Edited excerpts:
How are consumer goods companies globally dealing with inflation and volatility?
The feedback that I’m getting most often is that there are some traditional ways of managing inflation in the sector. You’ve got something called “shrink-flation", which is if you are unable to pass on your input costs to retailers or the end consumer, then you keep the price, but reduce the packaging size. This will have certain limitations. There are some products that you can’t easily do that with. So, we’re back to some traditional levers of managing cost base—synergies, efficiencies, pushing your digital transformation even faster, looking at your processes and the end-to-end value chain so that you can really take the costs out. The education of consumers in terms of their ability to understand that if you want to keep the same quality and if you want to keep the same brand and product promise, then the prices will have to go high, is important. What is different for me in this environment is there’s an increasing move for companies to understand the consumer holistically and not just in their own category.
In Europe, the words that are being used on the front lines of the papers at the moment are the “cost of living crisis" because in Western Europe and in the US, the companies are talking about inflation rates that they haven’t seen since 2008. So, the big question for me is where is the overall consumer spending going to be directed? What is the shift between categories of spending? Within a category, where is the consumer arbitrage between functional spending and discretionary spends, indulgent spending versus immediate spending?
The companies that we’re talking to, they’re not looking at managing their category only. They are looking at how they need to manage their category within a consumer’s overall available budget to spend. For instance, at the height of the concern over covid, we saw certain demographics of consumers shifting their disposable spending towards categories such as insurance or medical cover. All the clients need to make sure they really use all the data that they all have to really go granular in understanding who is your customer.
How much of this is impacting smaller companies? Will the CPG space see some consolidation?
I don’t think we quite know how this story is going to play out because it’s not just the inflation story that’s happening on its own in a vacuum. You’ve got the inflation story, coming at the back of a covid period where the category spends and the omnichannel distribution of that spend are being disrupted. It’s coming at a time where the companies need to invest in their digital transformation, but they’re being challenged (for the large players) quite significantly by digitally native companies. It’s a very complex picture. I could make a case that the large companies are finding it really tough at the minute because what does play to their advantage in terms of scale is also making it more difficult (for them) to be agile, responsive, and innovative and change the way that they’re operating and capture new parts of the markets that traditionally they haven’t looked after. I think we will see a lot of redistributing of the cards. I’m not sure I would use the word consolidation. You’re going to see a lot of hybrid models. It’s just going to be a richer landscape of hybrid alliances, joint ventures, participation, and new forms of capital being available.
Will this year be more challenging in terms of consumer spending?
Globally, one of the metrics that we keep a very close eye on is consumer confidence. This is a lead indicator of a recessionary environment. It is true that consumer confidence has just dipped pretty much everywhere. What will be key to that is the way that governments decide to respond to that with the levers that they have, be it their stimulus packages or their interest rate policies. The pinch is being felt in different ways in different segments of the population. We’re back to the point that I was making earlier, which is there will be winners and losers in this environment. The winners will be the companies that really are very explicit and clear about what they stand for, what their value proposition is, and what they bring through their product or their brand or their customer experience. Then they execute well on that promise, but more importantly, they really know who they want to talk to in the market. I don’t think you can win in this market with the input prices and the squeeze on margins if you try to have a completely undifferentiated communication strategy or advertising strategy.
