Inflation is stubborn across the globe. While we continue to hear about price increases slowing down, the wording is important. Slowing down does not equal stopping or decreasing. I know I’m a bit of a math nerd and a stickler for words, but that wording is important.

The concept is straightforward: prices are still rising, but at the slowest pace since the pandemic began in 2020, and at a rate comparable to, or slightly higher than, the historical 2-3%. I apologize to my friends in certain G20 countries where exponential inflation growth has made 2-4% seem like the global norm.

If you are a manufacturer of fast-moving consumer goods anywhere in the world, this slowing of inflation presents challenges that manifest in a couple of different ways. First, despite what consumers are reading and hearing, raw material input pricing is still largely on the rise because while some commodity inputs are decreasing in cost price, most are not and unemployment remains low, translating to continued high labor costs. This translates to continued higher on-shelf pricing as those costs are carried through the value chain to the end consumer. This challenge is represented by a potential change in consumer demand.

The United States is experiencing real wage growth that is now surpassing inflation, and there has been a slight increase in consumer confidence in May following a period of decline. However, expectations of consumer confidence are still not in the ‘Wow, this is the most amazing time in history!’ range, leading to challenges with demand. Combining the lag in real wage growth with declines in consumer confidence provides a recipe for challenged demand. A Wall Street Journal article released last week cites a disparity in US consumer spending with lower-income earners spending less and higher-income earners continuing their normal spending patterns. If your business is targeting the high-end consumer, it is possible your business is not seeing a significant impact. But, if your target market is the lower-income market, then you may be seeing more drastic impact on demand.

As a manufacturer of fast-moving consumer goods, you must think about how you deploy the scarce resources you have, to increase demand while still creating incremental value at the retail level and doing so in keeping with the bifurcation of consumer spend rates noted above. In a world where inflationary pressures persist, this is no easy feat. Creating incremental value while increasing demand entails evaluating your value chain for efficiencies to understand where you can focus on negotiating for incremental value for your business while simultaneously looking at ways to create additional demand within the constraints of your price elasticities.

Let me say that in a more digestible format. Are there opportunities to create more value for your business, from procurement and sourcing to supply chain, sales and demand creation (shopper marketing), without overburdening the consumer? When considering the profile of the stretched consumer from above, it is important to consider the market positioning of your offerings in terms of price.

Anecdotally, I have had the opportunity to work with a client that has established a negotiation board to support their sales organization. But on that board sits representatives from marketing, procurement and supply chain.

The conversation on that board is about maximizing value across the value chain and each party weighs in on how they can contribute to increase not just the margin, but the value to the consumer. It’s a fascinating process designed to increase shareholder value while increasing consumer demand.

Going through the process of evaluating the value chain for opportunity, consider your supplier segmentation that feeds the market position of the impacted products and where it makes sense for both parties to create value versus your company to extract value. Similarly, consider your customer segmentation and where it makes sense for both parties to create value versus extract value. Sounds pretty easy, right? Because this is what synergistic functional alignment looks like. The challenge is, despite what most companies think, that synergistic functional alignment doesn’t always exist nor is it aligned enough to execute negotiation effectively across the value chain.

When executive leadership talks to me, often they speak of the synergistic workings of their organization’s internal mechanisms from sourcing through to the consumer. This horizontal integration needs to exist to maximize the potential of the value of the business and this is a place where strategic leadership is often viewed as lacking. For those who can view the transformation points internally and externally, great! But, if you need a hand doing so, give me a ring. For those that know me well, you know I won’t answer, but I will call you back.

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About the author

Scott Chepow joined The Gap Partnership in 2015 and is currently a Partner leading negotiation solutions and behavioral programs worldwide for some of our largest clients. He is a professional in business development, sales and marketing with over 20 years of experience. He has been successful in maximizing market opportunity, achieving significant growth, and bringing new products to the market.