Deloitte has released its 2023 consumer products industry outlook, which looks at labor, supply chain, inflation — and how all of the above are affecting consumer perception of retail value.
The report kicks off with a great question: Was this a good year or bad year for the industry?
In many ways, it’s been both, depending on how you’re holding the glass, and your definition of full. Inflation has meant high prices, but it’s also meant consumers trading down to private label and a loss of brand loyalty.
According to Deloitte’s outlook data: Consumer products executives surveyed also feel conflicted about the year ahead. On the one hand, they are negative about the macro environment, with eight of 10 respondents saying they are neutral or leaning pessimistic about the global economy and geopolitical stability.
But when it comes to their own companies? Three in four are optimistic about their company’s performance (74%) and its strategy (80%).
SN sat down with Nick Handrinos, vice chairman and leader of Deloitte LLP’s retail and consumer products, to break down the data: what it means, and how retailers should be thinking about and approaching consumers in the year ahead.
Supermarket News: This outlook report kicks off with a great question, which is, was 2022 a good year or a bad year for the industry? So, which is it?
Nick Handrinos: If you were to take the positive lens in terms of what was good about the year, what you would say is that on the food manufacturer side, and from a value creation standpoint, the sector has created a lot of value. The capital markets looked at what this cohort has done, at least on the food manufacturing side, and said, there’s been value creation here notwithstanding a lot of the volatility. So that would be a positive on that side.
Number two, we’ve been experiencing unprecedented volatility. So many issues coming at management teams so fast. We've heard them all. Inflation, interest rates, labor strife, geopolitical and ingredient risk, regulatory changes in shifts. I mean just about every variable that has been consistent and stable for over a decade or two decade has been up for grabs. And so I think the second positive is that you got to give management teams across the value chain, retailers and manufacturers, you got to give them a pat on the back and say, “Boy, you really did the most with what you could given what was coming at you and the speed it was coming at you.”
SN: Labor was a big challenge in 2022. How are retailers thinking about labor going into 2023?
NH: The immediate-term strategy and reaction for labor has been, frankly, wage inflation. So pay to get the labor back, hope that some of the stimuli that created some of the labor challenges dissipates, namely the governmental checks that were sent out, et cetera, and see people come back to work. I think that's largely happened.
Over the medium to long run, the issues we face are going to create talent problems, because how many stories have you heard of ‘Sally’ the stock keeper who worked her way up and became the CFO of a retailer 15 or 20 years later? That feeder process, I think, has been disrupted. And so I don’t think it's something to think about this year, but five, eight, 10 years down the road, I do think we'd look back on this period and say that was the period of time where maybe even some of our leadership talent was affected.
SN: Supply chain. According to your report, some 62% of retailers expect that supply chain issues are still going to be a big challenge in 2023. Can you break that down for us?
NH: There are all sorts of logistical variables that have really wreaked havoc that I think are now normalizing quickly back to historical levels. I think the best example of that is overseas freight rates have really fallen off of a cliff — so you'll see that snap back. Those costs were really difficult to handle, supply chain-wise. Ingredient costs, again, the volatility of supply of those plus the cost of those, affected the supply chain, and it essentially led to a position where the in-stock positions retailers were accustomed to fell all the way down to sort of the low 80%. Those are back up into the high 80s, low 90s, and trending quickly into the mid- to high 90s.
SN: Your report indicates that 2022 set the record for higher CPG prices. Where does that leave us for 2023?
NH: I think pricing still has a way to go in ‘23. I would separate it into the first half and back half of the year. I think in the first half of the year, you'll see continued price increases. I know that is happening as we speak.
So, there will continue to be price increases. I think the magnitude of them are decelerating. They’re slowing down. And I think most in the industry would agree that we’re approaching a frontier where you’re playing with elasticity, dynamite. You light this fuse the wrong way, and you could either force trade down to value-oriented brands and/or private label for the branded manufacturers. And at the same time, you start to hit this idea of consumers potentially even exiting the category, which is very expensive to remediate.
In terms of net pricing, I think you’re going to see in-store promotions accelerate. So while you may pass along a price increase, you may give back some of it because you’re having to promote in more frequency or in a deeper depth of discount. So the net of it may not be as bad as we saw in ‘22.
SN: It sounds like we're getting close maybe to that pricing threshold. We’re not quite there yet, but you think we’re almost there. And then you think some of that might shift over to promotions?
NH: I think you'll see promotion increases. We’re somewhere around 15% to 20% lower in terms of frequency and depth of promotions on average than we’re used to. And that’s because during the pandemic, people would grab what they could. You remember the famous toilet paper shortage? There’s things like that which drove consumer behavior. You didn't need to promote around that. I think that's coming back and I think you're going to have to start calibrating that a lot better than you had to before.
SN: The report also had some takeaways around profitable growth leaders.
NH: So the first thing I’d say profitable growers do is they start with a capital allocation and return mindset. The second thing they do a little bit more operationally is that they're really advancing their marketing and their communication with shoppers and consumers in the digital world. So whether that’s through social media, mobile, even discussions about metaverse, et cetera, that’s the new way to market. And they're certainly part of the traditional mix that'll never go away, but the diversity of consumers we're dealing with in shoppers today, they consume media and messages in a very different way, including experientially. Pop-up stores, experiences where products are placed, that's very different from the 32nd or 62nd commercial at 8:00 PM on your local cable channel. So social commerce, all that, is very important.
I think leaders are committed to product superiority and innovation, so that doesn't ever go away. Leaders have that in their ethos. And supply chain resiliency. As boring as that sounds, it’s not boring anymore. Supply chain has a seat at the table that matters and will continue to matter for the foreseeable future.
And the final thing I’d say is omnichannel, whatever buzzword you want to use, but consumers want to be able to purchase and interact with the product in a number of different ways in a number of different media. And so you're going to have to really understand how to make that a seamless experience so it doesn't look like I'm dealing with four different companies when I want to buy the product or service that I'm involved with. So as a retailer, I'd be thinking about that. There's some obvious ones I didn't spend a lot of time on real quickly, but you better be world-class at pricing and margin management, net revenue management. You better be good with labor and understanding how to manage through that. But at the end of the day, that's the type of mindset and type of levers that leaders are doing better than the average companies or laggards.
SN: All of that speaks to this idea of the changing consumer, which you guys have also in your report, that it's trying to meet that changing consumer where they are now. Is that right?
NH: I think that's exactly right. First thing is, the mix of the consumer base and the diversity of that is changing so rapidly that just who the human beings are we're trying to talk to and convince to come into our franchise is different across all sorts of attributes that are well-chronicled. So the consumer is very hard to get your arms around, and you've got to really talk about the shopper and the consumer at a granular level to understand how you're going to meet them where they are and how you're going to get them to be interested in the value you have to offer them.
