Consumer products industry outlook
Volume 8, Summer 2021
Key takeaways from the summer 2021 consumer products industry outlook
- One of the strongest headwinds facing the industry is a challenging labor market.
- Strong consumer spending is expected, led by back-to-school spending early in the fall.
- By selling directly to consumers, apparel companies get better access to consumer data, allowing them to predict and adapt to behaviors and preferences.
- Continued production disruptions due to weather and increased demand will keep prices higher in food and other consumer products.
- Increasing transparency to meet evolving ethical, environmental and clean label consumer demands is paramount for food and beverage businesses.
Consumer preferences and shopping habits post-COVID-19 will trend toward returning to pre-pandemic activities, with the last six months of the year fueled by the American Rescue Plan for middle- and low-income families and a return to experience-focused spending.
U.S. consumers are returning to their pre-pandemic 2019 level of purchasing food away from home. During the pandemic, quick serve and fast casual dining benefited the most as consumers preferred delivery or curbside pickup, while fine dining lagged due to seating restrictions and health concerns. Customer engagement through digital channels in both the quick serve and casual dining segments has led to increases in same-store sales and helped maintain customer loyalty. Domino’s Pizza continues to be a leader, with 70% of U.S. 2020 sales coming through digital channels.
As retailers work to replenish their exhausted inventory levels and look to return to their just-in-time supply chain over the next year, they will continue to face increases in prices from the strain on manufacturers in their supply chain. One of the main drivers of rising inventory costs is the increase in transportation costs, as well as a surge in storage costs due to shipping delays.
MIDDLE MARKET INSIGHT
Retailers and restaurants that are able to focus efforts on being nimble, and negotiating and re-negotiating pricing, will have the best opportunity to protect margins.
Large importers are securing current shipping container rates in contracts highlighting that the demand for the transportation of goods will be here at least for the next year. Businesses that are forced to rely on spot rates will be impacted the most as they have limited negotiating leverage. Those retailers and restaurants that are able to focus efforts on being nimble, and negotiating and re-negotiating pricing, will have the best opportunity to protect margins.
The strongest headwind facing the retail and restaurant sector is a challenging labor market. The total job openings of 9.286 million in April were the highest of any one month. When comparing January through April for sectors in which retail and restaurant commonly compete for talent, the data shows the highest number of job openings in the last 10 years. The demand across all industries is giving employees an opportunity to be more selective in the roles they take and the industries they want to engage. Companies are working to increase benefits and compensation and looking for any new or creative ways to be more attractive to potential employees. The entire ecosystem is hopeful that finding good help will become easier as supplemental unemployment benefits expire.
Retailers and restaurants continue to face margin pressure as both labor and inventory costs have risen in the last nine months. The minutes from the Federal Open Market Committee stated that while January and February of 2021 saw decreases in manufacturing production due to weather in some parts of the country, "new orders indexes in national and regional manufacturing surveys pointed toward solid increases in factory output in the coming months.” The minutes added that while goods are being produced, “reports of shortages in materials and labor, as well as bottlenecks in transportation, signaled some potential restraints on the pace of the manufacturing recovery."
These constraints in manufacturing have a direct impact on retailers and restaurants. In addition, with the challenges on the cost side of the equation, retailers and restaurants are looking to increase sales to help preserve margins.
The RSM US Middle Market Business Index identified in November 2020 that more of the middle market is anticipating raising consumer prices in an effort to pass along some of the increase in costs. Six months later, the same respondents had yet to actually implement this strategy, but even more are anticipating doing so as costs continue to rise. Passing along the costs via a price increase will be a challenge for companies that compete solely on price as their competitive advantage. Both retailers and restaurant operators are hopeful that pent-up demand after the pandemic will be strong enough that consumers will accept price increases.
MIDDLE MARKET INSIGHT
This combination of more efficiency through the supply chain in an increasingly digital ecosystem, along with stronger customer loyalty, is a critical component of a successful strategy for both retail and restaurants as we emerge from the pandemic.
Another strategy middle market companies are exploring to improve margins on existing sales channels is better and smarter use of customer data. The effectiveness of this approach has already been proved by larger retailers, such as Nike, which recently experienced one of its strongest quarters in 50 years. On their Q4 2020 earnings call, John J. Donahoe, president and CEO at Nike, said that technology investment has allowed the company to create a "digital supply chain," and that data analytics enables execution on an age-old retail adage to deliver "the right product in the right place at the right time, so that we can deliver that product in a low-cost, convenient and speedy and … climate-friendly way." Donahoe noted that creating a virtuous cycle with customers has also led to an increase in returning customers. This combination of more efficiency through the supply chain in an increasingly digital ecosystem, along with stronger customer loyalty, is a critical component of a successful strategy for both retail and restaurants as we emerge from the pandemic.
The American Rescue Plan Act of 2021 changed the child tax credit by increasing the amount along with making it fully refundable allowing more families to claim the child tax credit. The IRS estimates that 39 million households and 88% of children in the United States will see the monthly payments. As with the past stimulus, income limits are applied. Families making less than $112,500 for head of household or less than $150,000 if married and filing jointly are able to claim the increase in the child tax credit. Families making over the thresholds will see their amount phased out up to the thresholds of $132,500 and $170,000, respectively.
For the first time with the child tax credit, families will receive part of the credit in monthly payments starting on July 15 and running through the remainder of 2021. The monthly credit ranges from $300 for each dependent under six years old to $250 for each dependent between the ages of six and 17 years old for families able to receive the full increased child tax credit.
This boost to household income over the last six months of the year will likely have a similar impact on spending that we have seen with the last three stimulus checks with increases in spending on consumer discretionary items.
Many questions remain, including how long the pent-up demand will last, how the hybrid working environment will affect the economy, and the impact when the existing moratoriums on rent and mortgage payments are lifted. However, the current economic fundamentals still support a very strong second half of 2021 for the retail and restaurant ecosystem. Winners and losers will be separated by how well they can manage margins through the use of data and technology to employ smarter pricing tactics and mitigate labor shortages and supply chain challenges.
Home furnishings demand continues even as pandemic drivers begin to reverse
Demand for furniture and home furnishings continues to surge even as the underlying forces that drove demand early in the pandemic subside. Furniture and home furnishings consumption growth through the first five months of 2021 increased 31% from the same period the previous year and was well above pre-pandemic growth rates of 5%. Demand accelerated last summer as consumers redirected savings from government assistance as well as services spending to outfit their homes for new lockdown lifestyles. They also sought out the space offered by larger homes farther away from urban centers.
With many offices reopening after slower spring months, rental markets in urban areas are heating up again as consumers reprioritize their living and working proximities. As consumers are drawn back into urban lifestyles, home furnishings companies with compact and affordable offerings of furniture and appliances should see continued strength from millennial and Gen Z consumer bases that may have cohabitated with parents or relatives during the pandemic. Likewise, consumers who have permanently moved to the suburbs will once again rethink living spaces and outfit their homes for more permanent work-from-home lifestyles.
As supply constraint and input prices continue to drive up the cost of existing and new homes, consumers are turning to remodeling and renovations to address space and lifestyle needs. The National Association of Home Builders future market indicator reached a new high in the first quarter of 2021, signaling that demand for remodeling projects will have sustained momentum for the near term.
Supply chain disruption with stretch demand for home furnishings
While demand for home furnishings products continues to increase, supply chain struggles stand in the way of businesses’ ability to tap into opportunities. While the impact of the pandemic on the U.S. consumer is subsiding, it continues to affect factories in key production areas in South Asia, and their ability to keep up with demand. Shortages in container and truck supplies, as well as increased freight costs, are limiting the ability of many companies to accumulate inventory and bring available products into the country, or get them to retailers and ultimately to consumers. Airfreight has provided an expensive alternative for some importers, but is cost prohibitive for heavier furniture items.
Business are continuing to adapt in a variety of ways. Products are being rethought so that customization, a popular offering in the furniture space, can be performed at domestic warehouses rather than at foreign manufacturing sites. Some businesses are continuing to invest in new products and diversify sourcing to avoid being overdependent on one particular supplier or geographic region. Consumers are likely to see fewer seasonal items, as suppliers will be reluctant to invest in increased logistics costs for products that may ultimately need to be discounted.
The supply chain disruption will stretch the demand for home furnishings longer and provide an opportunity for innovative companies to capture market share from larger players by providing high-quality items with shorter lead times.
Shortages in container and truck supplies, as well as increased freight costs, are limiting the ability of many companies to accumulate inventory and bring available products into the country, or get them to retailers and ultimately to consumers.
Beauty, bricks and clicks
Beauty is back in a big way thanks to widespread vaccinations, reopenings across much of the United States and pent-up consumer demand. Consumers are reengaging with color cosmetics such as lipstick, as well as other categories that saw sales bottom out during the height of the pandemic. Brands are responding to the surging demand and renewed energy by repackaging product launches that were planned for 2020 to appeal to 2021 consumers eager to travel, meet with family and friends, and return to work and school. Also hitting the market is a flood of multipurpose products that combine the appeal of color cosmetics with wellness attributes popularized in the skin-care category during the pandemic.
While many brands invested in recreating high-touch in-store experiences online, the appeal of the physical store experience is drawing customers back.
Product combinations aren’t the only example of pre-pandemic trends merging with new habits; beauty businesses are having to rethink channel and marketing strategies to respond to changes in consumer preferences. Beauty sales counters were not immune to the proliferation of e-commerce over the past 18 months; however, with businesses reopening, physical stores are playing an important role in the beauty rebound. While many brands invested in recreating high-touch in-store experiences online, the appeal of the physical store experience is drawing customers back. According to the IRI E-Commerce Demand Index, which measures consumer spending changes from the previous year across e-commerce sales channels and fulfillment types, growth through click and collect has outpaced that of shipment and delivery as the economy continues to reopen. While beauty brands will need to calibrate their investments in online marketing campaigns that carried them through the pandemic, in-store displays and promotions will create immersive customer experiences in the physical and digital worlds.
Apparel imports get ahead of a busy back-to-school season
The apparel industry is positioning to stay ahead and maximize the value of what’s predicted to be a strong holiday season amid new supply chain challenges. The summer of 2021 is seemingly the inverse of where fashion businesses found themselves 12 months ago, when they heavily discounted available product offerings to free up cash flow amid historically weak demand. With consumers preparing to get back to offices, schools and restaurants over the remainder of 2021, apparel companies are navigating supply chain disruptions stemming from material shortages, COVID-19-related factory closures, shipping container availability, surging freight costs, and geopolitical tensions—all factors that have contributed to exasperatingly long lead times.
Apparel businesses with popular pandemic styles, such as athleisure, saw these issues lead to out-of-stock items and lost sales opportunities. The industry is responding by bringing product into the United States earlier than ever. Through May 2021, apparel and footwear imports surpassed 4.9 million metric tons, a 21% increase from a pre-pandemic peak for the same period in 2019. The surge demonstrates apparel brands’ and retailers’ willingness to take on additional inventory risk.
The concept of nearshoring has been attractive to businesses looking for the agility to respond to changing consumer preferences and restock popular styles without significant investment in underperforming products.
U.S. businesses seeking to mitigate risk are also bringing manufacturing closer to consumers. The concept of nearshoring has been attractive to businesses looking for the agility to respond to changing consumer preferences and restock popular styles without significant investment in underperforming products. In the past, high production costs and lack of reliable infrastructure in Central America and the Caribbean basin have led U.S. businesses to favor sourcing in South and East Asia. However, the importance of speed to market, the lure of reduced waste, and human rights concerns in traditional manufacturing nations are beginning to change that outlook.
Lastly, some apparel companies are taking the expected demand surge into their own hands by circumventing traditional department stores and apparel retailers and riding the direct-to-consumer wave. By selling directly to consumers, apparel companies get better access to consumer data, allowing them to better predict and adapt to behaviors and preferences and avoid margin-eroding fees and returns. The channel migration also gives brands better control of their inventory, allowing them to get products in front of the consumers most likely to buy them.
In the last 12 months, the consumer price index (CPI) rose 5%, its largest increase since 2008, according to the U.S. Bureau of Labor Statistics (BLS). A majority of food items experienced price gains for the 12 months ended May 2021, with pork and fresh foods and vegetables increasing 3.2% each. Food purchase for consumption at home is beginning to plateau, as shown in its year-over-year increase of 0.7% at the end of May compared to 1.2% at the end of April. Food away from home continues a strong recovery with a 4% increase. Most notably, limited-service meals, defined as pickup, takeout and delivery, increased 6.1% year over year at the end of May 2021. While still strong, food-at-home purchases are now returning to pre-pandemic levels.
According to Nielsen IQ data, the average price of all grocery store food purchases as of April 2021 increased 5.7% from the same period in late April of 2020. Although recent data from the United Nation’s global index on food costs has eased slightly, grocery margin pressures remain as food producer prices continue to outpace the CPI for food at home purchases as seen in the latest releases by the BLS.
Many factors are causing pricing pressure in food and beverage. For example, the U.S. producer price index (PPI) for transportation and warehousing of final goods is up 11% year over year as of May 2021. Higher transportation and warehousing costs continue to be an issue, as limited freight capacity cannot keep up with increased demand.
Weather conditions are also affecting food prices. According to the U.S. Drought Monitor, as of the end of June 2021, “much of the West is classified as severe drought or worse.” The extreme heat continues to dry out soil and vegetation. Farmers do not have enough water for crops and livestock, and in some of the high plains states, ranchers are having to sell entire herds as conditions worsen. There have even been fishing restrictions placed in certain areas where water levels are low and warm. After the supply chain shocks from the pandemic, continued production disruptions due to weather and increased demand will keep prices higher.
Food and beverage producers, processors and distributors still struggle to attract and retain labor as stimulus funds remain available into the fall. Labor wage-rate growth for food manufacturers has lagged that of other industries; however, increased scrutiny around safety and retraining may require food manufacturers to increase compensation to bring workers back to production floors.
Middle market companies may see some relief, as many states are ending the $300 unemployment benefit before the government’s September deadline. Conversely, for many employees the cash is not the deciding factor. Many Americans have difficulty returning to work without access to adequate child care or remain concerned about COVID-19.
Consumers see promotions in grocery aisles but not bills
Grocery store shelves are getting crowded again, and brands are reengaging for consumers’ attention, appetite and wallet share. The change is captured by the IRI CPG Promotions Index, which measures promotional activity such as displays and temporary price reductions for food and beverage products against the same period in the prior year. The second quarter saw a surge in promotional activity in March 2021 compared to the onset of the pandemic, when brands focused on getting products on shelves as consumers loaded their pantries. With in-store promotions as the dominant form of brand recognition, the return of promotional activity signals supply constraints beginning to ease. However, while consumers may see more promotions in the aisles, the impact won’t show up on their weekly grocery bills. The promotional depth index, a measurement similar to the IRI that tracks the discounting level consumers are seeing from promotional discounts, hasn’t rebounded like the overall activity. Discounts are below prior year levels as brands unleash their marketing budgets but continue to pass along rising input costs to the end consumer.
Sustainability, security and innovation
According to data from ADM, a multinational food processing and commodities trading corporation, more than two-thirds of consumers want to have a positive impact on the environment, and over 30% purchase sustainably produced items. Increasing transparency to meet evolving ethical, environmental and clean-label consumer demands is paramount. In July 2020, the Food and Drug Administration (FDA) released its “New Era of Smarter Food Safety Blueprint” to keep up with the changing food system. To meet the goals of safer and traceable food, Frank Yiannas, deputy commissioner for food policy and response at the FDA, launched the traceability challenge. He is calling on food technology solutions providers, public health advocates and innovators to create affordable traceability solutions for use from farm to table, connecting primary producers, importers, manufacturers, processors, distributors, retailers and food service providers throughout the food supply chain. He also hopes that using technology will prevent supply chain disruptions, providing for a more agile and robust food system. The results from this challenge could be meaningful to middle market food and beverage companies, which often lack the resources to implement this type of technology.
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