Imports provide a glimpse into how companies expect consumers to spend for the rest of 2023.
Key takeaways
Understanding the core consumer will enable strategies to drive margin improvement.
Investment in predictive analytical tools and data analytics platforms will be critical.
Companies should evaluate generative AI and other technologies for their business.
Data analytics technology will be key for many middle market companies
As consumer goods businesses plan for the coming months and years, one thing is clear: Strategic investment will be critical to growth in a post-pandemic economy. Targeted investments in the appropriate technology tools will allow companies to leverage broader market trends and improve profitability.
Lagging imports guide expectation for remainder of year
Robust consumer spending throughout the pandemic led consumer goods companies to increase their inventory purchases in 2022. Imports from overseas suppliers have declined in 2023, compared to 2022, a trend that points to concerns around unsold inventory and an unwillingness to overexpose balance sheets given shifting consumer demand towards travel and experiences.
As many companies continue to contend with elevated inventory levels, product discounts will likely be a key strategy to move excess products for the rest of the year. However, even as materials costs have receded from recent highs, slow-moving inventory may put further pressure on future margins. Foreign imports data from IHS Markit for major consumer goods product categories—apparel; electronics, TV and sound equipment; furniture; and toys, games and sporting equipment—shows that, on a year-over-year basis, imports (on a 20-foot-equivalent unit, or TEU, basis) have declined each month since September 2022 across all product categories.
This is not overly surprising given the continued focus on inventory levels in several major public company earnings releases since the summer of 2022. However, 60% of middle market executives polled for the second quarter RSM US Middle Market Business Index said they continue to plan for inventory growth in the coming months, even as some consumers, most notably those in the lower two income quartiles, reevaluate their purchasing power on discretionary products.
After years of bullish consumer spending on goods, the tide has shifted, and consumers are focusing more on services and experiences. Meanwhile, they are more mindful of product value, and companies have returned to discounting to attract in-store and online traffic and unload excess inventory.
TAX TREND: Inventory management
Consumer goods companies taking steps to normalize their inventories can manage costs by understanding how their indirect tax obligations may change as they increase business activity in new jurisdictions.
A thorough evaluation of consumer buying trends and product movement will be critical for companies looking to drive margin improvement. For many middle market companies, this likely means targeted investment in data analytics technology to better evaluate the performance of both the company and its products. While the current interest rate environment makes borrowing more expensive, there is a silver lining. Higher lending costs will put a premium on the appropriate investment strategy and will limit the ability of businesses to make several significant investments at once.
Understanding consumer strength is critical to future growth
Overall, delinquencies of consumer debt remain low; however, debt analysis by age bracket shows cracks forming, most notably among 19- to 39-year-olds, according to a recent New York Federal Reserve report. In addition, repayment of federal student loans is set to resume later this year, putting more pressure on spending by younger consumers.
Many companies experienced high profitability over the past three years, aided by bullish consumer demand. Now, amid financial pressure and the shift in demand from goods to services—a shift noted by major credit card companies in recent earnings calls—analytical tools to understand companies’ core consumers and their financial stability will be critical in determining purchasing, discounting and expansion strategies.
Make investments in the right tools, not just the popular ones
Over the past two years, much has been discussed about the benefits of expanding into the metaverse. But the popularity of the metaverse has waned following the excitement surrounding the release of ChatGPT—the latest shiny technology object—and potential business use cases for generative AI.
As shown in the chart, mentions of AI and the metaverse have been relatively consistent on consumer products earnings calls over the past two years, peaking in the first quarter of 2022. More recently, mentions of technologies in the context of inventory and supply chain have risen, signaling that companies are seeing an opportunity to use AI and other modern technologies to better evaluate and address those challenges.
The exact benefits of generative AI tools are still being assessed, and we likely won’t see wholesale productivity changes from their use for some time. But middle market executives should evaluate the available options, including predictive analytics, and start strategizing now to determine the best AI tools for their business.
CONSULTING INSIGHT: Generative AI
Generative AI is revolutionizing the development and delivery of products and services, and many organizations are working to understand how to use this technology. Learn how you can capitalize on the generative AI trend, increase value and mitigate risk.
Technology can help companies expand into new regions, product lines, and audiences, at lower costs. Public companies understand this and are using these tools to help provide stockholder value. Middle market companies will need to do the same to remain competitive.
TAX TREND: Technology investment
For consumer goods companies investing in data analytics and other technologies to evaluate business performance and strategy, embedding modern tax applications into business transformation programs can be a strategic differentiator. Involve the tax function at the outset of any project to promote an effective integration.
Originally published by RSM US.
RSM contributors
