Rising inflation and higher interest rates are partly to blame for the projected loss, said Vishal Garg, partner at Strategy& (a member of the PwC Network).
While month-over-month increases are decreasing, “there is no doubt inflation is still going to be on the higher side,” which will impact employment costs and consumer purchasing power, Garg explained.
Month-over-month inflation for all items slowed from a 0.5% increase in October to a 0.1% increase in December, but accelerated again in January with a 0.5% increase, bringing the 12-month unadjusted rate up to 6.4%, according to the most recent Consumer Price Index released Feb. 14.
Inflation for food consumed at home remains stubbornly higher at 11.3% for the 12 months ending in January, but the month-over-month increased slowed in January to 0.4% from 0.5% in December and 1.3% last July, according to the Burea of Labor Statistics.
CPG companies also are feeling pressure from higher interest rates and “crude oil volatility,” Garg said. The federal interest rate “reached 4.5% by the end of 2022, and we expect to see that it will rise further. [The] expectation is that it will get to 5-6%,” Garg said. On top of that, crude “oil increased from $70 per barrel in 2021 to $105 per barrel in 2022,” he added.
“We see CPG companies are likely to face both cost of goods sold and SG&A increases, and alongside declining revenue growth in 2023; all these factors are converging to impact on different parts of P&L.”
Move beyond the price increase playbook: 3 macro strategies to grow
Last year, many CPG companies, including PepsiCo, Coke, Monster, and others, raised prices to combat these pressures. However, increasing prices in 2023 might "alienate consumers," Garg explained.
CPG companies "were good at passing on the increase in the cost to the consumers, and consumers were buying, and that is reflected in the revenue growth in 2022," but "passing on the same price increase to consumers in 2023 will be detrimental," Garg said.
Instead of raising prices, PwC suggested that CPG companies focus on larger and more near-term ways to drive growth, including:
- Focusing on most valued consumers: The most valued consumers "will be your long-term ally in these turbulent times, but also they would help you focus on the services and the products that matter to them," Garg said. By catering to these consumers, CPGs can optimize their portfolios while also making sure they are evolving to meet their consumers' demands, he said.
- Empowering employees: CPG companies' best assets are the people working for them, Garg noted. Not only do employees need to understand what their role is in the larger organization, but CPGs also need a "model that gives them power to drive decisions," he said.
- Forming strategic partnerships: CPG companies "need to understand what is the role that [they] play within the broader ecosystem," Garg said. To do this, companies need to partner with suppliers and vendors to address the most pressing concerns of consumers, he added.
What to do in the near term? Streamline
CPG companies also have a “number of levers that they can pull now to drive the market,” Garg said.
One area is "focusing on net revenue management," which PwC has found "can drive as much as 2-3% in revenue growth as well as 5-20% in operating income growth," Garg said. He went on to say that many CPG companies also should take a closer look at their marketing efforts. They “have significantly increased their spending on their advertising and media spend; however, their ROI has not significantly increased in those investments,” he explained.
Another area CPG companies can focus on is investment prioritization, Garg pointed out. Since "the cost of capital has gone up significantly, that means that every dollar that companies are borrowing now is much more expensive, compared to the dollar they were borrowing two years ago," he added.
“They need to be much more watchful ... where to allocate their next dollar of investments. That doesn't mean that they should stop doing any investment in [a] growth initiative, but they need to be mindful [on how they are] allocating and prioritizing the initiative that will help in the long term.”