Behind The CPG Slowdown: Price Hikes, Discretionary Spending and Private Label’s Newfound Popularity

Purchasing habits, higher grocery prices and an ever-changing physical and digital retail landscape have had a significant and lasting impact on both CPG companies’ profits and the margins of grocery stores since the start of the pandemic.

During a recent webinar hosted by Jefferies analysts, guest speaker Jeff Wojtkowiak, president of In The Loop Consulting and a former Kroger executive, broke down the current dynamics in the snack and confections categories and the roles retailers, private label and e-commerce have played in meeting consumer’s new demands and expectations.

High Prices Push Products Into Promo Cycles

Price increases over the past few years have caused volume growth to take a hit and have reduced retail basket sizes across the board. While some categories have seen costs fluctuate, with prices rising and falling in response, Wojtkowiak said that on average, once those prices go up, they will remain elevated.

Some suppliers and retailers may test temporary price reductions to encourage consumers to fill their carts more, but he believes sustained high prices will make promotional cycles and merchandising strategies a bigger priority. That will allow brands to recover lost volume growth and retailers to rebuild orders, which have “declined and continued to stay down” since the pandemic.

“I just really think value promotion really makes a big difference in getting sales moving again and getting consumer consumption up again… Carbonated soft drinks and salty snacks are the two largest categories within the grocery industry in the United States so they play a big role for the grocers. That’s why not only the CPGs want it, but the grocers want it too.”

Snack Momentum Becomes Integral For Grocers

When it comes to price growth, snacks, he highlighted, have fared better than other categories like confections, where consumers are more discretionary and price sensitive. Though snack prices have risen just as much as other categories, these products are closer in line with meals, or can be used as complements to meals, which he believes has helped the category maintain upward momentum.

The category has also benefited from clever packaging and promotions including positioning snacks in single-serve, meal-replacement-like formats, Wojtkowiak said.

“We’re seeing packaging change across the entire store [with] the growth of power bars, granola bars and single-serve stuff,” he said. “Snacking is really getting stronger and it’s fundamentally becoming a larger part of the way that people are eating and therefore there’s higher demand. CPGs are putting out [smaller] packaging that consumers are looking for, retailers are promoting it more because they know it’s a grab-and-go type of business and therefore I think it’s going to grow at a faster rate”

While larger snack CPGs like Campbell’s and Utz are able to iterate pack sizes and meet changing demands, Wojtkowiak notes that the category has seen a fair amount of consolidation alongside the sales surge, which he believes has squeezed out opportunities for many regional players. For regional and smaller snack players like Boulder Canyon or Kettle Brand chips to be successful, he said they will have to lean heavily into flavor innovation.

Within the confection set, Wojtkowiak believes the “war on sugar” and growing awareness around diet-related diseases like diabetes has been the biggest headwind. Coupled with higher prices in cocoa, he said that the confection space is subject to more current-day challenges that will stunt its sales growth over the long-term, in comparison to snacks.

“Chocolate is not necessarily a complement to…meals. I think that’s why salty snacks as a whole have remained part of the meal plan for the family, whereas chocolate has been discretionary.”

Retailers Ride Out Post-Pandemic Purchasing Habit

On the retail end, price also dominated the discussion, with Wojtkowiak explaining that increases have been a boon for club and value-positioned retailers. He believes that traditional grocery retailers are struggling the most as competition for the category is taken away by non-traditional sales channels.

He also believes consumers are increasingly more value-driven and more willing to spend on a club membership in order to stock up on bulk-sized items. But that doesn’t mean it’s all downhill for retailers. Grocers with a strong private label business, like Kroger’s Simple Truth brand, are well positioned to drive profitable growth through those brands, he said.

“It’s kind of a self fulfilling prophecy,” he said. “If you were selling Hellman’s mayonnaise [at] $3.99 a jar and you sell Kroger [brand] for $2.99, you’re losing $1 per unit and so it impacts you at the register. But on the other hand, it’s good for gross margin because generally private label brands are going to be more profitable.”

There’s also an interesting dynamic among this next generation of private label and club shoppers. Whereas historically this demographic was strictly a value-based shopper, Wojtkowiak said “mainstream” and even “upscale” consumers are now beginning to shop club and private label for grocery.

In line with that change, he believes these “premium upscale traditional” retailers will grab an outsized share of the grocery market, highlighting companies like Walmart and Aldi as well as Target, Publix, HEB and Wegmans. That spells trouble for “middle of the road” grocers like Kroger and Albertsons, he said.

“They’re not necessarily the best in price and are not necessarily the best in service,” Wojtkowiak. “I think they start to get squeezed out, they lose their identity and anytime I’ve seen retailers that have done that in the past, those are the ones that generally are losing share and begin that downward spiral.”

Speaking of downward spirals, Wojtkowiak believes Amazon has made little to no gains, particularly in eGrocery, with its Whole Foods business in the seven years since it acquired the natural grocer. He believes Whole Foods would need to significantly grow its footprint to become a strong competitor.

“If you look at the quarterly reports that the CEO of Amazon has talked about, they’re just frustrated with grocery,” he said. “They’re trying to open small format stores, they’ve done a terrible job with Whole Foods and the pricing [and] selection is still there and…I just think it’s messed up.”