2023 Outlook: How FMCG Companies Can Navigate Persistent Market Volatility

Editor's Note:This article is part of the "2023 Supply Chain Opportunities and Challenges" series.Click here to read other articles in this series。

For Mike Kirban, co-founder and executive chairman of coconut product giant Vita Coco, uncertainty has always been a constant in business.

Vita Coco'shistory dates back to a cold winter night in a New York City bar in 2003. In the company's early days, executives had to convince consumers to buy its products; then, when demand soared, they had to scramble to keep up with supply.

The past few years have brought new challenges: industry-wide shipping costs surged from $2,000 per container two years ago to over $10,000 at their peak last summer, while a shortage of shipping containers severely constrained product supply.

Market conditions led to shortages of pineapple and mango puree,affecting the availability of some Vita Coco flavored coconut waters on retail shelves last summer. For products that were in stock, transit times from factory to warehouse also lengthened significantly, stretching from the usual two weeks to as long as three months. High costs nearly halved Vita Coco's gross margin last year and prompted it to raise prices twice.

"That's the beauty of this kind of business—there's always a new challenge,"Kirban said with a laugh at Vita Coco's New York headquarters. "We've learned a lot and become better in many ways, allowing us to survive the tough environment of the past few years."

He noted that Vita Coco (which also produces water in aluminum cans, energy drinks, and protein-fortified water, alongside its namesake coconut beverage) has seen costs begin to stabilize, but labor, packaging, and shipping expenses remain high. The past few years have prompted Vita Coco to change how it operates, spanning everything from product sales and marketing to sampling strategies and innovation.

Volatility remains the dominant theme

However, growing evidence suggests that the challenges facing Vita Coco and other consumer packaged goods (CPG) companies will persist in 2023 and may force these already battered companies to make further adjustments.

Supply chain difficulties, inflation, the ongoing war in Ukraine, and soaring input costs have proven to be a test for even the most senior executives. Corporate leaders must now consider: how to plan for the future when there are no ready-made answers or historical precedents to draw upon.

Krishnakumar Davey, president of client engagement at IRI, recently discussed sourcing and supply chain issues with executives from several top CPG companies. He was surprised by their outlook for this year.

"They said: 'Listen, 2023 is going to be just as volatile as last year and the past few years,'" Davey recalled. "I was quite shocked by what they said."

Neil Saunders, managing director at GlobalData, agrees. He says most food and beverage manufacturers expect 2023 to be "a fairly tough year... because consumers remain under significant pressure."

Greg Longstreet, CEO of Del Monte Foods, which makes canned vegetables and fruits (and owns Contadina tomato products and College Inn broth products), says the company will implement what may be its final round of price increases for the near term in February.

But he notes that with packaging, ingredient, and transportation costs still high, Del Monte Foods continues to look for ways to cut expenses across the supply chain and enhance the appeal of its products to consumers.

To that end, Del Monte has introduced more products that resonate with value- and convenience-seeking consumers at various price points, such as fruit cups and multi-packs of canned vegetables. Meanwhile, over the past four years, the company has more than doubled its spending on factories to improve speed and efficiency.

"To stay competitive... we have to be highly automated, high-speed, and efficient to deliver these products to consumers at better value," Longstreet said.

More layoffs to come?

For many companies, the biggest variable is whether the U.S. economy will enter a recession and, if so, how severe it will be.

A recession would put even more pressure on consumers—who are already facing higher borrowing costs due to a series of Federal Reserve interest rate hikes, while prices for everything from food and clothing to healthcare and travel continue to rise.

Economists point out that last month there were reports that PepsiCo, seen as a bellwether for the industry,plans to cut hundreds of corporate jobs in North America, which could be a precursor to further tightening of staffing at other food and beverage CPG companies. So far, most of these companies have been largely unaffected by the wave of layoffs in other industries. This move may signal that, despite price increases helping to offset rising costs, companies realize they need to take more steps to control expenses.

This contrasts sharply with the economic environment during the pandemic—when food manufacturers were hiring aggressively due to surging demand as homebound consumers went out, traveled, and worked less. While production and manufacturing workers should largely keep their jobs in the coming months, corporate white-collar departments may not be spared.

"The pandemic was quite favorable for most food and beverage companies because they saw a surge in consumer spending, and people were very casual about hiring at the time," Saunders said. "Now the tables have turned, and people are saying: 'We need to consolidate, we need to look at whether these roles are all necessary, we need to reassess some of our forecasts.'"

"People always need to eat"

Inflation data released by the U.S. government last month offered a glimpse into the predicament facing CPG executives.The Department of Labor estimatedthat prices for food consumed at home rose 0.2% month-over-month in December, and were up 11.8% year-over-year. Overall, inflation across all product categories fell 0.1% month-over-month in December,marking the largest single-month decline in nearly three years。

Even as inflation retreats from multi-year highs, prices are expected to remain above pre-pandemic levels. Further price increases may still work in some categories, but overall, many consumers may not be able to absorb more on top of the multiple rounds of increases already implemented in 2022.

Valerie Oswalt, a former Campbell Soup Company executive, became CEO of Kodiak Cakes in November. The maker of high-protein whole-grain pancakes, waffles, energy bars, and baking mixes is closely monitoring metrics ranging from demand for private-label products to how often consumers dine out. She said the company is tracking product sales and working closely with suppliers and its procurement team to improve efficiency.

"Our top priority is really to try to improve productivity to offset the headwinds from inflation," Oswalt said. "We have to be very careful with pricing" to avoid pushing consumers elsewhere.

Davey said CPG companies may cut costs by: streamlining SKU counts to simplify production, reducing input purchases (such as buying fewer bottle caps to improve efficiency), trimming advertising or marketing spending, and adopting "shrinkflation"—reducing package contents while keeping prices the same.

He noted that food manufacturers may also substitute or reformulate with cheaper or more stable ingredients, while introducing more automation and artificial intelligence into their operations.

"There are always many opportunities... CPG companies are just getting started. There are still plenty of opportunities for them," Davey said. "Over the past two years, because CPG and food industries have grown strongly, they haven't aggressively cut costs."

Since food and beverages are necessities for consumers, people may look for ways to save money within this category.

Saunders said these options may include shopping more at discount stores, cutting back on certain non-essentials, or trading down to cheaper products. Private-label brands, which have performed strongly in recent years, will continue to see demand.

Meanwhile, premium products are expected to maintain demand as consumers use money saved from dining out less to purchase them, and remain willing to pay a premium for higher-quality items with unique attributes.

Economists note that despite ongoing uncertainty in the food and beverage industry, this category remains relatively stable compared to other sectors such as technology, manufacturing, or retail.

Marcel Koks, director of industry and solution strategy at Infor (whose work involves partnering with companies to adapt to market changes), said that while "disruption has become the new normal," the food industry overall "has always been a very stable industry." He specifically cited the industry's resilience following the recessions of 2001 and 2008.

"Compared to other industries, the food industry has performed relatively well," Koks said. "In terms of total value, demand still exists. People always need to eat."