The Data of Demand: Why CPG Manufacturers Need Predictive Analytics Now More Than Ever

To say that the past few years for CPG manufacturers have been tumultuous is an understatement. Though the onset of the pandemic forced an immediate reckoning with everything from shifts in consumer demand to supply chain shortages, CPG manufacturers were often able to pass along the increased costs associated with production directly to the consumer. 

In fact, when we look back at 2020-2021, history may well regard this period as the halcyon days of revenue growth for companies in the CPG sector. The aftermath, however, has created an altogether different reality.

In the current economic environment, protecting revenue growth requires a more nuanced approach than simply charging consumers more. Why? For starters, this approach only works if adequate demand for these goods exists. It's not surprising, then, that the question of demand continues to weigh heavily on the minds of CPG manufacturers everywhere. 

Inventory and Consumer Sentiment: The Twin Faces of Demand 

By now, the story is a familiar one. Faced with rising fuel prices and supply chain disruptions, CPG manufacturers, bolstered by stay-at-home orders that created immediate shifts in consumer behavior coupled with government stimulus and enhanced unemployment benefits, saw tremendous growth in 2020 and 2021 despite the challenges. 

What 2022 made clear, however, is that this growth would not continue unabated. With the looming threat of a recession, it's clear that consumers will not only limit their discretionary spending but also become more discerning in their purchasing habits overall.

To be sure, an emphasis on consumer behavior only tells one part of the demand story. For a more comprehensive picture, a focus on the current inventory gluts most retailers face is instructive. Shifting consumer sentiment and weaker purchasing power, combined with what some have called "post-pandemic oversupply," have all created the perfect storm for retailers bogged down with a significant inventory load they need to move before greenlighting new orders.  

Ultimately, retail inventory levels directly impact what manufacturers do next. But in this current climate, it's not surprising that major retailers continue to cancel orders, renegotiate vendor contracts, and push back on suppliers attempting to offset increased production costs by passing them along to retail consumers. 

As a result, CPG manufacturers find themselves caught in the double bind of demand – an oversupply of inventory on the retail side and a weaker consumer with less purchasing power than they've had in recent history. 

From Reactive to Proactive: Using Predictive Analytics to Navigate Uncertainty 

What are producers and CPG manufacturers to do in this climate of weakening demand? How can they protect their revenue as best as possible and make strategic decisions over the next 6-12 months about what to produce, how much to produce, and when to produce it?

Historically, CPG manufacturers have relied almost exclusively on internal and historical data for forecasting, leaving them with an incomplete picture of present market conditions. This is especially the case when recent events call into question the notion of what constitutes an accurate historical timeline. 

Simply put, CPGs must rely on more than just modeling data from 2020 and 2021 to forecast correctly because that period was unprecedented, and as a result, fails to provide a reliable picture of future growth. In fact, any accurate model — internal, external, or otherwise — requires harkening back to 2019 to establish a proper baseline for evaluating growth moving forward.

CPG manufacturers need to start asking, “Where would we be if 2019 was our last accurate indicator for economic growth?” Similarly, companies need to take the data from the past couple of years and accurately quantify the precise impact the pandemic and related events have had on bottom-line revenue growth rather than simply taking the numbers at face value.

Recessions: Never One-Size-Fits-All

While there's little doubt choppy waters are ahead, at least in the short term, history has shown time and again that economic downturns are far from homogenous. Notably, recessions do not occur similarly across all industries simultaneously. While it's undoubtedly the case that discount retailers and big-box chains may continue to cancel orders to deal with inventory issues or increase their private label brands to give them more leverage against CPGs during this economic downturn, the critical questions, however, are not if, but when, and for how long. 

Companies that work to understand the timing and depth of these recessionary pressures will be better positioned for success when the economic climate eases and consumer spending power increases.

To prepare accordingly, CPG manufacturers need to use industry-specific data coupled with broader economic indicators to focus on headwinds and model risk scenarios with an emphasis on contingencies that have the potential to impact revenue and profit margins. For instance, economic indicators point towards interest rates continuing to rise over the next 6-9 months, along with an uptick in unemployment that will weigh heavily on consumers and directly impact demand.

Ongoing shifts in consumer spending habits, and retailers awash with inventory they can only move at a steep discount, will require CPG manufacturers to stay attuned to how consumer behavior continues to change and evolve in the face of economic pressure. But consumer demand moves quickly, so CPGs need to track these changes in real-time.

A more holistic approach incorporating external data sets and various indicators like consumer sentiment, disposable income, and oil and gas prices can provide a more precise and comprehensive understanding of the consumers' CPGs target. Taking these broader market indicators into account will go a long way toward helping CPG manufacturers weather a potential storm over the first few quarters of 2023. 

—Rich Wagner, CEO and founder of Prevedere