2025 CPG Brand Profitability Outlook
This article serves as a case study where the 2021-2024/5 boom-stall-bust-reset cycle periods experienced by FlavorWave Snaps (pseudonym) are presented and discussed through the lens of the financial impacts.
Margin Velocity Accounting (MVA)™ was used to expose the direct financial impact of velocity, distribution, price, promotions, COGS and other expense changes on the profitability of FlavorWave Snaps.
It's a case study that likely reflects the challenges, constraints and profitability pressure that several enterprise and emerging CPG brands have experienced these last few years.
For several brands, 2024 is going to be painful
Just less than half of the 2024 brand growth outlooks, for several CPG brands that I have reviewed over the last 4 months, were at a high risk of not being achieved. There were several outlooks that, from a straight-talk perspective, were pure fiction.
Spreadsheets and fancy "AI" tools are wonderful for make-you-feel-good forecast gymnastics. However, if the growth assumptions do not adequately consider the prevailing economic realities, the brand's unit economics constraints, and pragmatic and actionable growth prospects.....the 2024 actual versus budget shortfall is going to be painful.
To be clear, I am not talking about low-balling an outlook or a budget here. Rather, I am highlighting that it is time to get real, to declutter, to cut the BS and to maniacally concentrate the entire teams' singular efforts on those few but critical fundamentals that will create the reset platform for 2024 and 2025.
The pre-COVID large CPG brand algori(y)thm
Prior to COVID, the annual profit algorithm was consistent for large high-share or even for smaller legacy "slow-growth" brands. Stagnant volumes, propped up by habitual price-promo and sales activation plans, were augmented by low single-digit annual price increases.
This "slow growth" income stream was bolstered by operational improvements, bolt-on acquisitions and a myriad of in-out, line-extension "innovations" that delivered buckets of incremental income. It was an annual growth algorithm (algorythm?) that worked.
Emerging brands flourished. Sort of.
For emerging CPG brands, cheap money, excess/profitable co-packing capacity and retailers seeking assortments that would acquire new households, ensured a steady stream of entrepreneurs and innovations. The goal was to quickly gain some of the much-coveted shelf space in the race to establish a foothold as consumption and category behaviors shifted.
Mostly, emerging CPG brands were premium priced. High COGS that did not decline as quickly as founders envisaged and high minimum order runs consumed cash. High double-digit volume growth remained illusive for many startup brands, not because the product sucked but rather because the narrow product attribute benefits targeted were just too niche to attract sufficient new shoppers in large enough numbers to form the basis of a scalable platform.
For other emerging CPG brands that were trying to usurp larger players in large categories, growth remained constrained. Founding teams (and investors) underestimated and underfunded the extent of trade, shopper, and digital marketing investments needed for ongoing sales activation. Setting investments aside for longer-term brand building? A can kicked down the road.
Sustainable brands are built over decades
The digital media gold rush, ROAS hype and the influencer influenza ensured that many emerging CPG brands ignored a fundamental truth. While there will always be outliers, most successful and sustainable brands are built painstakingly over decades.
There were a small number of winners, many strugglers and some failures. It is how free markets, entrepreneurship and venturing works and how over time and over a number of investment bets, value and prosperity is created and evolved on an overall basis.
The past four years muddied the water
Actually, muddied is putting it mildly. The CPG industry experienced severe turbulence which is only now starting to subside into smaller whirlpools.
The COVID and the post-COVID inflationary period changed the growth "algorythm", at least, temporarily. The period accelerated and exposed a boom-stall-bust-reset category cycle for many brands simultaneously. During normal periods, these moments and cycles are also present but they mostly occur for individual brands at different stages and over over longer time periods.
I will single out two particular dynamics that come to mind. Flow and Pricing.
The disruption and variability of flow
For sustainable brand growth...Flow, within, CPG is about achieving predictable and replicable velocity momentum, distribution expansion and household penetration gains.
Over the last four years, flow was disrupted as supply chains collapsed, at-home vs. away from home consumption patterns changed, wellness sensibilities shifted, and economic disparities widened.
At the retail level, this disruption of flow manifested itself in significant volume declines and swings as down/out trading, channel shifting and purchase/consumption behaviors rapidly changed. New meandering and shifting flow pathways were created.
Pricing was the Cinderella of the royal ball
Pricing at retail, for many brands, used to be a type of "once-and-done" exercise. Annual increases were small, expected and predictable. CPG inflation was in check. Price gains were mostly achieved via premiumization and price-pack shifts. For some emerging brands, pricing used to be done on a "just get the deal done" basis".
To some extent, pricing as a strategic growth tool was long-forgotten. For a few brands, large and small alike, pricing had been relegated to financial, commercial or revenue management teams that sat in some dark corners. Other than promotional activities and events, brand and sales managers absolved themselves from their accountability to strategically manage price as a critical component of brand building and brand growth.
A silver lining of the tumultuous and devastating COVID and post-COVID inflationary period, has been the renewed focus and a new understanding on the power of pricing. In many ways, pricing has been brought out of the shadows.
Companies and brands with smart company-wide revenue growth management system approaches always knew that pricing was the Cinderella of the 4Ps. During the post-Covid inflationary period, Cinderella was finally able to go to the royal ball.
Large and emerging CPG brands that grasped the enormity of this once-in-a-decade opportunity, boomed and pocketed the excess profitability dollars. Those that did not were left with the pumpkin in their hands.
Talk is Cheap. Money buys Whisky.
How did all these COVID and post-COVID inflationary dynamics manifest themselves from a profitability perspective. To explore the impact of many of the dynamics highlighted in this newsletter, I will present some data from a case study that unmasks the direct financial impact of these dynamics and profit drivers.
Are we talking profitability or volume or even both? Which profitability metric?...Gross Profit, Sales Contribution, Operating Profit, Net Profit?
There are many levers and drivers that impact a change in profitability at these various levels. For the purposes of this case study, I will show the financial outcomes as they relate to Sales Contribution.
From a management accounting perspective, I prefer the use of Sales Contribution to Gross Profit. Measuring at the Sales Contribution level ($/case, % of Net Revenue and total period dollars) forces you to consider the totality of direct sales, marketing and supply chain costs, that might otherwise be omitted when reporting Net Revenue (or Price) and Gross Profit (or Margin).
As a reminder, and for the purposes of the case study data exhibited:
Sales Contribution $ = Gross Revenue - TSD Marketing Expenses - COGS - Direct Selling & Marketing Expenses.
TSD Marketing Expenses = Trade, Shopper & Digital marketing expenses that drive sales activation at retail.
COGS = Cost of Goods Sold which includes raw materials, inbound freight, direct labour, utilities and other direct manufacturing overhead costs...but excludes outbound freight.
Direct Selling Expenses includes broker fees, sales team commissions, outbound freight and can include other selling expenses such as slotting fees, new listing fees and other ongoing sales expenses that might not be appropriate to be allocated in the TSD bucket.
For CPG brands, especially emerging CPG brands or new innovations for small and large established brands, it is the flow of Sales Contribution Dollars that pays for overheads and other operating expenses, and if sufficient within a period, delivers the operating profit outcome.
A 6-Pack of CPG Sales Contribution Drivers
If we are going to unmask actionable financial impact drivers of sales contribution, let's frame a "6-pack" that aligns brand dynamics at the shelf or channel and the way we look at financial performance.
Velocity Momentum & Distribution Expansion
Typically, in brand P&Ls we look at price and volume impacts at the revenue level only. Furthermore, only a small number of CPG companies break down volume into its velocity and distribution components.
When they do expose that breakdown it's usually in the context of KPI's and it's linked to retail sales performance and via data sourced from data syndication companies like Circana, NielsenIQ or SPINS. This is great, but I recommend going a step further. You can do this by using advanced analytics approaches like Margin Velocity Accounting (MVA)™ to tie changes in velocity and distribution directly to changes in sales contribution, operating income and even net income. You will see this later in the case study.
Price-Pack Integrity
For the Pricing driver, I prefer to frame it as Price-Pack Integrity as I see price-pack-channel architecture as the greatest opportunity for brands to strategically use price as a tool that builds and not deplete brand equity. Pricing and its integrity is an integral part of the brand's attribute set.
Pricing closes the value loop between a) the functional and emotional value that the brand delivers to a consumer and the b) the financial and economic value that flows back from the retailer and distributor to the brand owner. Maintaining that integrity is key to prevent channel cannibalization and commoditization
TSD Marketing Effectiveness
TSD stands for Trade, Shopper and Digital. Technological advances in digital and retail media reach and activation have blurred the lines between activities and expenses that were traditionally "physical" in nature (and bucketed under Trade Spend), and activities that were typically expensed somewhere else on the P&L under some marketing and sales operational bucket.
The dilemma with this is that, by not including these expenses when monitoring sales contribution profit, you then fail to expose the true cost and profitability of building that brand for that retailer in that channel. This puts you at risk of over/under pricing the brand and also of over/under investing that brand.
For TSD Marketing Effectiveness, you want to capture all the expense activities that drive sales activation at retail, so that you can monitor the effectiveness of that spend as it relates to driving Velocity Momentum!
COGS Efficiency
COGS efficiency speaks for itself but I will highlight the following.
SKU proliferation and complexity, is one of the largest contributors to increasing COGS per case. This is especially true for emerging CPG brands. A related problem is that SKU proliferation a) increases all costs, b) substantially decreases forecast accuracies and, c) decreases flow by increasing volatility in velocity!
Brands managers might believe that they are innovating but maybe the hidden rationale is different. The question to ask goes like this. Are you truly adding incremental sales contribution dollars or are you seeking a solution to mask a core decline in your core hero brand-packs?
Direct Sales (and Marketing) Expense Curtailment
Direct sales expenses remain hidden when only looking at brand profitability at the gross profit and gross margin level. A common mistake for emerging CPG brands is when sales teams close new distribution or retail deals by only looking at the brand owner gross margin.
I have seen many instances where distribution expansion deals have been won but that are basically unsustainable when including broker fees and when appropriately considering outbound freight and logistics costs.
Why unsustainable? Low sales contribution $/case and sales contribution % margin routes-to-market suck up valuable dollars that could be better spent on trade/shopper/digital marketing activities to drive velocity momentum in core markets and core retailers.
Another point to note on the direct sales (and marketing) expense bucket is the inclusion of direct marketing expenses that predominantly activate sales at retail. This bucket should also include direct sales and marketing expenses that, for your brand and company, might not be suitable to include in TSD Marketing. What is important here is to capture all the relevant activities and expenses so that you can a) expose them and b) highlight sales contribution performance which includes everything, irrespective of where it is allocated.
That is why sales contribution (versus gross profit) is a much better way of capturing the real complexity and competitiveness of building a brand via different channels.
From a 2022 profitability peak to a 2024 valley
2024 Sales Contribution dollars will be a bust.
The operational financial performance of FlavorWave Snaps, for a particular geographical region within the US, was tracked and analysed from 2021 to 2023. A 2024 projected outlook was determined during the October 2023 budget compilation period and was revised at the end of Q1 2024, given realistic assumptions.
FlavorWave Snaps followed sales and profitability patterns that were typical of several brands during the 2021 and 2023 periods.
Total Sales Contribution dollars increased 24% for 2022 to just over $9.3 million for that region and then declined 5% in 2023. The outlook for 2024 points to a further 10% decline that reduces the Sales Contribution back to Pre-COVID levels.
A "bust" here for 2024 does not imply that the brand's net profitability will be negative. However, a $1.2 M decrease in sales contribution over two years for this brand in this region is a significant amount. Other regions are also exhibiting similar declines.
This is significant because the eventual cashflow of that amount will no longer be available to defray operating and interest expenses that has increased during this period.
If 2024 and 2025 is not tackled as a reset period, the brand could well post a negative net income for 2025.
Changes in unit economics have a large impact
Within the region, and during the 2021 to 2023 period, changes to the unit economics of FlavorWave Snaps followed similar tailwinds and headwinds experienced by many CPG brands.
The sales KPI and unit economics data points for this volatile period, for a particular geography within the US, are presented in the table below.
Intuitively we know that double-digit changes have meaningful impacts on sales contribution and therefore on operating and net profit. But, even the seemingly small changes of 1% to 2%, depending on the sales contribution driver, can yield outsized impacts on the financials.
The changes in the various sales KPIs (velocity, distribution) and unit economics (price, TSD marketing, COGS etc) all influenced the Sales Contribution in some way. All these factors and changes contributed to the overall boom-stall-bust change in Sales Contribution from 2021 to 2023.
Each year there was an evolving and, in some situations, a different dynamic and a different "mix" level of these factors and drivers.
The sales KPI's and the unit economic factors all changed positively or adversely by some level of percentage each year. But, not all percentages changes yielded the same level of change in Sales Contribution.
For example, a 1% change in price does not deliver the same $ change in Sales Contribution as a 1% change in velocity or a 1% change in COGS.
What is the direct impact on Sales Contribution?
To understand the magnitude of the unit economic and sales KPI changes experienced by FlavorWave Snaps, shown in the table above, we need to understand their financial impact. This is done by, firstly, bucketing them as the Sales Contribution drivers we introduced earlier.
These driver buckets are mostly aligned with how various P&L line items that flow down from Gross Revenue to Net Revenue to Gross Profit and ultimately to Sales Contribution.
The change in Sales Contribution dollars can then be shown by unmasking the direct financial impact of each of the 6 drivers for the different annual periods.
If you want to start targeting priority opportunities for growth, the following key questions need to be asked :
What was the extent of the direct financial impact of each of these factors and drivers on the overall change in Sales Contribution?
By how much can we realistically target a factor for achievable change, given the current conditions and given the interdependence of all these factors and drivers?
If you want to better understand the real impact of these sales KPIs and unit economics you can use a management accounting approach such as Margin Velocity Accounting (MVA)™ to achieve this.
What is different about MVA?
The deliberate and specific breakdown of sales volume into its velocity momentum and distribution expansion components.
The use of MVA to unmask and expose the extent of the actual direct financial impact that each of the six drivers had on the change in Sales contribution.
MVA breaks down the change in Sales Contribution $ between two periods into Dollars as follows:
The MVA management accounting approach will be used to show the impacts as bridge chart breakdowns for the 2022 vs 2021, 2023 vs 2022 and 2024 vs 2023 periods.
For FlavorWave Snaps, MVA exposed and can track the extent to which each driver impacted Sales Contribution.
More importantly MVA allowed the executive team to participate in open and insightful discussions on the impact of decisions and trade-offs they needed to make and will have to make in order to bring about the reset for 2024 and 2025.
The following article sections outline the actual financial impact on Sales Contribution dollars for FlavorWave Snaps.
2022 vs. 2021: Inflationary Period provides a Boom
Sales Contribution Dollars boomed by just over $1.8M from 2021 to 2022 for FlavorWave Snaps in the region. This reflected an increase of 24% in an inflationary period!
(1) Velocity & Distribution Impact [22 vs. 21]
Ongoing post-Covid "at-home" consumption dynamics were aggressively pursued by FlavorWave Snaps with creative shopper/digital marketing messaging that elevated wellness attributes. Shoppers and consumers responded.
Retailers rewarded the brand, for reliable supply deliveries and for the proactive merchandizing from the field marketing teams, by providing increased secondary placement and display opportunities for the core brand-packs. Some paid for, some not.
Unit velocities increased by 8% in a tough competitive environment. That 8% velocity increase delivered a $645,000 financial impact to the change in Sales Contribution.
On the back of strong velocities in core markets, FlavorWave Snaps was able to also increase points of distribution (PODs) by 10%. The POD increase reflects increased store placements and new stores.
Overall that's an equivalent of just under 1,000 stores. The sales contribution change impact due to an increase in distribution yielded was just over $800,000.
It certainly makes a difference when you can express velocity and distribution changes in dollars at the profitability line item level!
(2a) Gross Price Impact [22 vs. 21]
The four large incumbent category leaders, in conjunction with retailers, all increased the price on shelf in 2021. Some of those category leaders increased pricing by more than 15% in 2021 and then by about 10% in 2022.
FlavorWave Snaps followed with only a 8% increase at the shelf in 2022 even though the brand was experiencing input cost inflation of between 11 and 12%. The rationale was that:
The brand was already priced at a premium, relative to the more "mainstream" category leaders, and
The brand wanted to deliberately reduce the price gap with the goal of siphoning incremental trade-up consumers looking for better-for-you alternatives.
A portion of the velocity gains in 2022 can be attributed to narrowing of the price-gap , given that category leaders velocities had decreased somewhat due to both price elasticity impacts and also due to premium brand competitiveness shifts at the time.
To maintain expected gross margin percentages for retailers and distributors, the 8% on the shelf increase had also translated to similar increases for the case price-to-retailer and the case price to distributor.
The 8% resultant gross price increase (across all brand-packs and retailers in the region) delivered a direct financial impact of just over $2.5 Million to the change in Sales Contribution.
It was, by far, the largest driver of profitability and therefore provided significant mitigation of other drivers whose impact was adverse.
(2b) TSD Marketing Impact [22 vs. 21]
TSD Marketing is about Trade, Shopper & Digital Marketing activities and related expenses that serve the prime goal of sales activation at retail and the "shelf".
During 2021 and 2022, FlavorWave Snaps had meaningfully cut back on wasteful price-promo activities. The team shifted spend and even increased TSD marketing dollars per case by investing in displays and digital/retail media that drove foot-traffic to the stores.
The increase in TSD Marketing $/case of 4% in 2022 vs 2021 had a financially adverse impact on Sales Contribution to the extent of about $250,000 for that region.
Weighed up against the just over $1.4 Million gain via velocity and distribution gains that the shopper and digital marketing helped to deliver, the team confidently justified the increase in TSD Marketing!
These are the types of financial trade-offs you want to see.
(3) COGS & Direct Sales/Marketing Expense Impact [22 vs. 21]
COGS $ per case and Direct Sales & Marketing Expenses per case increased by 11% and 12% respectively from 2021 to 2022. These increases were both in line with the inflationary input cost increases of brands of a similar scale.
The direct financial impact of the COGS per case increase had an adverse impact on the change in Sales Contribution to the extent of just less than $1.7 Million for that region. The adverse impact from the increased TSD Marketing $/case was just over $252,000.
What is important to note here is that the 8% price increase completely mitigated the 12% COGS and the 11% Direct Sales & Marketing increase in unit costs.
The 2022 vs. 2021 Boom
The Sales Contribution driver and bridge chart visually highlight how and why FlavorWave Snaps experienced a profitability boom when comparing 2022 to 2021.
Many of the Sales Contribution driver stars were aligned for FlavorWave Snaps that year. Velocity, Distribution and Gross Price had all increased.
Several large and several emerging CPG brands in different categories exhibited similar boom "bridge profiles" for this period. It was a dynamic, predominantly fueled by price increases, the ratcheting power of which, is not always well understood or well communicated within CPG.
2023 vs. 2022: Waning Inflationary Period -> A Stall
Sales Contribution Dollars decreased by about $450,000 from 2022 to 2023. This reflected a decrease of just under 5% in this 2023 waning inflationary period!
Revenue, for FlavorWave Snaps, had increased by just less than 2%, but given ongoing cost input headwinds, total gross profit dollars and total sales contribution dollars decreased.
A quick glance at the sales contribution driver and bridge chart, visually highlights the drivers that changed and the drivers that yielded the largest positive and adverse impacts.
These dynamics were, once again, quite reflective of the broader headwinds and tailwinds impacting the profitability for many CPG brands in different categories.
(1) Velocity & Distribution Impact [23 vs, 22]
In 2023 volume (in cases) had decreased by 3%. This represented a significant volume stall and decline when compared to the growth experienced in 22-vs-21.
This volume decline was driven by a 2% decline in brand-pack velocities and a 1% retraction in the points of distribution.
Despite FlavorWave Snaps' increased brand relevance over the previous few years, FlavorWave Snaps was now also facing the same headwinds that some other premium priced brands were also experiencing. These headwinds included:
Increased premium-positioned private label competition that captured shoppers who were trading down.
Decreased purchase frequency and purchase quantities by inflation and budget-conscious shoppers. (Even for more affluent shoppers)
The purchase behavior shift to different retail channels offering higher discounts or bulk-purchase $/oz savings for the same or for similar brands.
The 2% decrease in U/S/W velocity yielded an impact to Sales Contribution for that region of just over $180,000 for the period.
The 1% retraction in points of distribution was predominantly attributed to:
The loss of some of FlavorWave Snaps' facings for a third of its SKUs's given a major drive by two of the larger conventional supermarket retailers in that region to rationalize their assortments in flavor of brands with higher velocities and retailer gross margins.
FlavorWave Snaps' decision to double-down on core metro markets within that region (versus expansion to more outlying counties) so that the brand could fortify and concentrate the brand support given all the looming volume challenges.
Distribution expansion opportunities for 2023 were thus impacted. The impact was $92,000. The view was that the velocity declines would have been steeper than 2% had POD expansion accelerated without the appropriate levels of shopper marketing and field marketing support.
(2a) Gross Price Impact [23 vs. 22]
As retailer volume pressures increased and as CPG-wide inflationary input cost seemingly declined, retailer appetites for larger price increases dissipated.
Within FlavorWave Snaps' category the three share leaders were tempering their price increases in 2023 to an average of about 8%.
FlavorWave Snaps was able to secure an average 5% increase for 2023. The bulk of the increase was sourced from a price increases on the core SKUs that were in direct competition with the category leaders.
FlavorWave Snaps could have perhaps increased pricing to an average of about 7%, given their strong relationship with the two top regional retailers. However, that would have pushed the retail price point beyond a perceived price-point range that was deemed a threshold, by shoppers, for premium brands in that category. It certainly would have also opened the gap between FlavorWave Snaps and its direct premium-priced competitor.
Even a 5% average price increase, for FlavorWave Snaps, delivered a substantial positive impact despite velocity and distribution declines. The impact amounted to just over $1.8 Million for that region, an impact that helped mitigate many headwinds.
(2b) TSD Marketing Impact [23 vs. 22]
The velocity decline would have likely been higher, had FlavorWave Snaps not continued to provide display, shopper and digital marketing support that focused on sales activation within the stores.
In response to the increased price promotion activities by the category and also the main premium-priced competitor, FlavorWave Snaps also increased their activity. They however focused on an increase in frequency, that was aligned to the increased display activity of core brand-packs and not on the depth of discount.
The significant 6% increase in overall TSD Marketing Expense per case, amounted to an adverse impact of just over $400,000. You can argue that a significant portion of this spend increase was the "price paid" to slow down the velocity impact that would have likely exceeded that amount if TSD Marketing Expense "investments" had been reduced.
(3) COGS Impact [23 vs. 22]
Rampant ingredient and packaging prices continued a downward trend as supply chain disruptions eased and as global material inventory flows stopped whiplashing.
Suppliers have also been impacted by economic conditions that have constrained volumes throughput in their capital intensive plants.
For some suppliers, net prices hikes to brand owners were reduced in their efforts to maintain flow. For other suppliers, prices to smaller CPG companies continued increasing as suppliers themselves sought out approaches to rebalance their customer portfolios in favor of larger production runs from brand owners who were not at risk of defaulting.
For FlavorWave Snaps, COGS per case increased by 8% for 2023 versus the 11% increase that the brand had endured for 2022. The 8% increase, while less than the previous period's increase, was still significant given the volume challenges and given that FlavorWave Snaps had only increased their own average pricing to their distributors by 5%.
The 8% COGS per case increase yielded a direct adverse impact on Sales Contribution dollars by just over $1.4 Million for the period
The resultant 2023 vs. 2022 Stall
Once again, the profit-ratcheting power of customer pricing roved to be the largest positive contributor to a potential positive change in Sales Contribution.
As experienced by a number of brands in 2023, this price increase was unfortunately insufficient to meaningfully mitigate and offset a) the COGS per case increase, and b) the TSM Marketing per case increase that had helped to dampen the decline in velocity and distribution.
Overall Sales Contribution dollars had stalled.
2024 vs. 2023 Outlook: A Sales Contribution Bust
The Sales Contribution Outlook for 2024, for FlavorWave Snaps is a bust, of sorts. It's a bust because the projected total Sales Contribution dollars will likely be declining relative to 2019 levels.
The interdependency of the of the six Sales Contribution drivers to impact overall growth is clear, if you expose the financial impact of those drivers.
A more optimistic 2024 "budget" could have been set that would have pleased investors. But, what purpose would that have served if the associated growth assumptions were not achievable given the prevailing headwinds and FlavorWave Snaps' unit economics realties?
The beauty of breaking down profitability aspirations into its component drivers is that it forces you to confront brutal truths. The goal is to then find creative avenues to establish resets as needed.
(1) Velocity & Distribution Impact [24 Outlook vs. 23]
Velocity is expected to stabilize. A small gain in incremental in-store points of distribution is targeted. Actions include:
The increased investment and disproportionate focus on shopper, digital and retail marketing on core brand-packs.
The redistribution of field marketing resources in core metro markets and must-win retailers in the region.
(2a) Gross Prices Impact [24 Outlook vs. 23]
Given the overall volume headwinds and price resistance that retailers are facing from shoppers in 2024, achieving any further needle-moving front-line price increases for 2024 are off the table.
Yet, as you have see in the unmasking of impacts in previous bridge charts, pricing gains are critical in both driving profitability and also mitigating adverse cost increases that arise. Especially uncontrollable cost input increases.
FlavorWave Snaps is in the process of a price-pack architecture review and transformation initiative which will be fully implemented by the fall of 2024 and that will result in a 1% average price increase for the whole annual period. This involves brand-pack price-realignments and the introduction of two new brand-packs in that region. Full-year benefits will be achieved in 2025.
(2b)TSD Marketing Expense Impact [24 Outlook vs. 23]
In light of continued volume and velocity pressures, TSD $/case will be increasing again. For 2024, FlavorWave Snaps will also increase the frequency of physical price-promotions and digital retailer-focused deals in the top 4 metros to dampen and stabilize volume challenges. The bulk of the increase spend, however, is being set aside for increased display, shopper and digital marketing activities at the shelf.
The expected 2024 TSD Marketing expense increase per case will result in TSD Marketing Expense % of Net Revenue increasing from 19% in 2023 to 21% in 2024.
(3) COGS & Direct Sales/Marketing Impact [24 Outlook vs. 23]
While cost input inflation has subsided from the higher increases in 2022, annual increases are still present for 2024.
What is important to note is that COGS and direct sales/marketing expenses are expected to persist and likely increase at rates higher than the price increases at the shelf, moving forward.
Factors influencing the stickiness of cost input inflation include:
Ongoing direct manufacturing wage/salary increase pressures given the constraints in recruiting and retaining skilled and high-performance team members.
Freight, gas and energy utility headwinds and risks given the wars in Ukraine and the Middle East.
An upward march in digital and retailer media fees given the increased competitiveness and related bidding nature of an increasing number of CPG brands vying for the attention of fickle and media-bombarded shoppers and consumers.
The 2024 vs 2023 "Bust" Impact on Sales Contribution
It is expected that Sales Contribution dollars will decrease by just less than $848,000 in 2024 vs. 2023 for FlavorWave Snaps in that region.
Even a 1% pricing gain will deliver a positive $537,000 impact. Together, the slight stabilization of velocity and distribution will deliver just less than $188,000 worth of incremental Sales Contribution.
Unfortunately, the combined velocity, distribution and pricing financial gains will not be sufficient to mitigate the COGS per case impact of $800,000.
Also, the deliberate investment in shopper, digital and retail marketing to fortify the brand in these tough times, will yield an adverse impact of just over $500,000. It's an informed investment and trade-off choice that the management team is making.
To lessen the impact on operating profit, the management team is also making some tough decisions to re-organize the head office operation to reduce operating expenses.
Planning for a 2024-2025 Reset!
FlavorWave Snaps' Boom-Stall-Bust-Reset journey is a journey that many CPG brands have travelled these past few years.
The numbers are the numbers. If the 2024 outlook is not looking good, then at least expose it and understand the mechanics and boundaries of the underpinning drivers so that you can do something about it.
Everything is Connected.
Sow the seeds NOW for a 2024-2025 reset.
In various sections of this case study, I have highlighted or hinted at some of the actions that the executive team of FlavorWave Snaps has taken or is taking for their reset. Here is a quick summary.
Implement a system that unmasks the interdependent and real financial impact of profit drivers and that aligns ALL the functional departments against common and shared profitability goals.
Understand, elevate and exploit the ratcheting power of pricing as a source of significant growth and brand strength.
Set the motion in process to sort out and re-align price curves. Use sound brand pack-channel architectures to innovate new brand-packs that will deliver incremental 2 to 3% price improvement opportunities in this next period of downward frontline pricing pressure.
Build distribution and household penetration strategically on the back of strong and sustainable velocity gains. Retract from unprofitable brand-packs and routes-to-market and only re-enter or re-activate those when a) the core is strong and self-sustaining and b) you can do so profitably.
Acknowledge the convergence and interdependence of trade, shopper and digital marketing activities that drive sales activation at the shelf. Include those activities and expenses when reviewing Sales Contribution profitability.
Disproportionately invest in display and shopper and digital marketing activities at retail that helps to place your brand in shopper baskets, versus pouring dollars in deep and wasteful price promotions.
Question all operational costs and activities. Use data to make informed and the hard tradeoff decisions needed.
Later this year, I will issue a progress update.
For many CPG brands 2024 and 2025 is a period of fundamental reset. A reset that will frame the growth potential and capability of brands for the next decade.
Manoli Kulutbanis
Margin Velocity Accounting (MVA)™ is best suited for CPG brands generating annual revenues in excess of $10 Million per year where you can then also use syndicated or first-party retail sales data to enhance analyses and planning.
Manoli Kulutbanis, via UpScalability, works with emerging and enterprise CPG brands to develop and execute smart and pragmatic pricing, margin and brand growth roadmaps.
Earlier in 2024, Manoli launched CPG Growth Academy featuring a comprehensive route-to-market pricing and profitability course for sales, marketing and finance leads of CPG brands.