Higher rates, thinner margins
The Federal Reserve continues to raise interest rates. How high is too high? High enough is when demand for goods slows down, which will cause prices on goods to come down, or at least plateau.
Most shoppers who are watching interest rates go up may see this as a single lever that is being pulled by the central bank. Economists and pundits will label this action as “a blunt instrument” and the only instrument the central bank has. Despite these labels and ideas, the action has a direct (albeit somewhat delayed) effect on the CPG industry.
What’s really happening? Rising interest rates make borrowing more expensive, especially for businesses. When margins get thin, cost adjustments are made…and people begin losing their jobs.
How will unemployment rates affect demand, supply chains, purchasing power and promotions?
A shakeup in historic unemployment lows
Let’s first understand where we are likely going in the United States. Many of the large banks and investment houses are projecting that U.S. unemployment could rise to between 4.5% and 5.0% by 2024. We’ve been at historic unemployment lows for so long, even small shifts could have a disproportionate effect on consumer spending.
As an industry we must be thinking about a proactive response to this because all consumers will be affected. Obviously, those who’ve lost a job will curb expenditures, but so will employed households.
All consumers will be affected.
Those who remain employed will be anxious about staying employed, so they will try to bolster savings, reduce discretionary spending, and contract overall consumption.
Creating a path forward
Successfully navigating this situation requires answering many questions ahead of these events to create pathways for responses, including:
How do we bring back promotions most effectively?
Do pay cycles matter for purchasing my brands in this kind of environment?
Is there shifting within my portfolio of brands, either to smaller or larger sizes and price points?
Is my brand a small indulgence for the occasional splurge or a consumer staple?
Does my price pack architecture make sense?
What’s the appropriate price gap to private label?
What channel shifting dynamics occur when I change my price in one but not another?
Does my pricing strategy provide sustainable and predictable margins?
What is the right assortment?
How can you lead in uncertain times? By answering these questions now and formulating a proactive plan. Knowing what your pricing should be versus what it is will drive ROI on both a base and promoted level.
Dynamic, predictive capabilities will allow you to create and test scenarios for your brands, case packs and classes of trade, reducing risk and keeping buyer and trip conversion high.