Understanding the Impact of Inflation on FMCG Brands

American consumers have been dealing with the impact of inflation on FMCG products since April 2020. While recent NIQ data suggests some relief, high prices continue to affect shoppers. In response, many have begun tightening their belts and purchasing products in bulk, from value retailers, or switching to private label. In the past year, Value retailer sales reached 43.1% of dollar share, up 4% YoY.¹ At the same time, private label sales continued to grow as consumers sought better value for their money, reaching 19.5% of dollar share, up 3% YoY.² In response, many FMCG brands are revising their pricing models to compete. Unfortunately, very few FMCG departments are immune to rising prices as it continues to hit all areas of the store.

But inflation impacts more than just a brand’s pricing model and consumers’ shopping habits. Production costs are high for many industries as suppliers grapple with their own inflation. This is the same for the whole supply chain, as shipping costs are still high. Put together, this means FMCG brands are faced with rising prices across the board and they must pass some of it along to consumers to avoid losing their margins. Unsurprisingly, this means maintaining profitability is more difficult.

What is Revenue Optimization?

Revenue optimization is a strategic approach used by businesses to maximize their income through various means, including pricing strategies, sales tactics, and customer engagement. At its core, revenue optimization involves analyzing different revenue streams and understanding how each component of the business contributes to overall profitability. This process often includes using data analytics to identify trends and patterns in consumer behavior, allowing companies to adjust their strategies in real-time to better meet market demands and capitalize on opportunities. By fine-tuning pricing models, inventory management, and marketing efforts, businesses can ensure they are not leaving money on the table and are capturing the maximum possible revenue from their operations.

One of the key elements of revenue optimization is dynamic pricing, which allows companies to adjust prices based on current market conditions, demand levels, and competitive pressures. This technique is widely used in retail, where prices can fluctuate significantly based on various factors. Additionally, revenue optimization often involves enhancing customer segmentation to tailor offerings and promotions to different segments, ensuring that each group receives the most relevant and appealing offers. By leveraging advanced analytics and machine learning, businesses can predict customer preferences and behaviors with greater accuracy, leading to more effective marketing campaigns and higher conversion rates. Ultimately, revenue optimization is about creating a sustainable, data-driven approach to growing profits and achieving long-term financial success.

5 Strategies for Revenue Optimization

With so many factors impacting demand and consumers in a state of uncertainty, revenue optimization is taking center stage. But, not every strategy is effective and investing in the wrong one can leave you behind the pack.

With that in mind, here are 5 strategies for revenue optimization that FMCG brands should consider:

1. Rethinking Pricing and Promotions

The most common method FMCG brands use to optimize revenue is to rethink their pricing and promotion strategies. Pricing is the most critical lever impacting the commercial results, above fixed, variable costs, or even volume sales. Indeed a 1% improvement in price equals an 11% improvement in margins.​ Additionally, efficient and effective promotions drive incredible value for FMCG brands and retailers alike. Unfortunately, 72% of all trade spending prior to the pandemic did not return on the investment.³

Data is the key to mastering the art and science of optimizing the right price, pack, and portfolio mix in an ever-changing landscape. By strategically timing promotions to coincide with peak buying periods or product launches, manufacturers can generate excitement and encourage trial purchases, ultimately driving long-term brand loyalty. Understanding the unique value propositions of their brands and target audience preferences, manufacturers can tailor pricing and promotional strategies to effectively drive sales and achieve strategic goals.

2. Enhancing Operational Efficiency

Another area worth considering is your operational efficiency. That is, optimizing processes and resources to achieve better productivity, reduced costs, and improved overall performance. Enhancing operational efficiency is an ongoing process that requires commitment, adaptability, and a willingness to embrace change. Perhaps this means limiting the staff in your warehouse, or investing in cheaper, easier-to-use packaging.

You need to regularly review and monitor operational processes and metrics to identify areas that require improvement. Implement feedback loops and establish a culture of continuous improvement to ensure ongoing efficiency gains. Then allocate resources effectively by analyzing demand patterns, capacity, and utilization rates. Ensure that your workforce, equipment, and inventory are optimized to meet demand while minimizing excess or idle resources. This can save you valuable money and resources to overcome shifts in demand and maintain margins during inflationary periods.

3. Product Assortment Analysis

When sales are slumping and prices are rising, looking at your product assortment is a smart idea. But, assortment optimization is never an easy task, even when the markets aren’t under enormous pressure. If you want to get the most out of your assortment, you can’t just set it and forget it. Especially not when so many factors are at play. You need to set aside the time to delve into the data by channel if you’re going to have a chance against the competition.

While maintaining consistency, it’s also important to tailor your assortment to each channel. For example, your online store may offer a larger selection of products than your physical store, while your mobile app may highlight popular items or new arrivals.​ This is a good way to avoid wasting retail shelf space on less-popular products without cutting them entirely. It also allows you to personalize product offerings more easily. And with online sales in North America growing 14.1% YoY, every optimization can lead to big gains.⁴

4. Customer Segmentation and Targeting

Going forward, older generations will continue to be the largest spenders and most frequent shoppers, but, as Gen Z becomes a larger portion of the consumer market, FMCG brands will need to understand their unique perspectives and demand if they want to keep up. Gen Z’s spending power is expected to grow to $12T by 2030, and Gen Z’s spending is growing fast—to the tune of $2.7T USD in growth over the next few years.⁵

Getting out ahead of this shift is imperative for brands to continue to grow going forward. This may mean adapting to their demand for sustainable products, targeting them with health-conscious attributes, or innovating new products to meet their demands. Though appealing to Gen Z comes with challenges, it also comes with great rewards.

5. Investing in Technology and Data Analytics

Above all else, you need to be acting on up-to-date and reliable data if you expect to optimize your revenue. From consumer panel data to product attribute tracking, there’s a lot to be gained from taking a close look at data. By leveraging data-driven segmentation techniques, manufacturers can identify distinct consumer segments based on demographic, psychographic, and behavioral attributes, allowing for the creation of tailored messaging and offers that resonate with each audience segment.

Leveraging data for decision-making is a cornerstone of success for FMCG manufacturers navigating the ever-evolving retail landscape. By harnessing the power of data analytics, manufacturers can gain deep insights into consumer behavior, market trends, and competitive dynamics, enabling them to make informed and strategic decisions. Whether it’s identifying emerging consumer preferences, optimizing product assortments, or fine-tuning pricing strategies, data-driven decision-making empowers manufacturers to stay agile and responsive to changing market conditions.

Building FMCG Brand Resilience and Adaptability

When facing uncertain economic times, the most important thing for any FMCG brand is to stay agile and flexible. You should start by putting the consumer at the center of your strategies. Invest in consumer research and data analysis to gain insights into their needs, preferences, and pain points. Use these insights to tailor your products, packaging, and marketing efforts to meet consumer demands.

Another way that FMCG brands can build a stable foundation for the future is to focus on experimentation and innovation to stay ahead of the competition. Our data shows that when innovation sales grow, a company is 1.8X more likely to grow overall sales compared with companies whose innovation sales are stagnant or declining. To determine the true impact of innovations, we propose a shift from measuring their “success” and “failure” to their vitality. This can help drive more revenue over time as you aren’t overly reactive and abandoning innovative products that haven’t seen fast growth.