As the economy surges, inflation pressures are becoming more widespread. Everywhere you look, there are headline-grabbing reports of rising prices. Some areas where inflation is acute are in industrial commodities such as lumber and steel, while inflation in other areas directly impacts CPG companies such as agriculture, meat, packaging and freight costs. While those issues may prove transient, one issue that may be generational is slowing revenue growth as a result of a record decline in the birth rate, as reported this week. Unlike many industries, sales in the CPG industry scale more with the number of people consuming them than with income levels or economic growth levels.
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Total U.S. births in 2020 were the lowest since 1979 and represented the lowest birth rate of all time. Every year the statistics on birth rate come out, and every year, the U.S. birth rate seems to hit a new low since the data was first collected in 1930. Still, there is something about a 1.64 lifetime birth rate per woman in 2020 that seems rather apocalyptic when the replacement rate is 2.1 births per woman and immigration has also slowed. Plus, the volume of U.S. births declined each year from 2009 to 2020 with the exception of one year during that time frame even with steady economic expansion throughout that period. While the pandemic worked to reduce the birth rate last year, its impact was mainly limited to December, which saw birth rates drop sharply not just in the U.S. but in many developed economies around the world.
As a result of the pandemic, The Brookings Institution estimates that 300,000 fewer babies will be born in 2021 than were born in 2020. When the pandemic hit, it was unclear whether it would give rise to a baby boom or bust. Now, it’s safe to say it’s the latter. In the CPG world, that means not only fewer diapers and wipes purchased this year, but less of every other category of CPG purchased in future years. It also means slower growth rates for transportation services since the overall tonnage of freight moved on a per capita basis tends to be fairly consistent. In other words, while various transportation modes and companies compete for a share of the transportation pie, the number of people determines the size of the pie.
This week, The Honest Co. performed in defiance of the declining birth rate by increasing 44% on its first trading day. Shares of The Honest Co. (a company started by actress Jessica Alba that makes baby products and personal care products) started trading on the Nasdaq Wednesday, appreciating from $16 to $23. Shares then retreated to close at $20.58 on Thursday, bringing the market cap to $1.8 billion. I expect The Honest Co. to be closely watched now that it is public because it is a test of consumers’ willingness to pay a premium for products that fit the company’s ethos for natural ingredients. Many much larger CPG companies have been purchasing brands that fit into the “better for you” category that The Honest Co. competes in. I believe the company makes a strong case that it has considerable room for growth as it bolsters its omnichannel strategy and rolls out new products. The company argues that the categories are growing 9%-10% versus 1%-2% growth for the large and established companies in the space.
Chicken prices are soaring amid cost pressure throughout the supply chain. Inflation is rampant throughout supply chains, and prices for chicken wings and skinless chicken breast meat are other examples that made headlines this week. Wingstop reported that it’s paying 26% more for bone-in chicken wings this year, while smaller chains and independent restaurants are reporting chicken stockouts. Some are blaming this on the fad of fast food chains offering new chicken sandwiches, but it’s clear that chicken producers’ input costs are rising as well. The rising chicken prices should alleviate some of the cost pressures that poultry producers are facing from rising feed prices.
Beyond Meat reported a larger loss in Q1 than analysts were expecting. The company reported EPS of -42 cents versus the consensus estimate of -21 cents and the 6 cents in EPS the company reported in Q1 2020. With year-ago comps more difficult this quarter, revenue of $108.2 million in Q1 2021 only grew 11.4% y/y, which is far below the close to triple-digit revenue growth increases in recent quarters. Beyond Meat has been a controversial stock given its high valuation, continued losses and tough competition (both from direct competitors like Impossible Foods and from established players like Tyson, which plans to launch competitive meat alternatives shortly) with a short interest often exceeding 25%. The company recently rolled out version 3.0 of its products that have a “new meatier taste.”
Kellogg’s results are the latest indication that consumers’ pandemic snacking habits are sticking. Shares of Kellogg rose 7% on Thursday after beating analyst estimates and raising guidance that the company first issued in February. Results were boosted by a 3.5% organic revenue increase in the snacking division, which the company has seen accelerate even as the economy is reopening. Some of the other largest snacking companies, such as Pepsi (which owns Frito-Lay) and Mondelez (maker of a wide range of snacks including Oreo) have also indicated that consumers have maintained their snacking habits, at least so far. The company is about three-quarters hedged on input costs during the first half of this year before an expectation that cost pressures will intensify in the second half.
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