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Will the correction in commodity prices boost CPG margins?

Ingredient costs for consumer packaged goods have risen faster than prices, leading to margin pressure

Has CPG ingredient inflation peaked? 

I can only speculate whether the recent pullback in commodity prices will continue, but with crude oil off its high, crop prices well off their highs, many supply chain issues being worked through, retailers discounting prices to clear bloated inventories and the freight spot markets under pressure, inflation may not continue at 40-year highs for much longer. Agriculture futures are reacting to an expectation that bumper crops may offset disruptions from the war in Ukraine, and the retreat in oil prices reflects a recent production increase as well as demand destruction caused by higher prices.  

In the past week, corn futures for December 2022 delivery have retreated to their lowest levels since before Russia invaded Ukraine. Source: Barchart.com, Inc. 

A CPG gross margin recovery?  

In the past 18 months, most CPG companies saw their costs rise faster than they expected and at a rate brisker than they could pass those costs along through the retail channel. As a result, CPG companies’ gross margins were pressured with contraction of several hundred basis points on average. 

With some input costs stabilizing and steeper retail price increases taking hold, CPGs are eager to halt the margin contraction. So far, the public CPGs mostly have been highlighting their expectation that in the next year they can recover their dollar increase in costs with higher retail prices. (The implication is that gross margin, as a percentage, will continue to contract). 

Since retail prices change slower than input costs, it stands to reason that if CPG margins contract when commodity prices rise, margins should expand as commodity prices fall. But that requires CPGs to be nimble when dealing with retailers. If commodity prices stop rising, the window may close on CPGs’ ability to fully pass on their costs through the retail channel. Potentially, retailers will only be accepting of price increases as long as they can independently see the prices of raw materials and ingredients rise as they conduct their own audits of suppliers’ pricing proposals. CPGs have successfully pressed for steep price increases of late — for example, General Mills’ guidance for a 15% retail price increase in the next fiscal year. 


Since retail prices move more slowly than ingredient and commodity costs, it could still be several months before consumers receive a break on food prices at stores even if the recent pullback in commodities proves to be the start of a trend. With retail prices still rising, demand elasticity remains perhaps the biggest uncertainty for the CPG industry in the coming months. So far, most CPGs have reported that elasticities remain below historical levels, although most are expecting them to increase going forward.  

Freight rates on the spot market (green line) have fallen sharply since the first quarter. Lower spot rates typically lead to lower rates in the contract segment (blue line), the market that most CPGs participate in. Source: FreightWaves SONAR

Will Amazon become a CPG behemoth? 

Most CPG items are still purchased at grocery stores or big-box retailers. However, there is a large and growing demographic of mostly busy professionals who prioritize convenience and “use Amazon for everything.” Once a household subscribes to Prime and considers the value of the lost time associated with shopping at physical stores, buying CPG items on Amazon becomes justifiable for many. 

This Prime Day, Numerator, a data and tech company, expects Amazon’s market share of CPG sales to be at least 20%, its highest ever, and above Amazon’s CPG market share on Prime Day 2021 and Prime Day 2020 of 19.1% and 18.3%, respectively. On regular days, Amazon’s share of CPG sales is about 4% to 5% and growing. 

As Amazon becomes a larger player in CPG sales, I expect that will present opportunities for smaller and emerging brands to take share from the largest and most established national brands that have long commanded premium shelf space at the biggest retailers. The trend also elevates the importance of targeted online advertising. 

Poor rail service persists

With containers dwelling for extended periods at the West Coast ports and Union Pacific receiving a regulatory order to better serve poultry processors, the need to improve rail service is one issue that has earned bipartisan support

Lately, a debated topic has been whether intermodal service will be as poor in this year’s third quarter as last year’s third quarter or whether service will improve in the second half. Clearly, there are some similarities now to last year’s third quarter — chassis availability is still tight, there is congestion at intermodal facilities, and drayage demand remains elevated. But there are a few reasons why congestion may prove to be less severe — the domestic container fleet is growing, railroads are adding crews, and rails are under more regulatory pressure to improve service levels. Most of all, it’s unclear how well volume will hold up given all the macroeconomic pressures likely to weigh heavily on freight demand. 


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Michael Baudendistel

Mike Baudendistel is an analyst and Market Expert at FreightWaves focusing on the railroad, intermodal and transportation equipment industries. Prior to joining FreightWaves, Baudendistel served as a senior sell-side equity research analyst covering the publicly traded railroads, suppliers that manufacture and lease railroad equipment, and suppliers that manufacture trucks, trailers, engines and other components. He has 14 years of experience following the freight transportation industry with experience that also touched the truckload, Jones Act barge and domestic logistics industries. He is a CFA Charterholder.