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Inflation, rising interest rates, spiking commodity prices, supply chain snarls and an unpredictable labor supply are all converging to squeeze margins and profitability at consumer packaged goods (CPG) companies. Meanwhile, the decline in consumer purchasing power is of great concern to almost half (49%) of executives.
In this relentless economic environment, how can companies look ahead to growth? We recommend three main areas of focus: customers, operations and strategic relationships. But first, a brief analysis of recent industry performance.
Slower growth, smaller margins
The industry’s recent performance suggests that slowing revenue growth and rising costs will likely lead to declining net margins. We analyzed the impact of several economic forces on key financial metrics for 10 top-tier US consumer and household products companies, and compared their performance during the 2017-21 period with their estimated performance in 2023.1
Our analysis illustrates that revenue growth for these companies is projected to slow to 2.7% during the 2022-24 period, compared with a 4% growth rate during the 2020-21 period. This rate will likely be exacerbated by a roughly 7% increase in the cost of goods and services (COGS) as well as 4% for selling, general and administrative services (SG&A). These increases can ultimately lead to a roughly 4% decline in net income margin.
1S&P Capital IQ (company financial results), June 2022.
Based on our analysis, we recommend targeting three key areas for continued growth:
- 1. Focus on the most valuable customers
- 2. Build an agile, streamlined operation
- 3. Increase the impact of strategic relationships
1. Focus on the most valuable customers
To help promote healthy revenue growth and improve net margins, focus your efforts on the right set of customers, in the right markets and channels, via the right products. Leverage data-driven techniques to uncover which micro-segments can help generate higher returns, and under what conditions, then invest accordingly.
These two techniques can help:
- Net revenue management (NRM)
With NRM, you can collectively leverage pricing, promotional execution, trade investments, product assortments and even commercial terms as a cohesive whole, to fuel profitability. - Marketing spend optimization (MSO)
MSO helps to right-size and effectively allocate spending across different priority areas to gain desired results.
Used together, these tools can help boost net margins between 1% and 4%.
2. Build an agile, streamlined operation
Companies can help create a more nimble, efficient operation by deploying innovative solutions:
- Streamlining COGS spending by reexamining areas such as:
- Procurement
- Stock keeping units (SKU) and brand rationalization
- Design to value
Our analysis illustrates that these levers can increase net margins between 2% and 5%.
- Reset the SG&A cost structure by making strategic bets on:
- Automation
- Process excellence
- Operating-model transformation
Our analysis finds that these levers boost net margins between 3% and 5%.
Take the example of a leading consumer and household goods company we analyzed. Its 2017-21 net margin of approximately 12% had declined to roughly 6% during the 2021-22 period. Revenue growth had flattened in 2022. Meanwhile, COGS had increased by approximately 4%. To return to historical net margins, the company should have strategic COGS and SG&A reductions.
Helping unlock digital value
Digital value creation, meanwhile, employs new ways of working that can enable real and accelerated impact: a production hub — complete with playbook — as well as standard tools and repeatable solutions to help build, automate and improve processes. Unlocking value will likely require a systematic, factory-like approach that can produce products, a reimagined experience, streamlined ways of working and enhanced productivity.
At a global CPG company, PwC helped build a bespoke digital hub: an end-to-end ecosystem of experience, design, development and service teams to help identify opportunities, design products and reconstruct the value chain for various front-, middle- and back-office functions. The change management component accelerated digital adoption among customers, employees and vendors. Outcomes included increased headcount efficiency, streamlined processes and an uptick in revenue.
Uncover tax efficiencies
Successful transformation programs focus on after-tax value realization by involving the tax function in the process from day one. By doing so, companies can put themselves in a position to help align tax with the new operating model by capturing value creation in the appropriate location. The resulting tax efficiencies and jurisdictional credits and incentives often can help offset or fund the cost of the overall project in the short term, while providing for a sustainable operating model in the long term. On the other hand, there are significant risks in not considering the tax implications (such as incremental tax or noncompliance with reporting requirements). Accordingly, it is important to adopt a holistic approach to assessing the value levers.
3. Increase the impact of strategic relationships
Across the entirety of the value chain, strategic relationships and alliances remain essential to CPG companies. Effective relationships with suppliers and sellers focused on collective outcomes that can help fuel growth, despite rising costs. These types of collaborations require care and attention over the long term.
As strategic relationships have evolved over the years, CPG companies have moved from transactional, coverage-based arrangements toward selective long-term agreements — with collaborators who share a common vision. Strategic relationships that can allow companies to share the burden during challenging economic periods and the benefit during a boom are often the most resilient and successful.
Looking ahead
No one-size-fits-all growth formula exists because each company has its own distinctive characteristics. The only constant is a strong strategic vision flexible enough to weather economic turbulence while preparing for the future.
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