Understanding shifts in consumer purchasing behavior will be key for all sectors.
Key takeaways
Businesses must leverage technology to understand consumer habits, anticipate inventory needs and minimize the impacts of labor shortages.
Discounting, reevaluating product portfolios and divesting underperforming products can better position businesses.
The impact of inflationary pressures on consumers and their willingness to spend, along with their shifting buying habits from goods to services, has made it difficult for middle market businesses to forecast financial performance for the rest of the year, and has left many consumer products companies holding bloated inventory levels.
While top-line inflation fell to 8.5% in July (compared against the 9.1% in June 2022), energy and gasoline prices continue to put outsized pressure on consumers, most notably for those in lower income levels with fixed monthly budgets.
While inflation gets the most attention and blame for affecting consumer spending, real consumer spending data (adjusted for inflation), indicates consumers had been shifting dollars from goods since January 2022. Many consumer goods companies that experienced outsized growth in 2021 largely driven by pent-up consumer demand, are now struggling to forecast consumer spending for the rest of the year as consumers pull back on discretionary spending due to price increases and a shift toward service spending as COVID-19 concerns ease.
By the numbers...
Since January 2022, on a three-month annualized basis, real consumer spending on durable goods declined each month, with the exception of March and April, when corporate bonuses and tax refunds helped drive spending. Over the same time, spending on nondurable goods declined in all but one month. Spending on services, on the other hand, has increased each month in 2022. This data indicates inflation is not the only issue affecting how consumer dollars are being spent. Pent-up demand to travel, dine out and spend on services is also likely a contributing factor in the recent decline in goods sales.
Understanding shifting buying behaviors
Managing inventory levels, driving consumer engagement and managing cost pressures will be the biggest challenges for consumer products companies in the coming months.
Discounting and divesting could counter pain points
Right now, the industry is going through some pain as consumer spending habits have pivoted. Discounting to offload excess inventory levels, evaluating product portfolios, and divesting business or product lines that have underperformed are strategies companies across all consumer products sectors should consider when building their business for the future. Companies will need to reevaluate forecasts to manage lower consumer spending and should not rely on 2021 financial results to determine future growth projections as the landscape for consumer spending has shifted dramatically.
Making difficult decisions today will support growth for years to come
Investing in technology, building consumer loyalty programs and mapping supply chains are some strategies that will be expensive today but will set up companies for success in the future. Executives need to shift their business to better understand the consumer of the future. The ability to leverage consumer and manufacturers’ data will allow executives to manage their businesses and make smarter, data-driven decisions.
Other top considerations to offset the impact of headwinds facing consumer products industries
Consumer goods companies should reevaluate inventory levels across all product categories and consider discounting options in the coming months. Many consumer goods companies are dealing with elevated inventory levels, primarily due to:
- Price increases
- Supply chain concerns causing executives to pull forward purchasing to avoid disruptions
- Inaccurate sales projections due to shifting consumer behaviors
Part of the strategy to reduce inventory as we approach the winter holiday season will be discounting, something many companies didn’t need to utilize as consumers largely overlooked price increases over the last 12 months. There is evidence that companies, most notably those selling general merchandise, are turning to discounting more than this time last year in an effort to move current inventory and make room for new seasonal items. However, it remains to be seen whether these strategies will drive additional consumer spending. Nevertheless, companies will need to make difficult decisions, and absorb months of margin contraction in order to right-size inventory levels later this year.
Food and beverage companies will need to navigate a consumer who has experienced significant increases in food-at-home costs since last year. Not only are customers challenged with the depth of price increases, but inflationary pressures for food costs have expanded throughout the grocery store, evidenced by cereals and bakery products, which showed a 1.5% year-over-year increase in July 2021 vs. 15% in July 2022. This could drive consumers to shift spending toward private label products, which may provide some level of price relief while budgets remain tight. In order for food and beverage companies to drive consumer engagement or investor interest, they will need to better understand consumers’ post-pandemic shopping habits, e.g., a focus on better-for-you or better-for-all brands, and position themselves to take advantage of sustained consumer behavior shifts.
Retail and restaurant companies should continue to drive consumer engagement in a period of high prices and labor shortages by better understanding the needs of the consumer at a local level. While some restaurants have benefited from a consumer largely looking to leave the house after more than two years of COVID-19 concerns, regional foot traffic varies significantly; understanding this and tailoring offerings will be a key to building future success. Additionally, the use of customer sales data on a store-level basis can help reallocate labor for peak sales periods in a time of labor shortages within the leisure and hospitality industry. Moreover, data can be used to better manage produce levels to ensure locations are limiting material waste.
Retailers need to further lean into technology to drive consumer engagement. While buy online, pick up in store (BOPIS) was a game changer for retailers looking to drive consumer engagement during the pandemic, BOPIS is now table stakes for retailers today. The key to driving consumer sales is providing a seamless shopping experience, leveraging consumer data to manage inventory at a regional and store level, and providing easy shopping options for a consumer on the move.
RSM contributors
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