First-Quarter Look

The close of the first quarter of 2021 brought with it a full year of pandemic data.

And even as vaccines roll out in greater numbers, the data showed a clear and somewhat surprising rise in demand during the first three months of this year — where March 2021 saw the greatest demand of any month since the beginning of the pandemic in March 2020.

Demand Hits New Highs in 2021

For the first quarter, consumer packaged goods saw year-over-year growth of 8%, with sales totaling $1.62 trillion at an annualized rate. Within the quarter, each month proved to have higher demand than every month last year apart from March 2020, when panic buying sent CPG consumption skyrocketing. This January brought a 15% year-over-year increase in demand while February saw a 12.1% increase, with winter storms factoring into the slowdown.

March posted a 1.4% year-over-year decline, but that’s compared with a massive 21% spike the year before. To put the percentages in perspective, the annualized sales — a reflection of demand — of $1.65 trillion this March were only slightly lower than the $1.68 trillion in the panic-buying month a year before and the highest number seen throughout the pandemic since then.

“We couldn’t have predicted that a full year into the pandemic we’d still be seeing demand at these levels,” Consumer Brands President and CEO Geoff Freeman said. “These numbers are a reflection of what we hear every day from our industry — that they are still intensely focused on delivering for the consumer.”

Revised CPG Economic Forecast

Demand for CPG products during the first quarter was higher than predicted at the beginning of the year, which has affected Consumer Brands’ forecast for the year. Incorporating the latest data on personal consumption, together with upward revisions to consumption data, CPG sales for 2021 are now expected to total $1.56 trillion. The new estimate changes the expectation from a 1-2% decline in demand to anticipated growth of 1.4% over 2020.

Up Next: Demand Drives Industry Costs Up

All the demand has contributed to a supply chain at its breaking point. Every link in the chain is adding costs right now — ingredients and inputs, packaging material, labor and shipping — and it could be a long time before the supply chain catches up with demand.

These challenges are not unique to CPG. Other industries are experiencing dramatic increases in costs across their supply chains as well. As people across the globe were forced to work and study at home, sales of computers and technology equipment spiked. That, in turn, contributed to a shortage of semiconductors — the chips inside devices as varied as smartphones, ventilators, cars and fighter jets — and a ripple effect for industries from toymakers to auto parts manufacturers. Meanwhile, the housing industry has been reeling from the skyrocketing cost of lumber, which is adding an average of $24,000 to the cost of building a new home.

Steadily Rising Commodity Costs Force Change

When consumer demand goes up, manufacturers buy more raw inputs and materials. Producer prices rose 4.2% year-over-year in March, the biggest increase since 2011.

Packaging Materials Rise Sharply

The costs go far beyond what is inside the package: The packaging itself costs more. Aluminum, plastic resin, cardboard and other common packaging materials are all up and part of a cascade of increasing costs that CPG companies are no longer able to absorb.

Necessary for everything from canned food to beer and soda cans, aluminum is experiencing highs not seen since 2015. The Platts Midwest aluminum transaction premium recently hit a 29-month high of $.21 per pound, more than double the $.08 per pound in May 2020. The price increases are compounded by Section 232 tariffs that add cost to aluminum imported into the United States.

“Our industry CEOs are all saying the same thing — they have seen costs rise before, but they have never seen costs rise like this, let alone all at the same time.”

In 2020, 407 billion square feet of corrugated material was produced in the United States, according to the Fibre Box Association. The 3.4% year-over-year rise was the largest annual increase since 1994. For the CPG industry, this material is key to not only some product packaging, but also to shipping products to retailers for sale.

The secondary market for recycled material is also reaching new highs. Aluminum, one of the highest-value recycled materials, is trading at 64.13 cents per pound, compared with an average 40.13 cents a year ago. Recycled PET beverage bottles and jars are up 28% and corrugated containers are up 23% in the last year.

“Our industry CEOs are all saying the same thing — they have seen costs rise before, but they have never seen costs rise like this, let alone all at the same time,” Freeman said.

CPG Wages Rise, Jobs Grow Slowly and Openings Persist

Quarterly employment for the CPG industry ended the first quarter at 2.07 million, an increase of 7,000 jobs or 0.4 percent from the fourth quarter of 2020. After losing 130,000 jobs at the outset of the pandemic, recovery was quick and remains strong.

Hiring overall has slowed, with the latest jobs report showing lower-than-expected increases. But compared with the broader economy, CPG jobs have recovered faster. CPG jobs were down just 1.3% year-over-year in March, a contrast with a 4.5% decline in total non-farm employment.

But restoring — or exceeding — job levels seen prior to COVID-19 poses significant challenges as the labor market tightens. In February, the broader manufacturing industry had 538,000 job openings on a seasonally adjusted basis.

Other industries are competing for talent and further heating up the labor market. Fast food restaurants have particularly struggled and have reported increasing pay, offering signing bonuses and, in the case of Chipotle, giving free college tuition to employees who work at least 15 hours a week after only four months on the job.

Despite a national unemployment rate of 6.1%, the Wall Street Journal reported that some workers still fear getting or spreading COVID-19, struggle with childcare challenges, lack skills needed for available jobs, are unwilling to change career paths, or that “many people are receiving more in unemployment benefits than they would earn in available jobs.”

CPG industry wages are growing faster than the national average.

There are arguments that unemployment is still too high and that wages have not gone up enough to signal a labor shortage. Heidi Shierholz, senior economist and director of policy at the Economic Policy Institute, told the Washington Post, “When you don’t see wages growing … you can be fairly certain that labor shortages, though possibly happening in some places, are not a driving feature of the labor market. And right now, wages are not growing at a rapid pace.”

However, CPG industry wages are growing faster than the national average. Its workforce has shown up at a critical moment and the industry, in turn, has shown up for its workforce. BLS data shows wages for food manufacturing were 3.1% higher in March than the same month a year earlier. By comparison, nationwide non-farm wages declined 0.8% in the same period.

Tight Trucking Capacity Adds Further Cost

Labor issues are even more pronounced in the trucking industry, where high consumer demand and a tight freight market collide. Knight-Swift Transportation, the largest truckload carrier in North America, reported raising wages for recently certified drivers by 40% or more.

“In our view, this is the tightest driver market we have seen in our nearly three decades of being involved in the trucking sector,” Cowen & Co. transport analyst Jason Seidl said.

Cass Information Systems reported that per-mile truckload costs rose 8.1% in February from the previous year. The spot or last-minute truckload market shows even more aggressive increases. With far more loads than trucks, DAT Solutions LLC found the average cost to hire a big rig rose 41.9%, to $2.65 a mile.

The capacity challenges are exacerbated by the fact that filling orders for new trucks is being slowed by other supply chain issues. Specifically, the semiconductor shortage hurting many industries is also affecting delivery of new trucks that require the chips to operate.

“For our industry — companies that say they have never seen an environment like this — we should be asking what other levers can be pulled to reduce pressures on the system.”

In addition to trucking capacity issues, fuel prices are up. A gallon of diesel is up 68.7 cents per gallon in the last year. U.S. trucks go through 22 billion gallons of diesel a year, according to the Diesel Technology Forum. The CPG industry accounts for one-fifth of all freight and would use approximately 4.4 billion gallons of diesel, adding up to more than $3 billion in added fuel costs compared with last year.

Beyond products moving by road, many raw materials from overseas are coming into congested U.S. ports. The ship stuck in the Suez Canal in March added to the problem and created even more backlog. Once items do make it onshore, moving them requires more reliance on the spot market. As DAT Principal Analyst Dean Croke explained, “It’s going to keep capacity tight and keep spot rates high.”

All this lands at a pivotal time. More consumers are using e-commerce options, putting additional stress on the shipping market as even more goods flow into ports and move via truck, shaking up the delivery model. Nearly half (47%) of American consumers have tried online ordering for grocery products during COVID-19 and most (77%) plan to continue after the pandemic.

Derek Leathers, CEO of Nebraska-based carrier Werner, said in an earnings call, “I don’t think that you’re going to see any capacity relief coming in 2021.”

When Will Cost Pressures Ease?

As the United States continues emerging from the pandemic and states announce further reopening plans, some of the demand could ease. Exactly how and when the cost pressures will let up is a matter for debate, though some economists feel it will be a year or even two before demand lessens.

“Relentless demand drove costs up to record highs and it’s not clear when demand will alleviate,” Freeman said. “For our industry — companies that say they have never seen an environment like this — we should be asking what other levers can be pulled to reduce pressures on the system.”

Demand will take time. But in the interim, Consumer Brands is focused on answering that question. Doing so is central to the organization’s mission and critical for the consumers who rely on the CPG industry’s products every day.