Key points
- Consumer goods continue to perform well so far, despite cost pressures and concerns about the impact of inflation on demand
- Consumers are keen to resume everyday activities, but enthusiasm for domestic travel has waned slightly after a post-lockdown surge
- Shoppers are spending the same to acquire less on each trip as inflation starts to bite
- Convergence in the sector offers new product opportunities for companies flexible enough to think beyond organizational boundaries
- The outlook for the sector amid recessionary pressures is a concern, especially in the light of expensive valuations relative to other sectors.
Steady progress, but risks ahead
Most consumer packaged goods (CPG) companies are enjoying sound performance. High-level trends remain generally positive across food, beverages and household products, driven by solid price per unit with some elasticity impact on volumes.
Cost pressures on raw materials, labor and transport are inevitably affecting businesses. Several companies said they expect inflation to continue into, and probably throughout, 2023. Prices or supply of energy, diesel, agricultural commodities and edible oils were seen as especially challenging.
In response, many companies are raising prices across brands and categories. Some items have gone through two, three or more rounds of price rises. Companies explained they have yet to experience pushback on pricing, and that price elasticities remain below historical levels.
However, company stakeholders acknowledged the risks if an economic slowdown results in layoffs and unemployment after the summer. As the demand unleashed after COVID-19 lockdowns tapers off, and the impact of inflation starts to bite, consumer appetite is likely to diminish.
GOAL opens, GOAT stumbles
This trend may already be under way, at least in terms of consumer mobility, according to evidence shared with delegates by RBC’s Digital Intelligence Strategy team.
Drawing from multiple alternative data sources, the team monitors key consumer and macro trends in real time. Two of its key indices are Get Out and Live (GOAL) and Get Out and Travel (GOAT).
GOAL is a measure of consumers’ willingness to resume everyday activities, explained Mike Tran, a Global Energy and Digital Intelligence Strategist at RBC Capital Markets. It tracks indicators such as foot traffic at offices, restaurant reservations, and driving direction requests. This index remains extremely strong – at its highest point since the start of the pandemic.
However, this is not true of the GOAT index, which tracks US domestic travel-related metrics such as TSA throughput, hotel search interest, car rentals and airfare searches. After a strong start to the year, said Tran, this index had declined over five consecutive weeks and showed a 3% month-on-month drop.
There are two possible inferences: either pent-up demand for scheduled travel has been exhausted, or inflationary pressures have begun to hit consumers’ willingness to travel.
More trips to buy less
Tran shared more of the team’s work, offering insights on the impact on consumers of gas and food price inflation.
With gas prices now well above $4 per gallon for the first time since 2008-9, consumers are getting less for their money – but spending the same per trip. On average, consumers spend $25 to $30 each time they buy gas, regardless of price. As a result, they end up making 22% more trips to the pump.
A similar pattern is evident in food, where Tran’s team is tracking the rising inflationary impact on consumers of the costs of commonly used items such as fertilizer, corn, wheat, soy, and packaging. Again, consumers are spending similar average amounts per shopping trip, but taking away less.
Turning to supply chain problems, the team’s analysis suggests congestion at major ports is now causing average delays of 5.6 days. That represents an improvement from the peak of 8 days, but a decline from 5 days only a few weeks earlier. Tran emphasized that supply chain dynamics remain fluid, and recovery will not necessarily be a linear process.
Innovators can gain from convergence
The impact of convergence on the industry – and the opportunities this presents for CPG companies – was explored at a keynote session during the conference. Expert input came from Andrew Ross, former EVP of Strategy, New Business Development and Integration at the Estée Lauder Companies Inc., and Pano Anthos, Managing Partner at XRC Las, an accelerator and fund for the consumer and tech space.
Convergence is materializing in several ways. Consumers will increasingly straddle multiple demographics, and shop across all channels. Convergence is happening in categories – such as the emergence of hard seltzer at the intersection of beer, wine and spirits – and has driven acquisitions, as in Amazon’s takeover of Whole Foods.
Innovative start-ups are capitalizing on these trends to develop new products. For example, most personal care companies manage skin care and sun care as separate categories, but brands such as Supergoop! combine the two. This type of convergence is likely to cause significant disruption: for example, the supplement category could be entirely replaced by tasty nutritious snacks and drinks.
An adaptable organizational structure is key to success here. The challenge for many CPG companies is to take advantage of these opportunities by seeing things through their customers’ eyes, rather than remaining trapped in their own category definitions on P&L reporting structures.
High valuations signal concern
The Consumer Staples sector has outperformed in 2022 so far, aided by an economic backdrop generally favorable to defensive sectors. However, we are concerned about the outlook for the remainder of the year and for 2023.
Lower-than expected price realization, alongside continued pressure on commodity prices and the expiry of companies’ hedging strategies, sets up a more difficult margin environment for 2023 than the market may currently expect.
Consumer staples valuations are now trading at a premium of around 19% to the S&P 500, almost twice as high as its historical level. The sector also ranks low on our ESG scorecard, a longer-term concern, and the performance outlook for the sector over 6 to 12 months has been weaker than other major sectors in the eyes of our US Consumer Staples team, who are particularly worried about pricing.
We think it is important to remember that while Consumer Staples tends to outperform heading into a recession, it usually underperforms after US equities find their mid-recession low, even while the recession is still going on.
