By Nagi Jonnalagadda, Strategic Analytics, IRI
The past six months, in both the world at large and in the CPG industry in particular, have been nothing less than a rollercoaster for most of us. As consumer demand has shifted and shopper behavior has evolved, manufacturers and retailers have needed to rapidly keep up. But with no end in sight, how can they most effectively prepare for what comes next?
In the chart below, taken from IRI’s weekly CPG Demand Index, which tracks sales across categories, formats and geographies, you can see the swings that have occurred for some categories during the past several weeks. Since the pandemic began in the U.S., some categories have sustained sales increases of 15%-20%, while others are still down 5%-10%. With such variation in consumer demand amid a recession and a global pandemic, it may seem impossible to be able to effectively plan for what’s next. At IRI, we have been analyzing our vast data sets and building shorter- and longer-term forecasting models to help reduce the uncertainty.
Based on our analysis from the Great Recession of 2008, we know that value generally becomes a dominant consumer theme during recessions. Cash-stressed consumers seek the best price, as private, off-brand and commodity products pick up market share. Unit sales might stay the same, but revenue may decline due to a shift toward lower-priced goods. (Read more on this in IRI’s “Recession-Proof Your Business” series.)
Of course, we are experiencing some major differences this time, particularly with shopping patterns changing. Consumers are making less frequent trips to fewer stores and are navigating to bigger baskets and larger pack sizes. Continued work at home, and now schooling at home, impacts which products consumers purchase. In this current environment, what happens with COVID-19, recessionary trends, channel shifting, assortment changes, out-of-stocks and supply chain issues will all continue to impact business planning and actions.
To more accurately plan and forecast what comes next, companies must be able to answer critical questions across five key areas:
- Consumer Demand: How much of the recent growth in CPG is due to pantry loading, and how much is sustainable, long-term demand?
- Short-Term Uncertainty: With U.S. states in various patterns of the pandemic evolution and business reopenings, plus significant out-of-home consumption shifts and mobility constraints, how can companies better predict short-term demand?
- Mitigate Risks: How can companies mitigate risks in production overflows versus out-of-stocks by forecasting demand through the end of 2021?
- Supply Prioritization: What states and/or retailers should be prioritized when there are production constraints?
- Long-Term “New Normal” Demand: With the expected recessionary environment, how will demand evolve by the end of this year and into 2021? (For more on this topic, watch our webinar on capturing growth in 2020 and 2021.)
Case Study: A More Informed View With Demand Forecasting
One of IRI’s food clients has seen sales increase in most of its categories during COVID-19, given both its stockpiling suitability and easy preparation of its products. While it has not had any immediate inventory issues, continued expected demand spikes in the near horizon will likely create shortages. Demand signals from retailers are also not consistent or timely, as overdistribution can cause inventory overloads, which is a bigger risk to the business.
The client wanted to mitigate risks in production overflows, as well as out-of-stocks, by forecasting demand through the end of 2021. It was looking for a bottom-up category-based forecast that rolled up to a total view of its business in U.S. MULOC.
IRI created category-level forecasts for 11 key categories. This included short-term demand forecasts through the fourth quarter of 2020 and also different COVID-19 evolution scenarios. We created long-term demand forecasts too, through the end of 2021, using econometric modeling with various macroeconomic and vaccine-availability scenarios.
The short-term forecasts initially indicated robust growth across categories. We then also used profit/loss share performance from the company during the Great Recession to assess the impact on the company’s overall business performance. With this additional view, we learned that the expected incremental share gain in 2020 due to COVID-19 is estimated to be 0.3% to 1.9%. With this forecasting, the company is now able to make more informed and confident investment decisions about its business.
Lessons for Growth
With the pandemic in different stages across the U.S. and possible additional spikes on the horizon as the weather turns colder in parts of the country and socializing moves indoors, manufacturers may again face the prospect of widespread out-of-stocks as demand surges. Yet increased production without a continued increase in consumption can be equally risky, especially with demand more localized.
More robust demand planning can help manufacturers get ahead of these changes and plan production to meet the current and anticipated recessionary demand. Daily and weekly sales data with local and regional granularity, along with AI-powered analytics to accurately forecast consumer and sales changes, can help forecast demand in both the short and long term, as well as assess risks to the supply chain. IRI has found that not allocating optimally in the short run can cost manufacturers 10%-20% margin and longer-term sales of 5%-15%, further eroding share position at their most strategic and growing retail partners.
As CPG manufacturers and retailers continue to navigate the ongoing pandemic, there is a clear opportunity to not only leverage lessons from the past, but also use demand forecasting to help effectively inform the future.
To learn more about how IRI can help you more effectively forecast demand, understand risks and act on opportunities, read more about IRI’s COVID-19 Solutions and/or reach out to IRI.StrategicAnalytics@IRIworldwide.com.