A Real Economy publication

Consumer goods industry outlook: Fall 2022

Sep 07, 2022

Consumer goods industry outlook key takeaways

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To combat softening demand, companies should embrace advanced data analytics tools and invest in consumer loyalty programs.

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Companies must now decide how to unload excess inventory to make room for the holiday shopping seasons.

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Some of the most significant areas of uncertainty for companies have been the supply chain and the rates for oceanic shipping and domestic freight.

Economics Consumer goods

Consumer goods companies are reacting to a shift in the macroeconomic landscape

Consumer goods companies have benefited from a surge in consumer spending throughout the pandemic that drove gross margins well above the five-year pre-pandemic average. Companies were able to increase pricing without a significant impact on volumes, a key driver of margin expansion.

However, based on the latest information available—compiled from public filings of specialty apparel and apparel manufacturers, home products and home furnishing companies, and global personal care brands—gross margin contracted an average of 30 basis points in the second quarter from the previous quarter. It is important to note that even with this decline, companies are still generating all-time high profits—most notably home furnishing stores, which generated gross margins 8.2% higher than the five-year pre-pandemic average, based on the latest information available. 

Gross margin spread for consumer goods companies

Gross margin spread for consumers good companies chart | Consumer goods industry outlook and trends

For companies to maintain these margins going forward, they will need to adapt to a shifting consumer landscape, one in which consumers have begun pulling back on discretionary purchases as inflation continues to rise (with a 9.1% increase on a year-over-year basis as of this writing). Additionally, as new-home sales and cash-out refinancing have fallen since increases in the federal funds rate, consumers have begun pulling back on larger durable purchases that were a staple of the pandemic when they refitted their homes with at-home offices, gyms and school spaces. Further, the ability to continue increasing prices to offset rising input costs may have passed as price sensitivity across income levels sets in, most notably for lower-income earners.

To combat softening demand, companies should embrace advanced data analytics tools and invest in consumer loyalty programs that will allow better-targeted marketing strategies and inventory management to support long-term growth. Making these investments now will result in short-term challenges but will position companies for success over the long term. 

Real consumer spending points to a pullback in volumes for apparel and home furnishings

Inventory and real consumer spending

Inventory and real consumer spending chart | Consumer goods industry outlook and trends

In recent months consumers have been forced to reevaluate whether to spend discretionary dollars on wants as opposed to needs as inflation eats into fixed monthly budgets. This shift in how consumers spend is having an impact on current and projected inventory levels for consumer goods companies.

In June 2022, month-over-month real spending (adjusted for inflation) on furniture and home furnishings increased just 0.5%, while real spending on clothing and apparel declined 0.7%. Meanwhile, the three-month average inventory levels for home furnishing and apparel companies reached all-time highs and increased 45% and 40%, respectively, from the same period one year ago.

Consumer goods companies have struggled to navigate a variety of challenges affecting inventory levels, including:

  • The impact of China’s zero-COVID strategy on imports from Asian factories, where a large percentage of goods are produced
  • Supply chain challenges and increased logistics costs
  • Consumer demand uncertainty

These issues contributed to a surge in purchases as companies made the strategic decision to increase inventory levels to support consumer demand and ensure sufficient inventory on hand given the risks associated with supply chain pressures since the start of the pandemic. However, as real spending softens, companies must now decide how to unload excess inventory to make room for the holiday shopping season.

Many companies will need to revisit discounting to drive sales, especially for seasonal goods, something consumer goods pulled back on over the last 18 months as consumers absorbed price increases. However, as demand softens, there is evidence that discounting for some products has returned. Based on the IRI Promotional Depth Index, which calculates the level of promotions for the most recent four-week period against the previous year, promotional activity for general merchandise for the four weeks ended July 24 was 34% higher than for the same time last year. This could be a bellwether of increased promotions for the upcoming holiday season.

Signs of pandemic-driven supply chain relief

Some of the most significant areas of uncertainty for consumer goods companies over the past 18 months have been the supply chain and the rates for oceanic shipping and domestic freight. Since June 2020, when oceanic shipping rates from Shanghai to Los Angeles and New York increased 50% and 16%, respectively, from the two-year pre-pandemic average, consumer goods companies have struggled to budget for freight-in costs. However, since September 2021, when rates from China reached all-time highs, oceanic freight rates have steadily declined, nearly 40% at the time of this writing. Further, oceanic shipping rates from Shanghai to New York fell below $10,000 per 40-foot container for the first time since May 2021. 

Oceanic freight rates

Oceanic freight rates | Consumer goods industry trends and outlook

Lower oceanic shipping costs, as well as a decline in container ship backlogs in the Port of Los Angeles and Port of Long Beach, are signs that supply chain uncertainty is starting to ease for consumer goods companies. Further evidence of this can be found within the RSM Supply Chain Index, which reached its highest reading in the most recently released report. Recent increases point to ongoing relief for middle market importers. This should give consumer goods executives greater comfort, as well as the ability to be more strategic with purchases and potentially modify pricing to account for input cost relief. 

Despite inflation and popular narrative, consumers are in a strong financial position

An important consideration for consumer goods companies is that despite consumers’ concerns around inflation and a softening in discretionary spending, consumers overall are in a strong financial position. Unquestionably, inflationary pressures and other macroeconomic considerations are having an outsize impact on lower-income earners, and consumer confidence will vary drastically among income classes. However, as consumer goods companies build strategies for the remainder of the year, they must account for the overall strength of the consumer. Companies should recognize that the current macroeconomic landscape is unique and should be evaluated differently than past economic challenges such as the Great Recession.

Consumers today maintain significant levels of excess savings—$2 trillion more than in January 2020—and are willing to dip into that savings if they feel the expense is worth it. This is evidenced by the growing number of airline passengers, which averaged 2.3 million in the trailing seven-day average as of Aug. 2, approximately 88% of the seven-day average in the same period in 2019 and a 12% increase from one year ago. Consumers appear to be willing to spend on an experience they feel is worthwhile, despite rising airfares. Additionally, consumer debt levels are significantly lower than in past economic slowdowns, such as the Great Recession, further supporting the strength of the consumer. 

The path ahead

For consumer goods companies to be successful in a post-pandemic environment, it is imperative to invest in tools that provide insights into customer and product trends. Understanding your consumer will be critical to success not just for the remainder of 2022, but in the years ahead. Companies that invest in data analytics and embrace tools to more efficiently evaluate customer behavior and product performance will be more nimble in their response to shifting consumer preferences. Consumers today are looking for a tailored shopping experience that is easier to navigate, whether online or in person. Investing in tools to enhance their experience will set companies up for success in the years ahead.

RSM contributors

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