CPG Economic Pulse: Q1 Report
How Unrelenting Demand Is Forcing New Costs on the CPG Industry
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 hasn’t slowed — it has accelerated.
The three highest demand months since March 2020 were in the first quarter of 2021.
Supply chain costs are at a breaking point.
From ingredients to packaging material and labor to shipping, every link in the supply chain is creating more cost for CPG companies to deliver for consumers.
The CPG economic forecast is changing.
Slow emergence from pandemic life combined with record demand in the first quarter led to a revision of the CPG economic forecast that now anticipates greater sales and a later return to normal growth patterns.
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.”
The continued — and higher — demand seems at odds with vaccinated Americans spending less time homebound. At the same time, consumer confidence, personal consumption and disposable income are all up, which appears to be feeding increased CPG sales. Disposable personal income in current dollars surged 32% during the first quarter, spurred by stimulus payments, unemployment insurance benefits and tax refunds. While most of the income growth was attributable to government payments, employment gains created additional purchasing power, helping to lift spending in March by 11% year-over-year. The savings rate also rose to its second-highest level on record at 27.6%.
There are areas that can be expected to grow as pre-pandemic behavior reemerges. While the CPG industry has largely experienced unprecedented demand, some manufacturing, particularly for food service items like ice cream or popcorn for events or in-store experiences, will see some resurgence.
Further, as more people resume normal activities, spending is concentrating in areas that reflect a return to relative normal. In the first quarter, there were notable increases in personal care product sales, suggesting Americans are getting ready to get out in public again. From just February to March, spending on hair, dental and shaving products was up 7.1% and cosmetics spending increased by 7.2%. Cosmetics spending was up 23.5% year-over-year in March.
- Q1 2021
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.
The initial forecast offered two scenarios based on spending expectations: the 2% reduction assumed accelerated CPG spending spurred by the pandemic would end in May while the 1% reduction assumed it would continue until September. With the first quarter of the year in focus, Consumer Brands now expects accelerated spending to last until September, and that it might not completely return to previous levels even then.
While vaccinations have moved more rapidly than expected, percentages of vaccinated Americans are leveling off and supply is starting to outweigh demand, complicating a return to relative normal. Having a greater impact, however, are long-term or permanent behavior changes that will keep at-home consumption elevated. As detailed in Consumer Brands’ CPG Post-Pandemic Outlook report, lifestyle changes from small adjustments like making coffee at home to large transformations like working from home regularly will influence continued demand that will not be quelled by COVID-19’s exit.
- CPG Pre Pandemic
- CPG Post Pandemic
- Q1 2021
- Long-Term Trendline
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.
The Producer Price Index from the federal Bureau of Labor Statistics tracks more than 1,500 commodities. And everything from aluminum to oil seeds has been growing more expensive since early in the pandemic.
“The increased costs to make and ship CPG products have been edging up for a year,” Freeman said. “The industry has absorbed as much cost as it could manage, but it has reached a breaking point after more than a year in a relentless demand cycle.”
The lumber shortage that is contributing to housing costs is also affecting CPG products like toilet paper, diapers, paper towels and others that are dependent on wood pulp, a key commodity that has risen more than 20% in cost in the last year.
Raw materials for other CPG products are also hitting the industry hard. Bloomberg’s Agriculture Spot Index tracks key farm products and reported its biggest surge in almost nine years. As Bloomberg reported, “With global food prices already at the highest since mid-2014, this latest jump is being closely watched because staple crops are a ubiquitous influence on grocery shelves — from bread and pizza dough to meat and even soda.”
Echoing the Bloomberg Index, the Commodity Research Bureau Foodstuffs Index of agricultural commodities like butter, sugar and grains is up 15% this year. Soybeans and wheat are at their highest points since 2014.
Corn is the highest it’s been since 2013, up 16% during April, following increases every month since July. Corn is a key ingredient for many CPG products, but also for goods in other industries. As Axios’ Dion Rabouin explained, “The price of corn is especially important because it is a major input for everything from gasoline to meat to industrial products like wallboard and insulation used in houses.”
- Producer Price Index for Final Demand
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.
About This Research
Consumer Brands’ CPG Economic Pulse analyzes the totality of the industry — food, beverage, household and personal care products — to offer a timely look at an industry that contributes $2 trillion to the U.S. economy and supports more than 20 million jobs.
The data in this report is released on a rolling calendar schedule. The figures presented are current at the time of publication and are subject to updates and revisions.
Economic analysis provided by JEK Analytics.
The CPG purchases data is derived from U.S. Bureau of Economic Analysis reporting.
Estimates include food, nonalcoholic and alcoholic beverages for off-premises consumption; food purchased and consumed on farms; nonprescription drugs, household supplies and personal care purchases; and net purchase of goods by U.S. residents abroad.
The Economic Contributions of CPG
The CPG industry is the largest manufacturing employer in the United States. The food, beverage, household and personal care products that the industry makes have a positive impact on the lives of every American, every day.
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