expected to continue to increase in 2022 and with it spending out of home, Davey said.
To offset these headwinds and take advantage of shifting shopping habits in the new year, he recommends that brands and stores focus on attractive price points with a wider variety of assortment to retain consumers and diversify selection and services to meet in-home and out-of-home demand.
He said he also sees potential for innovation in the new year around easy at-home meals, premium indulgence, pack innovation and self-care through dietary enhancement.