A General Overview of the Consumer Packaged Good (CPG) Industry
Consumer packaged goods are consumed on a regular basis and also need to be replaced frequently. The market for such goods is virtually ever-present, yet it is highly competitive. This story provides a general overview of the consumer packaged good (CPG) industry.
"The CPG industry is fast approaching a tipping point, driven by a confluence of trends. Consumers are embracing technologies, devices, and services that make everyday tasks such as shopping, cooking, and even commuting quicker, easier, more fun, and more efficient."
― Patrick Hadlock, Partner, The Boston Consulting Group
The consumer packaged good (CPG) industry has undergone a massive change in the past decade. CPGs are those goods that are used frequently. Their regular use makes them ideal for mass production and lower cost.
While the picture of this industry may seem very rosy on the outside (owing to mass production and less prices), the truth is far different. Like every other industry, it has its share of advantages and disadvantages and challenges. A general overview of this industry is outlined in the paragraphs below.
The CPG industry manufactures good, like soft drinks, beverages, food products, processed food packets, baby products, toys, OTC (over-the-counter) drugs, dairy products, baked goodies, fruits, vegetables, groceries, toiletries, alcohol, cleaning products, etc.
These goods are manufactured by different industries, of course, but collectively, they are sold under the CPG banner.
An important point to be noticed here is that such goods mostly have a short shelf life, i.e., baked goods, pre-processed food packs, vegetables, etc.
Even if they are frozen and stored, they are supposed to be sold and consumed as soon as possible, from the date of manufacture.
The individual profit on these goods is not very large; however, the overall profit is marginally better due to them being mass produced.
This industry is fairly huge with many corporate sub-divisions.
The analytics in the CPG industry vary with the consumer demand and the retailers.
This industry uses channel management as well as the 'push' and 'pull' strategy to sell goods to consumers.
Different companies produce different products―the food industry manufactures processed food packets, the beverage industry takes care of beverages, etc.
These goods are purchased by the wholesaler, who in turn, sell the products to the retailers.
When the industry sells the products, it sells them at a wholesale price, while the customers pay retail price for the same products (retail price is higher than the wholesale price).
The 'pull' strategy involves heavy advertising, while the 'push' strategy involves mere selling without promotions.
There is a difference between the CPG industry and the retail industry―the former are the manufacturers, while the latter act as the go-between, i.e., they make the products available to customers and sell them accordingly.
From the perspective of a consumer, this is an important characteristic.
This does not essentially mean that the goods are always available at a low price, just that they are consumed on a daily basis, hence the low price issue sorts the problem due to extensive consumption and demand.
Also, the price may be subject to change, depending on the market situation; mostly though, they are easily affordable.
As mentioned before, food, beverages, groceries, etc., are regularly used items.
These are the goods that can be clubbed together as 'basic necessities'.
Since they are necessary almost everyday, their purchase is fairly frequent.
A customer will purchase a huge box of fresh fruit and come back within 3-4 days for another. Thus, there is frequent demand.
Huge Distribution Network
This characteristic is from the manufacturer/marketer's point of view.
Since the items are frequently necessary, the distribution network is obviously huge.
Every town, city, or suburb will have stores containing CPGs.
Thus, it is necessary for the manufacturer/seller to analyze the widespread network and distribute the items in every grocery store and supermarket.
High Inventory Turnover
Inventory turnover or stock turnover is the total cost of goods sold divided by the average inventory.
This value indicates the marketing effort and other related factors.
A low inventory turnover rate may indicate extra stocking, which may be good or bad depending on the current situation.
A high rate may indicate stock shortage.
In case of the CPG industry, the stock turnover is generally high, which may lead to a loss in case of a poorly managed inventory control system as well as marketing tactics.
Pointless though this characteristic may seem, it deserves an important mention.
This is because it plays a crucial factor for the high produce and sale. A consumer does not have to think much when he is buying CPGs.
In fact, he does not have to think at all―the investment is necessary and important and easy.
In contrast to buying a car or a computer, the purchase of these goods requires very less thinking.
Low Contribution Per Unit
Mathematically, this term is the difference between the selling price per item and the variable cost of the same item.
The value is important in the calculations of vital terms, like operating leverage.
The CPG industry generally has a low contribution margin.
The challenges to the CPG industry mainly involve preventing a total loss situation and avoiding overstocking.
That said, the trends can change any time, with the consumer's demand as well as the market situation.
The growth rate of the CPG industry has been remarkable over the past decade, due to a continuous growth in technology.
The manufacturers have to face the wrath in case of any fault in production.
A number of problems are bound to occur; for example, the extra products may not have been sold, resulting in a loss, there may have been excess demand for a particular product, which again threatens the industry, etc.
These issues must be carefully discussed before production.
Mass production is constantly required with respect to the CPG industry, the reason being, the regular usage of products. However, the production should also be carefully planned and monitored so as to avoid wastage of goods and loss of capital.