Over the past few months, we have regularly been asked by clients, “What is your outlook for CPG in Canada?”. Do we see headwinds or tailwinds? Most importantly, what do we think the implications are? As we have been putting our thoughts together and discussing with our clients, this felt like a perfect topic to kick off our first blog post in concert with the launch of our new website.

Historically, the consumer packaged goods industry in Canada has been quite predictable and incredibly consistent in terms of annual sales performance and growth. While there were many
initiatives and factors that would contribute to an organization’s individual results, we could plan and manage brands, categories, and companies leaning on a knowledge foundation that was highly grounded and predictable.

In the early 2000s, Canada was in the top one-third of countries globally averaging a CPG CAGR of +4% or more. Then 2008 happened and it shook this foundation. When the US financial markets melted down, the shockwave hit Canada as well. Fortunately, that was relatively short-lived and once again, the CPG industry could lean on a solid foundation of reference for planning and operating their businesses.

Overall growth rates tapered off into the +2% range and Canada slipped from the top one-third of countries for CPG growth, into the bottom third, but it was still highly predictable. This made commercial and operational planning much more manageable, but in a low-inflation, low-growth market, it felt like we fell into a trap of formulaic planning: A+B=C. It was so predictable that we could eliminate local manufacturing and lean on supply from all over the world. Order accuracy and fill rates were high and inventories and out of stocks were consistently being managed down.

And then the world changed…

Once COVID-19 hit, our historic frame of reference for CPG trends in Canada was changed forever. Demand and supply planning became significantly more challenging. Channel and banner shifting accelerated, driven by inventory availability and new priorities, like in-store health and safety protocols. We had three years of CPG growth in less than one calendar year, with less pricing and promotion activity than we had ever seen before. COVID systematically changed CPG in Canada (and around the world).

In response to our clients’ questions, we took a step back to consider how we arrived at this point and what the key drivers were, including:

• Rapid inflation
• Cost of living/housing
• Strained supply chains
• Demographics/aging population
• Immigration trends
• COVID-19 legacy
• Labour shortages
• Evolution of technology
• Social media

There are so many factors to consider, each of which is chipping away at that predictable Canadian CPG model. These impactors led us to the topic of chaos theory. Chaos theory suggests that small changes in a system can lead to large and unpredictable outcomes, which can make it difficult to forecast trends or predict consumer behaviour. This is also known as the Butterfly Effect, and it feels highly relevant given the dynamic shifts that we are seeing in the traditionally predictable Canadian CPG industry.

We know that during periods of rapid inflation or financial difficulty, economic systems can become more complex and less predictable. Factors like consumer behaviour, supply chain disruptions, and policy changes can all interact and influence each other in unexpected ways, making it challenging to anticipate how our industry, and more importantly, your business, will behave over time. In this context, chaos theory provides a useful framework for understanding how small changes or events can lead to significant and unpredictable outcomes.

So what are we seeing?

Consumer Implications:

• Significant inflation and cost of living are driving almost real-time changes in consumer shopping behaviour.
• Our own research is highlighting that the top two behaviours Canadians are using to try and save money are to:
  1. Buy cheaper food (50.3%) – Trading Down
  2. Eat out less (48.3%) – Trading Out
•  23.3% of Canadians are also buying less food overall, focusing more on their immediate needs while trying to eliminate waste.
• The shift is real, and it is happening fast; from conventional banners to discount banners, from branded to PL, and from base volume to promoted volume.
• Consumers have the ability to check prices in real-time and are using digital tools and their time to find effective ways to save money.

Only time will tell if these changes are systemic, but the longer consumers engage in these behaviours, the more ingrained they are likely to become.

Retailer Implications:

• Rapid inflation can have a mixed impact on retailers. On one hand, they are benefiting from increased retail prices, though based on the consumer response, we are seeing volumes soften, mitigating many of the revenue gains.
• Need to recalibrate performance expectations based on rapidly shifting consumer demand; value and PL brands are growing above historical norms and premium brands are exposed by potentially massive retail price gaps, causing a drag on underlying growth.
• If we are relying on algorithms for demand and supply planning, these take a long time to incorporate short-term datasets. There is a greater need for hands-on CPFR on the biggest and most strategically important products.
• Retailers with no discount formats and those that have moved to purely digital promotional events are likely exposed and are even more vulnerable to the consumer shift. Those with discount banners are accelerating their focus on fewer, bigger, and more exclusive programs.
• The desire to lean on promotional pricing as a traffic driver to “win the week” will grow the longer that volume and share losses continue.
• Fight the urge to only focus on where you are losing; ensure that you balance that with an enhanced focus on where you are winning and accelerate. It takes much less time and effort to leverage a strength relative to fixing a weakness.

Manufacturer Implications:

• The pent-up need to raise prices has manifested itself in multiple increases in rapid succession.
• Traditional price and volume modeling has become difficult to accurately complete, as the past three years were so heavily impacted by COVID-19. Analysis needs to shift to more of a real-time focus.
• In many cases, traditional promotional levers (inside flyer promos, multi buys) are becoming less effective (especially in conventional channels) while discount channel promotions and flyer activities (even at new price points) are becoming more impactful.
• In the meantime, the consumer response to new regular and feature price points, price gaps and price value is shifting week by week.
• Ensure that your teams are all gathering and sharing these learnings, driving them into your regular commercial planning process and out to your customers as well.
• Expect these shifts to continue through 2023 and into 2024, so account for them in your Strategic and Commercial planning processes. Consider these implications in the fundamentals of your go-to-market strategy and your innovation and renovation plans as well. Customer, channel, and brand mix is likely to quickly deviate from historic norms which can have significant and direct implications on your P&L.

And what do we think?

1. The learnings of the past are much less of a predictor of future success. While CPG is a massively resilient industry, systemic changes are taking place all around us.
2. Growth is absolutely possible but not a given. Constantly re-evaluate the drivers of your business: what’s working, what’s not; what to do more of vs. less of.
3. We have been conditioned to “keep it simple” and to provide high-level insights or factoids to chart the course, but in the words of David Goggins: “Embrace the Suck!”. There are no simple answers or options right now, so we need to accept that going granular (deeper analytics, new research, new insights, a new knowledge foundation) may be necessary to achieve forward progress.
4. These challenges are commercial challenges. They affect the entirety of the industry. Approach solving them that way. This is not a sales vs. marketing v.s supply chain v. retail battle. As you come into your annual planning process, leverage the power of your collective teams and the partners in your network to prioritize and focus on how best to navigate together.
5. Keep the consumer at the heart of your thinking. The largest consumer segments in Canada (and we look at 100 distinctly different segments of Canadians) are struggling financially. How important are they to your business? How can your brand help? Value is delivered in many ways. Ensure that your most important consumers understand how you deliver value.

While chaos theory may not directly apply to our industry’s challenges, it does help us understand the importance of resilience and adaptability in tumultuous times. In the face of rapid inflation and shifting consumer behaviour, organizations need to be able to respond quickly to these challenging conditions and adjust accordingly.

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Chris Rodkin is the Founder and President of BritOn Solutions Group Inc. BritOn Solutions Group (BSG) is a boutique sales and marketing consulting agency with advanced expertise in crafting comprehensive, multi-disciplinary strategies that deliver profitable revenue and growth for Consumer Packaged Goods (CPG) companies, brokers and retailers.