The past 4+ years have been no walk in the park for the CPG industry. Supply chain disruptions and inflation have added pressure to CPG manufacturers from all sides. While inflation is slowing, shoppers have grown tired of dishing out more and more of their household income for food – adjusting their behavior accordingly and making more cost-conscious decisions. (Recently PepsiCo announced that sales of Frito-Lay snacks actually fell compared to the previous period).
If prices begin to come down, will shoppers revert right back to their previous habits? The data says no. According to the Advantage 2024 Shopper Outlook, over half of respondents indicated they are buying less expensive options (55%), have switched to lower-priced brands (52%), and will continue to buy the lower-priced brands (55%). Meanwhile, to combat the changes in consumer behavior, big-box retailers have begun slashing prices on their own, putting further pressure on CPG brands to follow suit.
Emerging and mid-sized CPG companies often face greater challenges during inflationary periods due to their typically smaller scale, fewer resources, and lower brand recognition compared to larger players. In today’s environment, to avoid losing sales volumes brands need to be prepared to either lower prices or keep them from increasing further. Finding the right balance between price, product quality, brand integrity and profitability is probably the single most critical challenge they will need to overcome in today’s retail environment.
So how can brands achieve all this? Here, we suggest some strategies all based around a single acronym: RGM, or Revenue Growth Management. The right RGM strategies will allow CPG brands of all sizes to be more agile, innovative and competitive. But before we outline those strategies, let’s start by defining what RGM is.
Revenue Growth Management, or RGM, is a practice that involves enhancing revenue and profit margins through a blend of strategies focused on optimizing product assortment, pricing, and promotions. RGM takes a holistic approach, relying on coordinated efforts across various functions within the company. Through RGM, companies can better navigate the variables that can’t be controlled (like inflation and consumer shopping habits) while staying focused on desired goals – be it growth, profitability, or both.
In the past couple of years, “shrinkflation” has become a popular term – and we can thank Price Pack Architecture (PPA) for that. PPA involves organizing and designing product portfolios with a key emphasis on price levels, packaging sizes, and configurations. Optimizing PPA has been a go-to strategy for many CPG companies that have chosen to use pack sizes as a lever (i.e., reducing them) in order to maintain margins, avoid raising prices, and hold on to cost-conscious shoppers.
As for pricing, emerging and mid-sized CPG companies would do well to carefully set price points that balance consumer willingness to pay with maintaining margins. This especially rings true for the pricier, better-for-you (BFY) segment smaller and emerging CPGs tend to play in. Here, value-based pricing – where prices are set based on the perceived value to the consumer rather than just cost-plus margins – can help justify higher prices during inflationary periods.
CPG brands are focusing on more precise promotional strategies that target specific consumer segments or geographic areas where they can have the most impact. Rather than broad-based promotions, emerging brands are opting for selective, data-driven promotions and discounting strategies, focusing on products or regions where they need to drive volume or defend market share.
Leveraging data analytics to monitor important insights such as past sales trends, sales by geography or customer/store location, promotion performance, and trade spend effectiveness are vital in order to quantitatively inform such precise and targeted promotional strategies. (CPG brands like Lundberg Family Farms, Gimme Seaweed, Graza and others do this every day with our software and services platform.)
Most emerging and growing CPG companies were born out of some type of innovation by developing better quality alternatives to existing products. But in today’s environment, continuing to innovate can be a distinct competitive advantage when it results in lower costs and greater sustainability. Premium offerings that provide clear benefits that consumers value can continue to justify higher price points even during inflationary periods.
Emerging and midsize CPGs can leverage their smaller size and agility to innovate, test and iterate quickly. By keeping their “ears to the ground” they can respond to consumer preferences and launch products that resonate with current demands. BOMANI is one example of such a brand when they realized their “cold buzz” coffee cocktail was actually being called a “skinny espresso martini.” Quickly seizing on this trend, they rebranded and repackaged their product accordingly to positive results.
Needless to say, cost control and operational efficiency is an area emerging and midsize CPGs should always focus on despite macroeconomic trends. However, periods of inflation and shifting consumer demand only underscore its importance as one of the few areas that are controllable. This includes focusing on lean operations, reducing waste, and improving efficiency throughout the supply chain through better inventory management, optimizing production processes, and reducing overheads.
Brands are also revisiting their sourcing strategies, looking for cost-effective suppliers, and exploring alternative materials that can reduce costs without compromising product quality. Mid-Day Squares is an example: facing a cocoa industry in crisis, the functional chocolate brand has embarked on a journey to seek lower-cost, alternative sources and innovations to avoid raising prices.
Emerging and up-and-coming CPG brands optimizing for cost and efficiencies should avoid doing so to beat larger, more established competitors on price. These incumbent players have had many years to optimize their cost structures. Instead, they should do so while prioritizing product quality above all else – i.e. the value-add or innovation that differentiated them in the first place.
Building strong relationships with consumers through thoughtful branding, loyalty programs and personalized marketing can help CPG brands retain customers even when prices rise. These programs can offer rewards that add value without significantly impacting margins. Layer on to that an omnichannel approach, and brands can ensure consistency in pricing and promotions across both online and offline channels, which helps in capturing a wider audience.
With effective communication as a key part of their RGM strategy, emerging and mid-sized brands can earn their customers’ trust and mitigate potential damage from price increases by being transparent about the reasons for the change.
Lastly, we refer to that old saying – “if it ain’t broke, don’t fix it.”
CPG brands are using data to better understand what’s working well within their product portfolios – and streamlining to focus on their most profitable and core products. This reduces complexity and directs limited resources towards the areas where they can have the greatest impact.
Brands are also focusing on core markets where they have the strongest presence or the highest growth potential rather than spreading themselves too thin. This, again, is where data analytics focused on sales and even profitability per customer are critical to do more of what’s working and less of what’s not.
On the flip side, brands may also leverage data analytics to expose areas of the business that are broken. In this situation, they would need to decide whether to pour more resources into fixing the problem – for example, a store or region that isn’t working out – or pull the plug so that resources can be freed up to grow margin in places that are more profitable.
These RGM strategies offer CPG brands of all sizes a variety of levers to help navigate the challenges of inflation and evolving consumer behaviors. The ultimate goal is to position your company for sustainable growth. Has your brand implemented any of the strategies highlighted? Are there others you’ve tried that are not covered here? We want to hear from you on this important topic!
If you’d like to learn more about our CPGenius™ trade management software and services platform and how Promomash can help your brand with its Revenue Growth Management initiatives, contact us.