What are Consumer Packaged Goods (CPG)?

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Definition:

Consumer packaged goods (CPG) are products that customers like you use almost daily and restock frequently — These includes food, beverages, toiletries, over-the-counter drugs, and cleaning products.

🤔 Understanding consumer packaged goods (CPG)

Sometimes you’ll hear consumer packaged goods (CPG) referred to as fast-moving consumer goods (FMCG) because they often sell quickly from shelves — either because they are perishable (e.g., meat) or have high consumer demand (e.g., toilet paper). The CPG sector is highly competitive because (1) companies must fight for limited shelf space in stores and (2) customers can be fickle, often changing their brand loyalties on a whim. These goods — think Oreos — are typically produced on a massive scale and sold for cheap. While the profit (revenue minus expenses) per item is often tiny, CPG companies make up for this in quantity. In fact, the industry alone contributes 10% — or $2T — to total US Gross Domestic Product (the total value of goods and services that a country produces in a set period of time). Thanks to tech innovations, the industry is rapidly changing and services like Amazon Prime Pantry are challenging traditional CPG retailers like Target.

Example

Troy is sitting on the couch, making a shopping list of everything he needs to buy this week. He’s out of coffee, toothpaste, and diapers for his newborn. He drives to the store to get toothpaste and diapers, but he buys coffee beans online because he likes a particular roast that isn’t available locally. Troy isn’t surprised he’s out of this stuff because he uses them all the time. And he knows he’ll probably have to buy them again in two weeks. All of these products are consumer packaged goods.

Takeaway

Consumer packaged goods are like your camping essentials...

No, not your hammock or favorite book. Those are nice to haves. But you probably wouldn’t want to go into the woods for a few days without toilet paper, deodorant, packaged food, water, or coffee. These are all considered consumer packaged goods (CPG). Quite simply, you use them often enough that you’d want them when you’re out in the middle of nowhere. Because people like you buy these goods all the time, companies have to manufacture and restock them continuously.

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What are Consumer Packaged Goods (CPG)?

Consumer packaged goods (CPG) are products that people frequently use and replenish. These items are sometimes called fast-moving consumer goods (FMCG) because of how quickly they sell. These goods are purchased daily on a massive scale.

Some CPG products are perishable and have a short shelf life, such as meat and dairy products. Others have a long shelf life (i.e. won’t go bad), such as paper towels and cleaning supplies. But all of these goods are in high demand.

Here are some common characteristics of CPGs:

  • Frequently purchased: Customers buy these products daily.
  • Rapid consumption: These items are used a lot and must replace them frequently.
  • Low cost: They’re relatively inexpensive as compared to bigger purchases like a car or couch.
  • High volumes: They move in large quantities. They’re often packaged, shipped, and stocked in bulk. They’re frequently sold in big amounts, as well (think Costco).
  • Widespread distribution: People almost everywhere use them. This means the goods are widely distributed.
  • Low consumer engagement: Buyers don’t spend much time choosing a CPG. In contrast, a buyer likely spends a large chunk of time contemplating their laptop purchase.

One key feature of CPG products is their packaging, hence the name consumer packaged goods. This characteristic is important for a few important reasons:

  • This attribute brands the product
  • Packaging prolongs the shelf life of a product as long as possible
  • The wrapper informs consumers about ingredients, expiration dates, etc.
  • It keeps the product hygienic and protected

Package branding is one of CPG’s most noteworthy features. The industry is highly competitive since there is a consistently high demand for these goods and a wealth of products from which a consumer can choose. It’s easy to gain and lose customers since they can easily and cheaply switch to a new brand the next time they replace their coffee or mascara.

One way CPG companies try to distinguish their products from competitors is by package branding. For example, Tide uses bright orange containers for laundry detergent to help differentiate themselves and stand out on shelves.

CPG companies have the potential for high revenue (total income generated by a business through sales of products) because their goods are sold and purchased in high volume. The threat is high competition. There are generally many brands competing for limited shelf space and consumer dollars.

The CPG sector makes up a large portion of the US economy. In 2019, the Grocery Manufacturers Association released a study on the CPG industry and found that it:

  • Represented 10% of total US Gross Domestic Product (GDP)
  • Employed 20M+ Americans (over 10% of all US jobs)
  • Provided $1.1T in income and benefits to employees

What is the difference between CPG and retail?

The retail industry is just one portion of the entire consumer packaged goods (CPG) industry. Retail focuses specifically on the sale of a product to its end user, like you. Two key retail channels today that sell directly to the consumer are brick-and-mortar (i.e. physical) stores, such as Walmart, and e-commerce sites, such as Amazon.

In contrast to retail, the CPG industry is much broader and includes the whole supply chain (the entire network required to both produce a product and deliver it to the end user). This network includes anyone involved in the manufacturing, selling, and marketing of a CPG. This encompasses gathering raw materials, creating products, transporting goods, and developing a brand.

CPG companies typically use retailers to sell their products to end consumers like you. But sometimes they also have their own brick-and-mortar or e-commerce stores. Increasingly, companies use a mix of these channels to sell their products. For example, you can buy direct from Coca-Cola, a CPG company, because it has its own website and stores. But you can also buy Coca-Cola products in-person at a Walmart store and online at Amazon.

What is the difference between CPG and durable goods?

Consumer packaged goods (CPG) are products that consumers frequently use and replenish. Some examples include beverages, office supplies, and tissues.

But that couch you’ve been eyeing from West Elm? That’s a durable good. They’re items that consumers purchase and replace less often. Televisions, washing machines, and refrigerators are also considered durable goods.

Just like how CPGs are also called fast-moving consumer goods (FMCG), sometimes durable goods are referred to as slow-moving consumer goods. That’s because durable goods sell less quickly and often. They may sit in a store for a longer period of time.

Both terms have a keyword in their names. Consumer packaged goods typically thrive on differentiated packaging that sustains and brands a product. Durable goods are, well, durable. They last much longer than a CPG item and can take years to wear down.

The main difference is how often you replace the item. If you replace the product a lot — like your favorite white cheddar popcorn or flavor of La Croix — then it’s likely a CPG. If you rarely replace the product — like furniture — then it’s probably a durable good.

Generally speaking, durable goods are more expensive than CPG products. In turn, this affects buyer behavior. For example, customers take more time to research their options before buying a durable good like a refrigerator. On the other hand, they can quickly decide on a CPG purchase, such as choosing a cereal.

During recessions (when an economy is declining), CPGs continue to sell relatively well. But durable goods may not do as well. When consumers have little extra money, they continue to buy CPGs since they still need to eat, drink, clean their homes, and groom themselves. However, the same consumers may forgo replacing a durable good like a car. Instead, they may try to squeeze a few more years out of the vehicle.

What are the top CPG companies?

It’s common for large CPG corporations to have a house of brands (many different products with separate brand names). Companies do this to diversify their portfolio of products so they don’t have to rely too heavily on the sales of any one brand or product.

Let’s look at some of the top CPG companies and brands they own. The top CPG companies worldwide by sales in 2018, according to Statista, were:

1. Nestlé S.A.: The company primarily manufactures food including baby food, coffee, and ice cream. Nestlé owns household name brands such as Cheerios, Gerber, Perrier, Coffee-Mate, and KitKat. In 2018, they made $93.4B in worldwide sales.

2. The Procter & Gamble Company (P&G): P&G sells goods like cleaning supplies, beauty care, and personal healthcare items. Some familiar brands include Bounty, Crest, Charmin, Dawn, and Febreze. They sold $66.3B worth of goods in 2018 worldwide.

3. PepsiCo, Inc.: PepsiCo specializes in beverages and food like soft drinks and chips. It owns brands like Pepsi, Lay’s, Doritos, Quaker Oats, and Aquafina. They netted $64.6B in global sales in 2018.

4. Unilever: This company spans across multiple CPG categories like cosmetics, food, and cleaning products. Unilever owns Dove, Lipton, Klondike, Q-tips, and Vaseline. These brands earned them $60.1B in 2018 worldwide sales.

5. Anheuser-Busch InBev SA/NV: An undisputed beverage king, Anheuser manufactures beer, spirits, and soft drinks. The company owns brands like Budweiser, Corona, and Aguila. They sold $54.6B worth of goods in 2018.

Mergers and acquisitions (M&A) are common business strategies for CPG giants. By acquiring and owning several brands, these top companies maintain a balanced portfolio of products. Not only does this help increase revenue, but it also minimizes risk. In some cases, one company will own two brands in the same exact category just to satisfy customers who are loyal to different brands. An example of this is how P&G owns both Crest and Oral-B to get more shelf space in the toothpaste aisle and capture a larger share of the market.

What are the most important CPG industry trends today?

Rapid technological developments are causing the biggest changes in the CPG sector today. The most notable trends are:

  • Development of proprietary technology: Global CPG companies are creating in-house software and systems to help modernize their brands. For example, The Procter & Gamble Company built an innovation center in Singapore that has a team of data scientists, engineers, and material scientists, among others, working to build new products more quickly through initiatives like rapid product development and consumer testing.
  • Use of data and analytics: CPG companies are using data and analytics for targeted marketing — Yes, this includes those ultra-personalized Instagram ads.
  • Rapid growth of direct-to-consumer brands: Thanks to the explosion of e-commerce and improved supply chains, manufacturers are now selling directly to customers rather than using a retailer as an intermediary. An example of a popular direct-to-consumer brand is Glossier, which sells beauty and skincare products online primarily to Millennials.
  • Subscription-based payments: On a related note, many direct-to-consumer CPG companies are experimenting with a subscription model for their purchases. To incent consumers to sign up for a subscription that will replace a product at a fixed interval, many direct-to-consumer retailers offer a discount over the one-time purchase price. For example, Dollar Shave Club has a subscription-based model where they will send you razors and other grooming products every month or so.
  • Construction of brick-and-mortar stores by online retailers: E-commerce retailers are building physical locations, such as Amazon Go by Amazon. The company is experimenting with technology that allows shoppers to buy products without having to stand in a checkout line. While Amazon isn’t a traditional CPG company, it is challenging incumbent players and changing consumer expectations for the way they buy these goods
  • Demand for transparency: More than ever, consumers care about where their products came from and how they were manufactured. CPG companies are responding to consumer demand for transparency, especially regarding health and environmental sustainability. According to a Nielsen study, products that highlight sustainable farming are growing the most quickly out of all food sales.
  • Click and deliver: Tech now makes it possible for companies to deliver consumer packaged goods right to the buyer’s doorstep. Two examples are Fresh Direct and Amazon Prime Now. In the near future, many CPG companies may expand their delivery options to remain competitive with these challengers, either via partnership with these companies or by creating a system themselves.
  • Click and collect: Similarly, customers can order goods online and pick them up without waiting at select locations. For example, some grocery stores offer to shop the aisles for consumers so that they can walk right in and pick them up. This is an example of CPG companies adapting to consumer preferences and expectations.
  • Multi-channel strategies: CPG brands may implement marketing and sales strategies across several platforms to maximize exposure to a diverse group of consumers. For example, Quip, the direct-to-consumer toothbrush brand, has partnered with Target to diversify its distribution channels and have a presence in brick-and-mortar stores.

All in all, consumer behavior is changing due to advances in tech and the shifting expectations that this has created. CPG companies are working to innovate and respond to meet these customer demands.

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