Hidden CPG Margin Pressure 'Relief Valves' for Inflationary Times

Current inflation is intensifying margin pressure on CPGs and, along with other headwinds, is also shutting off the two common “relief valves” on each side of the margin equation: increasing revenue or reducing costs. 

Given the price sensitivity of consumers, increasing revenue by raising prices is not an attractive option. Any incremental revenue gains from higher prices could be easily offset by the loss of market share and brand equity associated with price hikes. On the flip side, how can CPGs minimize expenses when the costs of labor and materials continue to rise? The answers lie behind the scenes, in the back-office functions that are often neglected. 

There are three “hidden” margin pressure relief valves that CPGs often forget are at their disposal. Let’s take a look at each. 

Drive Top-Line Growth With Cost-Efficient Incentives

A recent Inmar study found 80% of shoppers purchased a different brand than usual during Q3 2021. Of those shoppers, 44% said that they would continue to purchase the new brand. 

There is a glass-half-empty and a glass-half-full way to look at this:

• Half-Empty: Once you lose a shopper, it is very hard to get them back. 
• Half-Full: When you win a new shopper, you are poised to build loyalty.

So how exactly do you win (and keep) shoppers? As outlined in Inmar’s white paper, “How to Win and Retain Shoppers in a Supply Chain Crisis,” the key is to identify shoppers ripe for trial and serve them timely promotions on relevant platforms. But with limited promotion budgets, the questions of “who” and “how much” are paramount. CPGs need to align the right offer value to the right shopper. Too little, and you risk not driving trial with a first-time buyer; too much, and you give away margin by incentivizing a shopper who would have bought your product anyway. The only way to ensure that budgets are being allocated optimally is by tapping into point-of-sale and shopper behavior data and developing promotion plans accordingly. 

Prevent Profit Leakage From Invalid Deductions

One of the most insidious sources of margin erosion is invalid deductions. On average, retailer deductions equate to 15%-20% of brand revenue and, of those deductions, 15%-25% of them are either invalid or preventable. The challenge is that validating and disputing deductions is a time-consuming process. Inmar’s “2022 Deductions Management Trends Report” found that almost one-third of respondents, who included CFOs, financial decision-makers, accounts receivable (AR) leaders and controllers at CPG companies, reported that their AR analysts spend more than 50% of their time-processing transactions, as opposed to doing any kind of analysis. 

This is a big missed opportunity for CPGs to insert artificial-intelligence and automation into their AR processes to help AR analysts prioritize, dispute and reconcile invalid deductions and maximize cash recovery. Software-as-as-a-service-based solutions can help CPGs increase profitability and decrease administrative work by up to 40%. 

Free Up Human Capital to Tackle Value-Added Work

In a similar vein, data intake and standardization are processes begging to be automated. In a recent Inmar survey of 300 professionals whose jobs involved some level of data input, 45% of respondents reported spending more than 10 hours per week on manual data entry. When asked what they would spend that time on, should it be freed up, many respondents answered that they would “tackle other challenges or process inefficiencies.”

Human capital is not cheap these days. Brands need to ensure that their headcount is helping to innovate to find margin-saving opportunities, not punching in numbers.

What’s more, there are countless cost-saving insights hiding in stacks of paper, PDFs and other unstructured data files (e.g., longitudinal insights from vendor invoices or shipping manifests). The problem is that brands aren’t able to input and standardize data from these file types in one place. Document processing, data standardization and analytics tools are key for brands to find new ways to generate revenue and drive long-term profitability.

Brands have a lofty task ahead of them as they face finicky shoppers, rising costs and an uncertain future. Fortunately, there are solutions to help ease the margin pressure, if you know where to look for the right “relief valves.”