March 17, 2023 | Supply Chain Strategy
Shoppers everywhere will remember the shortages of numerous consumer products during the COVID-19 lockdowns of 2020 and 2021. In 2022, pent-up demand drove inflation to its highest levels in 40 years, meaning higher prices for both raw materials and finished goods.
While supply chain constraints are easing, their effects will still take time to fully resolve. CPG companies need to know the most important factors that could drive disruptions to their supply chains in 2023 to adapt appropriately. Some of the biggest include:
Inflation is raising costs for materials, labor, and energy — making it expensive to manufacture and transport products. Moreover, consumers are expected to have less purchasing power in 2023 as inflationary pressure is rising globally.
In 2022, food prices in the U.S. rose nearly 10%, the largest annual increase since May 1979. While inflation appears to have peaked last year, the IMF’s latest predictions have put global inflation in 2023 at a still high 6.6%.
In 2023, consumer demand is likely to recede due to higher commodity prices as consumers shift focus to essential goods. To adapt to easing demand and continuing inflation, companies like General Mills and Walmart are reportedly focused on growing sales to offset production costs. Others, such as Unilever, are reported to be raising their prices.
Worker strikes, port closures and shipping delays due to blocked sea routes caused multiple port congestions throughout 2021-2022, disrupting supply chains.
In the first quarter of 2022, delays between Shanghai and the Californian ports of Los Angeles and Long Beach increased significantly. Since August, delays have decreased to just one day on average.
In Q4 2022, the increase in congestion in Chinese ports caused the global level of the container ship fleet to rise from 12.2% to 13.2%.
If global economic conditions do not improve, then port congestions are more likely to cause inventory disruptions in 2023.
Given the current uncertainties in the marketplace, CPG firms should examine inventory optimization and management solutions to maintain needed inventory levels.
CPG companies faced a massive workforce shortage in 2022 as a result of the mass exodus after COVID-19. This led to labor constraints in large economies such as the U.S. and China.
Labor shortages increased the strain on B2B interactions in the consumer services sector, exacerbating existing supply chain problems and the connections between retailers and suppliers.
The labor force participation rate is 62.1%, down from 63.3% in February 2020. The labor shortage is anticipated to persist in 2023 as the number people leaving the workforce is higher than the ones joining it.
To cope with the labor shortage, companies are expanding the use of robotics to automate production storage and distribution.
Three out of five CPG companies using robotics plan to increase their use over the next five years, according to research from The Association for Packaging and Processing Technologies.
In addition to existing demand scarcity, consumers shifted their focus on e-commerce platforms. In the U.S., digital CPG sales in the retail market are expected to increase by nearly 10% in 2023.
Although online shopping emerged out of necessity, it is here to stay. Many CPG companies have established online platforms and are assessing their performance in order to improve the buyer experience.
Many companies are jumping into the direct-to-consumer channel and capitalizing on hyper-personalization trends in certain consumer demographics. At the same time, retailers such as Kroger are competing with CPG companies with more prominent private-label offerings.
Companies such as Dollar Shave Club and Boxed represent the new model of CPG brands going direct-to-consumer (D2C). By doing so, companies can invest more in brand marketing and customer experience.
The challenge for CPG and retail companies trying to operate an omnichannel supply chain is ensuring that supply chains work seamlessly, with the resilience to handle disruptions, through multiple delivery channels (e.g., e-commerce, traditional grocers, big-box retailers, etc.)
To manage inventory in an omnichannel marketplace, CPG companies and retailers must gain real-time visibility into inventory. As a result, there is greater investment in AI-driven supply chain software to help optimize inventory and drive revenue.
Many of the trends that will have the biggest impacts on CPG and retail companies in 2023 are continuations of trends that were already in existence in 2022, and even back to the beginning of the pandemic in 2020. Companies must continue to adapt to inflation and other supply chain constraints by working with suppliers to control costs where possible, and making investments into technologies like automation and supply chain software to help keep their operations running in spite of whatever disruptions lie ahead.
Stay tuned for more CPG industry insights in our forthcoming 2023 outlook.