Note: Occasionally a client may opt to remove a piece, or they may go out of business, merge with another company, etc. In those cases, I do my best to put my latest version here. This piece was originally for Alix Partners.
2021 was a challenging year for consumer product (CP) companies, but bold moves paid off leading into 2022, which has been marked by turmoil. Going into 2023, the lessons from 2021 and 2022 will help companies navigate an ever-transforming and unpredictable market.
To understand the market’s performance across products in 2021, we separated over 200 CP companies into three segments based on financial performance. We used EBITDA (earnings before interest, taxes, depreciation, and amortization) margin along with sales and revenue growth to separate companies into “clear winner”, “calculated tradeoff”, and “missed a step” categories. We define these categories like this:
- Clear Winners were companies that grew both revenue and EBITDA margin.
- Calculated Tradeoff companies grew either revenue or EBITDA margin but sacrificed the other to do it
- Missed a Step companies saw both revenue and EBITDA margin decline.
Overall, CP companies faired decently in 2021, with 30% increasing both revenue and EBITDA margin. Only around 5% of companies included lost revenue and saw EBITDA margins decline, and the majority – 65% – managed to either grow revenue or EBITDA but not both. This means for most companies, sacrifices were needed to keep on track, which makes sense given the many obstacles facing companies over that period.
We also separated the results into six sub-categories by industry: apparel and luxury, durables, food and beverage, health and beauty, home and outdoor, and packaging. Health and Beauty companies faired the best, with that sector boasting the largest share of revenue from Clear Winners. Meanwhile, Home and Outdoor had the largest number of companies that either missed a step or made a calculated tradeoff.
How Companies Succeeded
Success in 2021 required flexible thinking and quick adjustments to tough economic circumstances, with plenty of collaboration across departments. The Clear Winners took advantage of an integrated margin management approach, which included two key elements:
- Smart price increases. Companies that did well were able to make multiple price increases work using brand strength, sales force, and good customer relationships, driven by a detailed understanding of customer and product profitability. The most successful companies were able to model and respond to cost increases from raw material, packaging, labor, and transportation, and increase prices without driving away customers.
- Quick adjustments to supply chain disruptions. Successful companies reacted and remedied disruptions quickly, prioritizing profitability via product portfolio rationalization, implementing flexible formulations, and employing to design-to-value approach to lower cost.
In other words, Clear Winners simplified and succeeded at increasing prices without losing customers by leveraging understanding. They knew what customers needed, didn’t try to sell them much else, and made delivering those products cheaper. Business 101.
Outlooks for 2023
Many obstacles have come up in 2022 that stand to make 2023 challenging for businesses. First off, consumer sentiment is at an historic low. Supply chain disruptions continue and inflation has become a hot-button issue. Meanwhile, the red-hot job market has cooled, and consumer debt is rising faster than income. In fact, if trends continue, income to debt ratio will return to historical levels sometime in 2023. This is causing many consumers to trade down, as evidenced by private label growth outpacing branded growth.
All this means the state of the market is more challenging than ever, and many companies will continue to struggle in delivering margin gains. Going forward, successful companies will have to find new ways to provide value. Keep in mind a few key strategies:
- Seek real understanding, including what COVID revealed about the business, rather than clinging to past methods.
- Make sure you’re ready to implement an integrated margin management approach as described above.
- Innovate price pack architecture to improve affordability while making strategic, surgical pricing and promotion decisions.
- Consider total cost of ownership (TCO) and use that mindset to drive supply chain improvements like diversifying your supply chain, balancing cost and flexibility, and shortening your supply chain overall.
Overall, success in 2023 will require bold actions and new thinking. CP companies that act now to set aspirational goals, re-energize collaboration, and focus on sleek, efficient execution will have the best chance at success.
The past three years have seen unprecedented disruption to markets, business, and life in general. CP companies that don’t adjust to new realities stand to get left behind, while fresh thinkers will thrive.
You’ll need to move quickly to ensure success going forward, and we’d love to help. If you’re ready to give yourself the best possible chance to succeed in 2023, contact us today.