The Margin Squeeze in the US CPG & Retail World

Recently in a few conversations with major CPG leaders, I came across this common theme of them talking about the margins being squeezed and thus increased pressures and scrutiny of spending on technology. Although some leaders and organisations are taking the bold step and realising that technology and AI in extension can be the enabler to unlock those potential incremental margins, I decided to look a bit deeper into why CPG margins are being eked into by the Retailers.

Key forces at play are converging to put pressure on CPG profitability:

1. The Inflation Hangover: The pinch of rising prices started from 2021 onwards. While inflation has cooled somewhat , prices for groceries are still significantly higher than they were pre-pandemic. CPG companies initially raised their own prices to cope with higher costs for materials, energy, and shipping. But consumers have hit their limit. They're now hunting for value, switching to cheaper options, or buying less. Retailers, facing their own pressures, are also pushing back hard against further price hikes. Hence, CPG profit margins (EBIT) have been hovering near 10-year lows, even with the price increases. The easy lever of raising prices is gone.
2. Retailer Power Play: The balance of power has noticeably shifted towards retailers. Big players are getting bigger through consolidation (think Aldi buying Southeastern Grocers ), giving them massive negotiating leverage. Retailers also have a treasure trove of data on consumers, the shoppers, thanks to loyalty programs and online tracking. They are using this data to optimize their shelves, push their own brands, and demand more from CPG suppliers.
3. The Private Label Boom: Store brands (private labels) are no longer just the cheap option. Retailers have invested heavily in quality and innovation, and consumers are noticing. Many shoppers now see private label quality as equal to or even better than national brands. Private labels offer retailers better margins and a way to build store loyalty. They are getting prime shelf space and promotion, directly competing with established CPG brands not just on price, but on quality and innovation too. This surge means CPGs are losing shelf space, negotiating power, and consumer loyalty.
4. Supply Chain Strain: The pandemic exposed how fragile global supply chains can be. Now, add the complexity of omni-channel retail – shipping to stores, to e-commerce hubs, directly to homes – and costs for transport, warehousing, and labor have shot up and stayed high. Retailers are also demanding faster, more reliable deliveries (OTIF), penalizing suppliers who can't keep up, even though Walmart has reduced their shipping requirements by 3% for OTIF penalties. Optimizing the supply chain for efficiency and resilience is no longer just about saving money; its a strategic necessity.

Finding the Opportunities: Strategies for CPG Growth

I believe to tackle these challenges, CPG leaders must have multiple arrows in their quiver and be ready to leverage these levers. So, how can CPG brands navigate this challenging landscape and find profitable growth?

1. Forge Resilient and Efficient Supply Chains: Treat the supply chain as a strategic asset. Invest in technology (visibility tools, automation, AI for forecasting/optimization) and process improvements (network design, supplier diversification, consolidation) to build agility, enhance reliability (OTIF compliance), and drive down costs.
2. Embrace AI & Technology in the whole value chain: AI offers huge potential to boost margins and efficiency across the board – from speeding up innovation to forecasting demand and optimizing logistics to personalizing marketing. Companies successfully using AI report significant revenue and margin gains. Its not just an option; its becoming essential to keep pace with competitors and savvy retailers.
3. Master Revenue Growth Management (RGM): This is about holistically optimizing pricing, promotions, assortment, and trade spend using data. Use value-based pricing , understand price sensitivity , design smart price/pack options , and tailor strategies for different channels and retailers. AI is a powerful RGM enabler.
4. Collaborate with Retailers (Really Collaborate): Shift towards true partnership focused on growing the entire category together. Using data sources like Walmart Luminate or 84.51 for Target to focus on Joint Business Planning (JBP) for win-win outcomes. Strong collaboration leads to better assortment, promotions, and ultimately, better performance for both sides.