The Supply Side: Consumer packaged goods makers, retailers prep for possible recession

Consumer packaged goods (CPG) manufacturers are operating in uncharted waters with inflation at a 40-year high, supply chain issues not helped by the Russian invasion of Ukraine, labor shortages and rising interest rates.

Rising prices on everything from fuel to breakfast cereal to hamburger meat are squeezing consumer budgets, and for many, it feels like a recession.

Marketing and analytics firm IRI issued a report on April 12 that looked at several ways CPG companies could use past consumer behaviors and buyer shifts to help recession-proof their businesses. IRI looked at the Great Recession of 2008-2009 for changes in shopper behaviors and the impact that had on discretionary categories, and the shift in where more value-oriented consumers did their shopping.

IRI reported that shoppers cut back on many CPG purchases as prices increased. They also shifted to value-tiered brands and made more purchases at discount stores. Consumers also cut back on impulse purchases and instead searched for deals and took advantage of promotions and coupons.

With rising prices on food and consumables, IRI said more consumers had less money to spend on general merchandise and bigger ticket items. Traffic also thinned in the typically more expensive convenience stores.

IRI said that in 2008 and 2009, consumers spent less money eating out, which could be an opportunity for grocers who market easy meal solutions at value prices in 2022. While the nation is not in recession, economists continue to forecast slowing growth through 2022 and into 2023.

Bloomberg’s recent investor survey found that about half of respondents expect the U.S. to enter recession by 2023. Deutsche Bank was the first major bank to forecast a U.S. recession by next year.

“We no longer see the Fed achieving a soft landing,” Deutsche Bank economists led by Matthew Luzzetti said in the analyst note. “Instead, we anticipate that a more aggressive tightening of monetary policy will push the economy into a recession.”

Deutsche Bank economists said the recession would be unavoidable, but they expect the downturn to be mild, beginning in the last quarter of 2023 and continuing into the first quarter of 2024. They expect unemployment will peak above 5%.

IRI said consumers traded down to private brands to save money in previous recessions and also cherry-picked among retailers searching for the best values and deals. Large families were apt to stock up at the beginning of the month, and snack food spending took a hit.

IRI also expects consumer behavior will repeat this time around, and shoppers will trade down to more value brands and try to stretch their dollar further. Unit sales for total CPG were down 2.1% in 2008, while dollar sales rose 3%. General merchandise saw unit sales drop 9.6%, with dollar sales falling 7%. The beauty category also suffered in the last recession. Unit sales for beauty and personal care fell 3.8%, even though dollar sales were flat. Grocery items sold in the center of the store fell 2.2% in volume, while higher pricing pushed dollar sales up 3.3%. The same trend was true for frozen and fresh foods, with unit sales falling and dollar sales rising because of higher prices.

According to IRI, CPG companies raised prices from 2008 through 2010, which cost them sales in large format stores like Walmart. When prices rose, sales volume declined. Total sales fell 2.1% in 2008 among the top 10 CPG categories. The categories that struggled the most with declining sales in the past recession were carbonated beverages, down 4.5% and chocolate candy, down 4.3%.

Private brands also thrived amid the last recession at the expense of more expensive name brands. At the start of the recession in 2008, private-label foods saw double-digit growth throughout the year. By 2009, growth flattened but returned in 2010 and remained elevated through 2012.

Analysts said consumers who tried private label items where the quality rivaled the name brand stayed with the lower-priced goods even when the economy improved. Private branded dairy, meats and frozen foods all gained share amid the past recession and have continued to grow.

IRI reported that categories that are already highly developed in private brands are likely to gain added share in 2022 and 2023. Walmart invested in its dairy plant in 2018 in Fort Wayne, Ind. The plant produces half-gallon and gallon jugs of whole, 2%, 1%, skim plain and 1% chocolate milk under Walmart’s private-label Great Value brand. In 2018, Walmart said the investment would help speed to market and give the retailer more control over the price.

The retail giant said in 2020 that 18 of its private brands did more than $1 billion in sales, and Great Value was a $27 billion global brand. However, Walmart’s Great Value is not always less expensive than deep-discount competitors like Aldi, who also have high-quality private brands.

While Walmart is a discounter with an everyday low pricing strategy, marketing analysts at IRI said Dollar stores that offer lower opening price points also tend to pick up share when consumers try to make their money go farther. Dollar General is also competitive with its aggressive couponing strategy, which bodes well for the retailer during economic downturns.

The Club shopping segment is also poised to grow share during economic challenges as they will often have the best overall value in a larger pack size than a traditional grocery store or supercenter. A club’s model is to sell basically at cost as the membership is what drives the profits.

IRI suggests that retailers and CPG manufacturers use lessons from prior economic downturns to prepare for another shift in buying behaviors. Stores that remained open amid the pandemic did well as consumers had money to spend and fewer places to spend it. Times have changed, budgets are tight and rising prices show no signs of slowing. The report noted that retail stores that can hold the line of raising prices would grab market share from those who can’t.