Economic headwinds: Consumer products

The impact of inflationary pressures on consumers and their willingness to spend, along with their shifting buying habits from goods to services, has made it difficult for middle market businesses to forecast financial performance for the rest of the year, and has left many consumer products companies holding bloated inventory levels.

While top-line inflation fell to 8.5% in July (compared against the 9.1% in June 2022), energy and gasoline prices continue to put outsized pressure on consumers, most notably for those in lower income levels with fixed monthly budgets.

While inflation gets the most attention and blame for affecting consumer spending, real consumer spending data (adjusted for inflation), indicates consumers had been shifting dollars from goods since January 2022. Many consumer goods companies that experienced outsized growth in 2021 largely driven by pent-up consumer demand, are now struggling to forecast consumer spending for the rest of the year as consumers pull back on discretionary spending due to price increases and a shift toward service spending as COVID-19 concerns ease. 

By the numbers…

Since January 2022, on a three-month annualized basis, real consumer spending on durable goods declined each month, with the exception of March and April, when corporate bonuses and tax refunds helped drive spending. Over the same time, spending on nondurable goods declined in all but one month. Spending on services, on the other hand, has increased each month in 2022. This data indicates inflation is not the only issue affecting how consumer dollars are being spent. Pent-up demand to travel, dine out and spend on services is also likely a contributing factor in the recent decline in goods sales. 

Understanding shifting buying behaviors

Managing inventory levels, driving consumer engagement and managing cost pressures will be the biggest challenges for consumer products companies in the coming months.

Discounting and divesting could counter pain points

Right now, the industry is going through some pain as consumer spending habits have pivoted. Discounting to offload excess inventory levels, evaluating product portfolios, and divesting business or product lines that have underperformed are strategies companies across all consumer products sectors should consider when building their business for the future. Companies will need to reevaluate forecasts to manage lower consumer spending and should not rely on 2021 financial results to determine future growth projections as the landscape for consumer spending has shifted dramatically.

Making difficult decisions today will support growth for years to come

Investing in technology, building consumer loyalty programs and mapping supply chains are some strategies that will be expensive today but will set up companies for success in the future. Executives need to shift their business to better understand the consumer of the future. The ability to leverage consumer and manufacturers’ data will allow executives to manage their businesses and make smarter, data-driven decisions. 

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This article was written by Mike Graziano and originally appeared on Sep 14, 2022.
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