Smarter, More Fit Players Reemerge
CPG industry leaders convened for the 2023 Consumer Analyst Group of New York conference last week in Boca Raton, FL. The annual CAGNY conference is a forum for consumer packaged goods companies, investors, and analysts to exchange information about results and growth strategies. This year's event hosted 29 participating CPGs in-person for the first time since 2019.
Here is our take on the eleven major themes we heard from CPG industry executives.
Getting Back to Business As Usual
A common characteristic of the mainstage presenters was the reemergence of stronger (and wiser) companies committed to getting back to business as usual. While most CPGs noted the impacts of Covid shutdowns, supply chain breakdowns, and inflation, all the companies clearly have their sights set on returning to their long-range financial targets as a fitter version of themselves.
The growth algorithm for most industry players looks familiar, still.
Focus on the Core Power Brands, Shed Non-Core
Pursue Sticky Innovation and High-Fit Acquisitions
Expand Gross Margins
Drive Added Efficiencies and Productivity
Reinvest Cash for Growth
This framework is nothing new and has withstood the test of the time to be sure. What is different is how the industry is executing this playbook and where CPGs are putting their money to work in this post-Pandemic era.
Focus on Power Brands. Getting behind the big brands that drive the vast majority of sales and profit was resounding in all presentations. CPG industry advertising and marketing expenditures, typically ranging from 3% - 6% of annual net sales, looks to grow in 2023 as companies invest more aggressively in their power brands. Brand and packaging refresh investments, more relevant marketing ads, and better reach via social and consumer analytics top the list of priorities amongst top spenders.
Portfolio Pruning and Replanting. Portfolio transformation is a constant imperative to maintain consumer-relevance for CPGs. Covid-driven supply issues made this imperative all the more necessary, forcing many companies to rationalize and divest dilutive brands and SKUs. Mondelez spoke to the divestiture of its gum business of Perfetti, of course. Similarly, KraftHeinz’s sale of its powdered cheese business to Kerry stands out. There is a simultaneous recasting of what “core categories'' means and a renewed interest in high-fit acquisitions.
Consumption Trends. The habits and preferences amongst consumers was the foundation for portfolio choices for all CPGs. The leading consumption trends discussed were as follows: eating at home will persist in the post-pandemic era; less sugar, more protein, lower sodium, zero sugar; younger generations turning to their kitchens; more households seeking restaurant-quality food at home; healthier cooking methods like baked and popped.
Digital Acceleration. Top on the list of CAPEX investments by all CPGs was investment in digital transformation. Most presenters spoke of their continued shift from traditional mass media to user generated content and influencer marketing via social platforms such YouTube, TikTok, and Pinterest. Of note, the growing use of 1st party data assets to achieve greater personalization and media analytics to maximize marketing ROI in brand communications. Church & Dwight CEO Matt Farrell talked about their Digital First ambition that involves the digital upskilling of its people and leaning into digitally savvy brands such as Hero and TheraBreath. Similarly, PepsiCo CEO Ramon Laguarta spoke to digital investments in areas of AI, Analytics & Insights, IoT, and Automation.
Inflation. Higher input costs (materials, labor, transportation) have plagued the industry since 2021. For Church & Dwight, by example, these impacts translated to $250mm in added costs in 2022 - a normal year sees these same input costs increase by $50mm - $60mm. The consensus amongst presenters is for continued inflation pressures through 2023 and into 2024. PepsiCo said this: “We think that we'll continue to have higher inflation this year and potentially in 2024, as well.”
Strategic Revenue Management. CPGs suffered margin compression in 2022 due to higher input costs (e.g. transportation, raw materials and commodities) and there is broad recognition of the need for margin recovery. Companies are undertaking a number of OPEX measures to lower operating costs and expect to pass along price increases to retailers (and shoppers) where feasible. Some companies noted the need to think first in terms of value-added features and benefits and the merits of earning the right to take price. P&G’s remarkable growth of Dawn Dish Soap best illustrated the importance of base innovation to the consumer’s price-value ledger. Moreover, clawing back lost margins without added consumer benefit is detrimental to long-term brand health.
Supply Chain Resilience. 2022 was characterized by inventory issues, long lead times, and out-of-stocks leading to sub-par fill-rates. The industry acknowledged that supply chain service levels are returning to normal and anomalies, such as hot-shot deliveries, are fading. The more important takeaway is the recognition that supply chains have been built in the last several decades for efficiency at the expense of resiliency. CPGs recognize the importance of future-ready supply chains and the investments required to avoid over reliance on too few suppliers. Less reliance on co-manufacturing and greater CAPEX investment in company-owned manufacturing capacity was heard from some of the presenters. Digital Supply Chain Transformation was another common theme.
Demand Science. Analytics was discussed as not just a function but often as an engine for growth. The more innovative CPGs regard their insights capability as a key strategic pillar and continue to invest in consumer intelligence and analytics including 1st party data assets. Conagra, by example, has transformed into an insights-driven business and continues to accelerate sales from home-grown innovation.
AI in CPG. CPG first cut its teeth in Artificial Intelligence with the application of predictive algorithms that proved useful in generating cross-selling affinities, out of stock alerts, and other demand signals. And now AI-generated content has come to CPG. James Quincy, CEO of Coca-Cola, announced from the mainstage the company’s new “exploratory” alliance with OpenAI’s ChatGPT. He also shared Coca-Cola ad creative generated by OpenAI’s DALL-E platform. It’s still early in the AI realm, but it’s here.
Environmental and Sustainability. Genuine commitments to leaving the planet no-worse were heard from nearly every presenting company. Notable initiatives included areas such as waste reduction through packaging and materials redesigns, increased recyclability, water replenishment, and sugar reduction. Coca-Cola called out that its senior leadership incentive program now includes sustainability measures. Church & Dwight shared progress on its introduction of sorghum - a sustainable, non-clay, lightweight grain for its cat litter products.