CPG Chatter

I’ve written a lot recently about how the rise of store brands has forced branded manufacturers to continue buying down price to remain competitive. This problem is particularly bad for any product or category that doesn’t enjoy any real product differentiation aside from sheer brand strength. In Irrational SKU Rationalization. Can Promotions Save the Day? I suggested that buying down price long-term is a no-win strategy. Unfortunately for many CPG manufacturers the situation may get worse before it gets better.

While price pressure was certainly a challenge, many CPG manufacturers have at least been able to fall back on relatively stable transportation and commodity costs. In fact just last week a post in Seeking Alpha, documented all the stellar Q4 earnings results from major brands such as Conagra, General Mills, and Smucker’s due to earnings growth partly due to declining commodity costs. However, Q4 financial performance is nothing but a lagging indicator.

Another article from Reuters last week suggests that perhaps the party could be over. The article outlines that price increases are likely going to return in 2010, as we’ve already seen categories such as beef, pork, and diary prices rise roughly 10% just since December. These increases could foreshadow increases in other commodities in the near future.

However, unlike past years where consumers saw fuel and commodity prices passed directly to them, the retail environment is much different today. Many CPG firms are just happy to keep their shelf space, and have been already competing aggressively by buying down prices with trade spending. Raising prices to consumers simply isn’t an option, so most will need to continue to eat the price increases in the form of even more trade spending and increased promotional activity.

Before we start calling out for a government bailout for CPG, let’s keep in mind this industry has weathered the recession far better than most, and as the Seeking Alpha article presents, have enjoyed quite nice profits over the past year. That being said, they are now being forced to give back some of those profits in the cost of goods, and additional trade. While I maintain that buying down price is not a sustainable long-term strategy, for the near term it might be the only strategy.

Want more? Listen to a Q&A session with Rob.  Podcast: Buying Down Price.