5 profit-boosting strategies for 2023 include focus on supply chain transparency, ESG & innovation, Deloitte says
Based on a survey of 150 CPG executives and economic analysis, Deloitte’s 2023 Consumer Products Industry Outlook published this morning found three-quarters of packaged goods executives are bullish about their companies’ performance and strategy, even though the same percentage or higher are pessimistic about the global economy and geopolitical stability, and seven in 10 believe high energy prices, higher input costs, supply chain challenges and the war in Ukraine will continue throughout the year and possibly longer.
While their optimism isn’t always shared by financial analysts (Deloitte found financial analysts are forecasting negative earnings per share growth for more than a third of the top performers surveyed) and weakening consumer financial sentiment could upend their positive projections, Deloitte found the companies most likely to pull off profitability against such a challenging background are the ones that continue to invest in their business, employees and long-range environmental, social and governance goals.
Embrace consumer changes
One of the most difficult challenges facing CPG companies is rapidly changing consumer preferences in response to inflation, but according to Deloitte, companies that embrace these changes and offer innovative products in new ways are more likely to grow profitably.
According to the survey, two-thirds of executives says consumer purchasing preferences have changed “considerably” in the past year and eight in 10 cite this change as their “greatest challenge.”
Among the most problematic change is a “decreased willingness to pay higher prices (63%) and consumers trading down to lower-cost offerings and options (57%),” including private label, which 41% of executives noted is on the rise.
Rather than caving to this pressure and slashing prices by lowering quality in a bid for market share and unit sales, Deloitte found the most profitable companies surveyed were actually offering more premium (and expensive) options – a counterintuitive move that Deloitte said helped justify higher prices.
According to the survey, 86% of companies growing profits prioritized introducing new products and services compared to 46% of companies that were not growing profits. Likewise, 77% of profitable companies invested in product innovation compared to 42% of all other companies.
Profitable companies likely felt more comfortable placing bets on innovation because they also invested in digital tools that helped them get closer to and engage consumers as well as personalize their experience.
Deloitte found the percentage of profitable companies that invested in technology to improve consumer and employee engagement, personalize their experience and better protect their data privacy and cybersecurity were about a third higher than companies that are not growing their profit.
Examples of these investments include developing AI-enabled product recommendations and the development of real-time predictive analytics models, according to the report.
Prioritize market share, not just dollar sales
While many food and beverage CPG companies have reported strong sales in the past year, most of this has come from higher prices – and a closer look reveals that unit sales and market share are growing slower and sometimes receding, which is squeezing margins.
But companies reporting higher margins and profits, not just sales, are more likely to aggressively go after market share than non-profitable companies, according to the Deloitte.
They are doing this by investing more in marketing and advertising, prioritizing acquisitions and focusing on emerging markets, the survey revealed.
Aggressive portfolio reshaping brings companies more in line with consumers
Another popular strategy among profitable companies is to “creatively transform” their business models and portfolios, according to the survey.
For example, profitable companies are more likely than others to vertically integrate their businesses (68% vs 32%) and either divest under-performing brands and businesses or team up with private equity firms and other companies to boost performance, Deloitte notes.
Invest in supply chain data
Following the widespread breakdown in supply chains early in the pandemic, nearly all companies are investing in improvements, but Deloitte found those companies that are investing in more transparency are more likely to be profitable.
For example, the survey found 90% of profitable companies are offering more transparency about their supply chains to consumers and other stakeholders vs 46% of all other companies. Likewise, 76% of profitable companies are investing in improving their ability to safely share data with partners vs 50% of all others, and 48% of profitable companies are making “significant” investments in data collection from supply chains vs 21% of all other companies.
Keep ESG front and center
While many companies moved ESG goals (especially around sustainability) to the back burner early in the pandemic to focus on more pressing demands, such as recruiting workers and keeping manufacturing facilities safely open, those that have returned their attention to these goals are more likely to be profitable.
For example, Deloitte found 97% of companies growing their profit agree that becoming more environmentally sustainable is a priority compared to 58% of all other companies.
“Examples from high performers in our financial analysis include investments in reusable packaging and bottles, deforestation prevention initiatives, sustainable palm oil sourcing efforts and climate-smart farming practices,” the research revealed.
Deloitte acknowledges that maintaining and advancing focus on sustainability may become harder in the future as consumers continue to pull back on their willingness to pay more for these products, but at the same time these attributes will become table stakes.
Companies growing their profit also were more likely to invest in diversity, equity and inclusion than other companies (75% vs 47%), which Deloitte hypothesized alleviated pressure on hiring and retaining top talent, likely because they were more appealing.