The Keys to Driving CPG Growth Through a Potential 2023 Downturn

By Krishnakumar (KK) Davey, IRI

While we can’t predict with certainty what the future holds, more economists are now issuing recessionary predictions for 2023. And several clear indicators of ongoing shifts in consumer attitudes and behaviors have arisen that all CPGs are acknowledging and are preparing for.

Among these worrying trends are:

• Declining consumer confidence.
• A rising level of spending on home payments, energy and food as a percentage of disposable income.
• Average personal savings that are at their lowest point in over 10 years as the stimulus cash cushion has disappeared.
• Rising credit card balances and more credit card applications.

This confluence of trends is resulting in growing consumer price elasticity in our current inflationary environment. People are looking for deals and promotions, and manufacturers are starting to offer them — though we don’t expect them to revert to the promotion levels that we saw pre-pandemic.

At the same time, the work-from-home (WFH) trend is remaining more durable than once predicted. We expect between 20 and 40 million workers to continue to work remotely, at least for part of the work week in 2023. And this trend, coupled with the higher costs of eating out, will likely contribute to a continued preference for elevated at-home consumption into 2023 and beyond.

How Consumer Behaviors Are Shifting

As inflation continues, we are seeing consumers respond by shopping value channels more and trading out to buy lower-cost items like value proteins and greater-value meal solutions. They’re also buying fewer premium meals and snacks and holding off on inessential household and beauty items.

Private label is also gaining market share, especially in staples where private-label products already held high share. And low-income households are clearly pulling back more on purchases as inflation increases compared to higher-income shoppers. Stores in low-income areas are seeing greater sales deceleration in fresh seafood, pricier meats, cosmetics, OTC healthcare and homecare products — showing the need for a bifurcated approach to reach lower- and higher-income audiences most effectively.

What Brands and Retailers Should Expect in 2023

The macroeconomic environment for 2023 could include a wide range of scenarios. But the rosiest ones involve low to moderate economic growth at best, and the potential downside scenarios could include a recession and/or persistent high inflation.

No matter where we ultimately land among these many potential macroeconomic possibilities, brands and retailers should be prepared for:

• Low-income households continuing to trade out and trade down even while high-income households continue to demand more premium products and experiences (“market bifurcation”).
• Continued growth in value channels, essentials, higher-value options and greater-value brands and products. Expect a growing appetite for deals and higher sales of affordable luxuries for at-home consumption as occasional splurge items.
• Shifts to digital becoming habitual, altering consumer interactions with brands and retailers over the long term.

2023 Priorities for CPG Players

It’s essential for brands and retailers to respond effectively to these trends. And doing so will require a balance between maintaining ongoing long-term investments and the tactical agility to aggressively monitor and respond to fast-changing market conditions.

To do this successfully, CPG players should prioritize the following in 2023:

• Digitize your analytics for faster decision-making to gain real-time, granular insights from varying touchpoints to become more agile in response to market shifts.
• Manage your revenue management levers closely to drive net price realization. Tailor your promotions and closely monitor their effectiveness.
• Innovate quickly with the purpose of effectively meeting changing consumer needs. Promote new uses and occasions for your products and reposition your brands and categories as needed.
• Focus on relevant solutions and differentiated experiences that create overall value through the right combination of quality, convenience and price.
• Accelerate your digital marketing with a focus on personalizing consumer brand experiences across a variety of touchpoints.
• Don’t chase earnings per share (EPS) upside or look to mergers and acquisitions to plug EPS downfalls. Instead, lean into long-term investments and capability-building in things like automation and supply chain localization.
• Make sure your HR policies are aligned to ensure that you are optimally acquiring and retaining talent.
• Be ready to adjust your strategic plans when needed and excel at contingency planning.

The recession of 2008 taught us that the companies that tried to save in the short term by failing to invest in enhancing their capabilities fell behind their competitors. And the past few years have reinforced that consumer behavior can now shift faster than ever, and sometimes out of character with historical norms. By investing now for the future — and in the technologies that enable better agility today — companies can foster both day-to-day operational excellence and customer-focused innovation. This approach will position them well both for a potential 2023 downturn, and for whatever comes next.

This blog is based on a recent webinar with Nik Modi, managing director and CPG staples analyst for RBC Capital Markets. For more information, view the full report and webinar on this topic and/or reach out to your IRI representative or IRI@IRIworldwide.com.