How FMCG Companies Can Prepare for Market Volatility in 2023

Editor's Note:This article is part of a series exploring the opportunities and challenges in the supply chain in 2023.Click here to read other articles in the series。

For Mike Kirban, co-founder and executive chairman of coconut products giant Vita Coco, uncertainty has always been a constant in business. Vita Coco's origins trace back to a cold winter night in a New York City bar in 2003, when early executives had to convince consumers to buy its products, and then struggled to keep up with supply as demand soared.

The past few years have brought new challenges: industry shipping costs soared 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 a shortage of pineapple and mango purees, affecting the availability of some of Vita Coco's flavored coconut waters on retail shelves last summer. For products that were in stock, the time from factory to warehouse also lengthened, stretching at one point from the usual two weeks to three months. High costs nearly halved Vita Coco's gross margin last year and led to two price increases.

"That's the beauty of these businesses—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, enabling us to weather the tough environment of the past few years."

He said Vita Coco (which also produces water in aluminum cans, energy drinks, and protein-fortified water, in addition to 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 adjust its operations, covering everything from product sales and marketing to sampling strategies and innovation.

Volatility remains the main 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 further changes at companies already hit by a series of setbacks. Supply chain issues, inflation, the ongoing war in Ukraine, and soaring input costs have proven to be tests for even the most senior executives. C-suite leaders must now figure out how to plan for the future without answers or historical blueprints to guide them.

Krishnakumar Davey, president of client engagement at IRI, recently discussed sourcing and supply chain issues with top CPG executives. He was surprised by their rather pessimistic outlook for this year. "They said: 'Look, 2023 is going to be just as volatile as last year and the past few years,'" Davey recalled. "I was quite shocked."

Neil Saunders, managing director at GlobalData, agrees. He said 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 produces canned vegetables and fruits, Contadina tomato products, and College Inn broths), said the company will implement what may be its final round of price increases in the near term in February. However, he noted that with packaging, ingredients, and transportation costs still high, Del Monte Foods continues to seek cost cuts throughout its supply chain and enhance the appeal of its products to consumers.

To that end, Del Monte has introduced more products at price points that appeal to value- and convenience-seeking consumers, such as fruit puree cups and multi-packs of canned vegetables. Meanwhile, its factory spending has more than doubled over the past four years to improve speed and efficiency. "To compete... we need to be highly automated, high-speed, and efficient to offer these products to consumers at better value," Longstreet said.

More layoffs to come?

For many companies, the uncertainty lies in whether the U.S. 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, as well as rising prices for everything from food and clothing to healthcare and travel.

Economists say last month's reports that PepsiCo (widely seen as a bellwether for the industry) plans to cut several hundred corporate jobs in North America could be a precursor to further tightening of staffing at other food and beverage CPG companies. These companies have so far largely been unaffected by the wave of layoffs seen in other industries. This could signal that, although price increases have helped offset rising costs, companies realize they need to do more to control expenses.

This contrasts sharply with the economic environment during the pandemic—when food manufacturers expanded hiring to meet surging demand from homebound consumers. While workers involved in manufacturing should be largely protected in the coming months, white-collar corporate jobs may not be spared.

"The pandemic was quite favorable for most food and beverage companies because they saw consumer spending surge, and people were hiring very casually," Saunders said. "Now the tables have turned, and people are starting to say: 'We need to consolidate, we need to look at whether all these roles are necessary, we need to revisit our forecasts.'"

"People always need to eat"

U.S. government inflation data released last month offered a glimpse into the dilemma facing CPG executives. The Labor Department estimated that household food prices rose 0.2% month-over-month in December and 11.8% year-over-year. Overall, inflation across all product categories fell 0.1% month-over-month in December, the largest 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 product categories, but overall, many consumers may not be able to afford larger increases on top of those already implemented in 2022.

Valerie Oswalt, a former Campbell Soup executive, became CEO of Kodiak Cakes in November. The manufacturer of high-protein whole-grain pancakes, waffles, energy bars, and baking mixes is closely monitoring everything 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 procurement teams to improve efficiency. "Our top priority is really driving productivity improvements to offset inflationary headwinds," Oswalt said. "Pricing has to be very careful" to avoid pushing consumers elsewhere.

Davey said CPG companies may reduce SKUs to simplify production, cut inputs (such as purchasing fewer bottle caps to improve efficiency), reduce advertising or marketing spending, and adopt "shrinkflation" (reducing package contents while keeping prices the same) to lower costs. He also noted that food manufacturers may substitute or reformulate with cheaper or more reliable ingredients, while introducing more automation and artificial intelligence into their operations.

"There are always many opportunities... CPG companies are just getting started. They still have plenty of opportunities," Davey said. "Over the past two years, because of strong growth in the CPG and food industries, 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 choices could include shopping more at discount stores, cutting back on non-essentials, or trading down to cheaper products. Private labels, which have thrived 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 buy these items and remain willing to pay a premium for higher-quality goods with unique attributes.

Despite ongoing uncertainty in the food and beverage sector, economists say the category remains relatively stable compared to other industries such as technology, manufacturing, or retail. Marcel Koks, director of industry and solution strategy at Infor (who helps companies adapt to the market), said that while "disruption is the new normal," the food industry overall "has always been a very stable industry." He noted that the industry showed resilience after the 2001 and 2008 economic recessions.

"Compared to other industries, the food industry has been performing relatively well," Koks said. "In terms of total value, it will still hold up. People always need to eat."