Estimating Demand and Pricing in Inflationary times, An analysis for Beverages Category
Tamir Shabat, Rahul Amrik, Sarvesh Kumar
Global Macroeconomic Outlook
A broad-based and sharper slowdown is expected in global economic activity, with inflation rising above levels seen in several decades. Cost-of-living pressures are mounting, with tighter financial conditions in most regions, the lingering COVID-19 pandemic and Russia’s invasion of Ukraine weighing on the outlook. Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023.
This is the weakest growth profile since 2001, except for the global financial crisis and the acute phase of the COVID-19 pandemic. Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024.
Estimating demand and pricing products correctly becomes very important as adjusting pricing for growing costs impacts demand and profits, defeating the purpose of price rise.
The most significant component of the cost of goods sold comes from raw material prices which change with time. With raw material prices going up and net revenues going down, eventually, companies are forced to pass it on to the customers to maintain profitability. For example, if we assume that raw material prices increase by 30%, and the company’s share out of net revenues is 50%, then to cover costs and maintain gross profits at the current level, the company will have to increase their average prices by 15%.
Management teams within large organizations are planning for a double-digit COGS Inflation. However, it is important to understand the implications of price increases with volume sales. Wrong pricing decisions will not only lead to short-term losses, but it will also impact brand perceptions in the long term. This was observed even during the 2008 crisis, where double-digit inflation ended up with customers spending less and overall FMCG demand decreased by upwards of 20%.
It becomes imperative to keep abreast with how pricing can affect sales volumes, efficient methods of contracting raw materials for short/long terms, and re-sizing and optimizing packaging and recipes to minimize losses.
Demand trends in the inflation environment
NON-ALCOHOLIC DRINKS MARKET
Growing awareness for health and wellness has put pressure on the sugared mainstays of the non-alcoholic drinks business: carbonated soft drinks, such as cola beverages and lemonades. Spending is shifting towards healthier, less-sugared products like bottled water and some non-carbonated soft drinks (like ready-to-drink tea and coffee). A stable pillar of the industry is the food service market as roughly two out of five US$ spent globally on non-alcoholic drinks are attributable to consumption away from home.
· Revenue in the Non-Alcoholic Drinks market amounts to US$1.25tn in 2022. The market is expected to grow annually by 7.22% (CAGR 2022-2026).
· The market's largest segment is Soft Drinks, with a market volume of US$0.85tn in 2022.
· In global comparison, most revenue is generated in the United States (US$425.20bn in 2022).
· In relation to total population figures, per person revenues of US$164.60 are generated in 2022.
· 3.5% of total revenue will be generated through online sales by 2022.
· By 2026, 41% of spending and 11% of volume consumption in the Non-Alcoholic Drinks market will be attributable to out-of-home consumption (e.g., in bars and restaurants).
· In the Non-Alcoholic Drinks market, volume is expected to amount to 931,373.8ML by 2026. The Non-Alcoholic Drinks market is expected to show a volume growth of 6.1% in 2023.
· The average volume per person in the Non-Alcoholic Drinks market is expected to amount to 108.21 L in 2022.
ALCOHOLIC DRINKS MARKET
The Alcoholic Drinks market has witnessed a secular decline in volume sales in developed markets while demand in emerging markets is still growing. Value growth is mostly driven by premiumization as well as by growth in the out-of-home segment. Worldwide, more than two out of five US$ spent on alcoholic drinks are attributable to consumption away from home (in bars, restaurants, etc.), highlighting the importance of the on-trade sales channel for the industry.
· Revenue in the Alcoholic Drinks market amounts to US$1,484.00bn in 2022. The market is expected to grow annually by 10.01% (CAGR 2022-2025).
· The market's largest segment is the segment Beer with a market volume of US$563.90bn in 2022.
· In global comparison, most revenue is generated in China (US$319.80bn in 2022).
· In relation to total population figures, per person revenues of US$195.00 are generated in 2022.
· In the Alcoholic Drinks market, 6.6% of total revenue will be generated through online sales by 2022.
· By 2025, 44% of spending and 26% of volume consumption in the Alcoholic Drinks market will be attributable to out-of-home consumption (e.g., in bars and restaurants).
· In the Alcoholic Drinks market, volume is expected to amount to 312,660.8ML by 2025. The market for Alcoholic Drinks market is expected to show a volume growth of 7.5% in 2023.
· The average volume per person in the Alcoholic Drinks market is expected to amount to 35.75 L in 2022.
Best ways to plan for inflationary times
Inflation affects FMCG (fast-moving consumer goods) companies because they must increase their prices to accommodate it. This means that they must change their pricing strategies to keep up with inflation. The challenge is even more in current times with brand loyalties reducing and newer emerging competition.
Some perils of inflation faced by FMCG companies if they decide to raise prices could be
a. Decrease in sales as consumers may be unwilling or unable to pay higher prices
b. Decrease in sales as overall consumption levels may fall
c. Margins may reduce
d. Maintaining the Supply chain/ Distribution network may become costly
e. Retailer margins or store real estate may become dearer
FMCG companies can offset this impact by lowering their own costs and increasing efficiency, which will lead to lower prices for consumers. They can also increase marketing spend and run promotions that will help them attract more customers who are looking for deals on products they use regularly. To know the ideal pricing strategy and right marketing and promotional support your brand requires to be profitable, read more about CatmanAI (TM) here
How can CatmanAI (TM) help?
CatmanAI (TM) is an always-on Business Decision Optimization Software suite (SaaS) that helps companies make data-driven decisions to maintain a competitive edge. It helps FMCG companies to manage uncertainty - shifts in consumer behaviour, declining brand loyalty, the rise of competitors and constant consumer channel shift.
CatmanAI(TM) ingests data from multiple sources such as retail, macroeconomics, weather, supply chain etc., and combines AI, predictive analytics, machine learning, and deep domain expertise to give you the most valuable insights.
It not only accurately anticipates future demand in the current dynamic market environment, but it also helps devise the optimal pricing and promotional strategies to ensure profits are not left on the table.
It also helps FMCG companies take control of their marketing budgets with its Media optimization process that enables marketers to maximize return on marketing investments by determining which advertising and targeted campaigns are most effective across different types of channels (offline and online), as well as media (traditional, online, and social).
An optimized media mix is important to understand where the budgets can be allocated for either
· Strategic goals like brand building, testing, increasing ROI etc.,
· Tactical goals like responding to competition’s media campaigns, promotional communications etc.,
Read more about CatmanAI(TM) here
The global growth outlook points to a slowdown in 2023 than 2022 owing to tighter financial conditions, war situation, lingering COVID-19, and rise in Inflation is said to exaggerate the cost-of-living crisis.
However, demand for both, alcoholic and non-alcoholic beverages is said to grow which presents brands in these categories with excellent growth opportunities.
Growing awareness for health and wellness ensures healthier, less-sugared products like bottled water and some non-carbonated soft drinks (like ready-to-drink tea and coffee) attract larger consumer spending.
The Alcoholic Drinks market will see Value growth mostly driven by premiumization as well as by growth in the out-of-home segment. Worldwide, more than two out of five US$ spent on alcoholic drinks are attributable to consumption away from home (in bars, restaurants, etc.), highlighting the importance of the on-trade sales channel for the industry.
Faced with challenges like rising raw material costs, rising fuel prices, inflation, and supply chain disruptions, the FMCG industry has had to develop new strategies to maintain profitability.
CatmanAI(TM) helps FMCG companies quantify the impact of such uncertainties and prepare both strategic and tactical plans to overcome the adverse effects of such uncertainties and yet remain profitable.