What are consumer packaged goods (CPG)?
Definition
– Consumer packaged goods (CPG) are items people use in everyday life that are consumed or worn out quickly and therefore need to be bought again frequently. Typical categories include packaged food and drinks, personal-care and cosmetic products, household cleaners, and other staple items.
Key characteristics (short list)
– Short usage cycle: products are bought, used up, and repurchased regularly.
– Packaged for retail: packaging is designed for recognition and to stand out on shelves.
– High turnover and fierce brand competition: many brands compete for the same shoppers; switching costs for consumers are low.
– Resilient demand: sales tend to be steadier than big-ticket purchases during economic slowdowns.
Concrete examples
– Food and beverages: bread, frozen dinners, soft drinks.
– Personal care and cosmetics: toothpaste, shampoo, makeup, nail polish.
– Household and cleaning products: laundry detergent, surface cleaners.
CPG versus durable goods
– CPG: low unit price, frequent repurchase, short useful life.
– Durable goods: higher price, expected to last years, purchase decisions are more deliberate (examples: refrigerators, cars, computers).
– Economic sensitivity: consumers are more likely to postpone buying durable goods in a downturn; purchases of CPGs are trimmed, downgraded, or shopped more frugally but rarely stopped altogether.
Where CPG products are sold
– Traditional retailers: grocery stores, supermarkets, drugstores, big-box stores.
– Online channels: e-commerce marketplaces (e.g., Amazon), brand websites, and grocery-delivery services (e.g., Instacart).
Who are the big players?
– The industry includes large multinational firms with recognizable brands. Recent industry lists of top revenue-generating companies include names such as Nestlé, LVMH, PepsiCo, Procter & Gamble, Unilever, Coca-Cola, Tyson Foods, and others.
How recessions typically affect CPG sales
– Overall demand for basic CPGs is relatively steady. During downturns consumers often:
– Trade down to cheaper private-label or lower-priced brands.
– Shift consumption patterns (for example, more at-home substitutes for services).
– Maintain purchase volumes for necessities, but reduce discretionary or premium CPG spending.
– Some categories may even see growth in recessions if consumers substitute away from higher-cost services (e.g., at-home beauty products replacing salon services).
What CPG companies worry about
– Shelf space competition and the need for ongoing marketing spend to retain or grow brand awareness.
– Managing inventory and accounts receivable efficiently in a high-volume, low-margin business.
– Product innovation to match changing consumer tastes.
Investor-oriented checklist (for evaluating a CPG company)
1. Product mix and brand strength: Are there leading brands or differentiated products?
2. Distribution footprint: Is the company well-placed in both physical retail and e-commerce?
3. Pricing power: Can it maintain margins or does it compete mainly on price?
4. Marketing intensity: How much is spent on advertising and is it effective?
5. Supply-chain risks: Dependence on a few suppliers or single-plant manufacturing?
6. Working-capital efficiency: Check inventory turnover and accounts receivable trends.
7. Balance sheet: Cash, debt levels, and margin stability.
8. Innovation and product pipeline: Ability to respond to changing tastes.
Simple worked example — inventory turnover and interpretation
Inventory turnover measures how many times inventory is sold and replaced over a period. A basic formula:
– Inventory turnover = Cost of goods sold (COGS) / Average inventory
Example numbers (annual):
– COGS = $500 million
– Average inventory = $50 million
Inventory turnover = 500 / 50 = 10
Interpretation:
– Turnover of 10 means the company cycles through its inventory 10 times per year.
– Days inventory outstanding (DIO) = 365 / turnover = 365 / 10 = 36.5 days
– For CPG firms, higher turnover and a lower DIO typically signal efficient movement of fast-selling items; unusually low turnover could indicate slow-moving SKUs, overstocking, or distribution issues.
Practical tip for students and traders
– Compare turnover and DIO
against peers and historical averages, and adjust for seasonality and product mix. Below are concrete metrics, formulas, worked examples, and a practical checklist you can use when analyzing a CPG (consumer packaged goods) company.
Key inventory and working-capital formulas (define jargon on first use)
– Inventory turnover = Cost of goods sold (COGS) / Average inventory.
– Days inventory outstanding (DIO) = 365 / Inventory turnover. (DIO measures the average number of days inventory sits before sale.)
– Days sales outstanding (DSO) = 365 / (Revenue / Average receivables) or = Average receivables / Revenue × 365. (DSO measures how long customers take to pay.)
– Days payable outstanding (DPO) = Average payables / COGS × 365. (DPO measures how long the firm takes to pay suppliers.)
– Cash conversion cycle (CCC) = DIO + DSO − DPO. (CCC is the net time cash is tied up in working capital.)
Worked example — put numbers on the formulas
– Given (annual): Revenue = $1,000m; COGS = $500m; Average inventory = $50m; Average receivables = $123m; Average payables = $82m.
– Inventory turnover = 500 / 50 = 10 → DIO = 365 / 10 = 36.5 days.
– Receivables turnover = 1,000 / 123 ≈ 8.13 → DSO = 365 / 8.13 ≈ 44.9 days.
– DPO = 82 / 500 × 365 = 59.9 days.
– CCC = 36.5 + 44.9 − 59.9 = 21.5 days.
Interpretation: a CCC of ~21.5 days means the company, on average, waits ~21.5 days between paying suppliers and collecting cash from customers. Shorter CCC is generally better for cash flow, but industry norms vary.
Other financial ratios and measures that matter for CPG
– Gross margin = (Revenue − COGS) / Revenue. Tells how much the company retains after production costs.
– Operating margin = Operating income / Revenue. Captures operating efficiency including SG&A (selling, general & administrative expenses).
– SG&A-to-sales = SG&A / Revenue. In CPG, high promotional spend or advertising can push this ratio up.
– Advertising-to-sales = Advertising expense / Revenue. Use to gauge promotional intensity and potential margin pressure.
– Net debt / EBITDA = (Debt − Cash) / EBITDA. A leverage measure: watch this for capital allocation and bond covenant risk.
– Free cash flow (FCF) = Operating cash flow − Capital expenditures. FCF shows cash available for buybacks, dividends, debt paydown.
How to compare companies (step-by-step checklist)
1. Peer and time-series comparison: For each metric above, compare the company to direct competitors and to its own five-year trend. Note seasonal swings (holiday quarters, back-to-school).
2. Adjust for channel mix: Direct-to-consumer sales often have higher margins but slower receivables; retail/wholesale channels change working capital dynamics.
3. Check promotional intensity: Rising advertising-to-sales or trade promotion spend can lift short-term volume at the expense of margin.
4. Inspect SKU and distribution notes in filings: Many CPG performance issues trace to SKU proliferation, product delisting, or shifting shelf space.
5. Review procurement exposure: Identify commodity inputs (palm oil, sugar, grain, plastics) and check whether the company hedges price risk.
6. Examine contract terms: Slotting fees, promotional allowances, and chargebacks can materially affect reported revenue and margins—read MD&A and footnotes.
7. Calculate CCC and its drivers: If CCC is lengthening, determine whether inventory buildup, slower collections, or shorter payables is the cause.
8. Quality of earnings: Reconcile net income to operating cash flow; large gaps can signal aggressive accounting or timing issues.
9. Valuation context: Use EV/EBITDA and P/E versus peers, but adjust for cyclical input costs and promotional cycles.
10. Scenario checks: Stress-test margins under commodity-price increases (e.g., +10% raw-material cost) to estimate EPS
11. Channel and customer concentration: quantify sales by channel (grocery, mass, club, e‑commerce) and by top customers. Large buyers (retail chains, wholesalers) can demand deeper discounts or slotting fees. Calculate percent of revenue from top 1–5 customers and test contract renewal timing.
12. Private‑label risk: estimate share of category sold as private label in core markets. Rising private‑label penetration compresses pricing power and margin. Check management commentary on loyalty programs, innovation pipeline, and price/mix strategies that defend branded share.
13. SKU rationalization and product lifecycle: high SKU counts raise supply‑chain and promotional complexity. Look for initiatives to delist low‑velocity SKUs, which can cut carrying costs. Track R&D/innovation spend versus sales to see if new SKUs are being funded sustainably.
14. Marketing ROI and promotional intensity: calculate marketing-to-sales ratio and trade spend as a percent of sales. High promotional intensity boosts volumes short term but reduces long‑run brand equity. Ask whether promotions are driving incremental volume or just shifting timing.
15. Input‑cost passthrough and hedging policy: determine which costs management can pass to consumers and the lag. Read risk‑management/disclosures to find hedging instruments and hedge horizons. A simple sensitivity: estimate percent of cost increase that can be passed through within 6–12 months (e.g., 40–80%).
16. Currency and geographic exposure: map revenue and cost base by currency. If costs are local but reporting currency is different, FX moves can hit margins. For cross‑border operations, check natural hedges and use of forwards.
17. Capital intensity and scale benefits: compute operating capital per dollar of sales (working capital + PPE) and return on invested capital (ROIC = NOPAT / invested capital). CPG firms benefit from scale — declining ROIC can signal structural issues or heavy reinvestment.
18. Regulatory, sustainability and supply‑chain risk: identify reliance on regulated inputs (palm oil, sugar) or regions with political risk. Sustainability commitments can mean near‑term costs (labeling, sourcing) but long‑term brand protection. Check disclosures for contingent liabilities and recall history.
19. Management incentives and corporate actions: read the compensation section to see if pay encourages short‑term sales at the expense of margin (e.g., sales‑volume bonuses). Track M&A history and whether divestitures improve focus or are used to hit short‑term targets.
20. Dividend policy and cash return mechanics: CPG stocks often pay dividends. Ask whether dividends are covered by free cash flow (FCF = operating cash flow − capex) and whether buybacks are opportunistic or used to maintain EPS per share.
21. Modeling checklist for scenario analysis
– Base inputs: revenue, gross margin, SG&A, capex, working capital days (DIO, DSO, DPO), tax rate, shares outstanding.
– Define scenarios: base, downside (commodity +10%), stress (commodity +20% and 5% volume decline).
– Timing/lags: assume cost passthrough delay of 1–3 quarters; apply input increases to COGS in the appropriate period.
– Output metrics: EBIT, NOPAT, free cash flow, EPS, EV/EBITDA, dividend coverage.
– Sensitivity table: show EPS or EBITDA change per 1% move in key inputs (commodity cost, volume, price).
22. Worked numerical example — +10% raw‑material cost
Assumptions (simple annual model)
– Revenue = $5,000m
– Gross margin = 30% → COGS = 70% of revenue = $3,500m
– SG&A = $800m
– Tax rate = 21%
– Shares outstanding = 200m
Base case
– Gross profit = Revenue − COGS = $1,500m
– EBIT = Gross profit − SG&A = $700m
– Net income = EBIT × (1 − tax rate) = $700m × 0.79 = $553m
– EPS = Net income / shares = $553m / 200m = $2.77
Stress case: raw‑material costs +10% (apply to COGS)
– New COGS = $3,500m × 1.10 = $3,850m
– New gross profit = $5,000m − $3,850m = $1,150m
– New EBIT = $1,150m − $
800m = $350m
– New net income = New EBIT × (1 − tax rate) = $350m × 0.79 = $276.5m
– New EPS = New net income / shares = $276.5m / 200m = $1.3825 ≈ $1.38
Comparison to base case
– EPS drop = $2.77 − $1.38 = $1.39
– Percent change in EPS = ($1.39 / $2.77) × 100% ≈ 50.2% decline
– Net income drop = $553m − $276.5m = $276.5m (50.0% decline)
Interpretation and key assumptions
– With SG&A fixed at $800m in this simple annual model, a 10% increase in raw‑material costs (applied to COGS) cuts gross profit by $350m and halves both net income and EPS. This illustrates operating leverage: fixed operating costs amplify the effect of changes in gross margin on profitability.
– Main assumptions: revenue unchanged, SG&A fixed, tax rate constant at 21%, COGS fully absorbs the raw‑material increase, no other cost offsets or pricing actions by management.
– Limitations: real firms may raise prices, cut discretionary costs, use hedges, or face volume changes; multi-period effects (inventory accounting, working capital, input timing) are ignored here.
Quick checklist for running similar stress tests
1. Fix your base assumptions (revenue, margins, SG&A, tax rate, shares).
2. Apply the cost shock to the appropriate line (COGS, SG&A, etc.).
3. Recompute gross profit → EBIT → net income → EPS step by step.
4. Calculate absolute and percentage impacts versus base case.
5. Note behavioral and accounting responses the model omits (price changes, hedges, inventory methods).
Reputable references for further reading
– Investopedia — Gross Margin: https://www.investopedia.com/terms/g/grossmargin.asp
– Corporate Finance Institute (CFI) — Earnings Per Share (EPS): https://corporatefinanceinstitute.com/resources/knowledge/finance/earnings-per-share-eps/
– U.S. Securities and Exchange Commission (SEC) — How to Read a 10-K: https://www.sec.gov/fast-answers/answersreada10khtm.html
Educational disclaimer
This is an illustrative educational example, not individualized investment advice or a forecast. Real financial modeling should incorporate company‑specific detail, dynamic responses, and accounting practices.