Madhav Durbha, Group Vice President, CPG & Manufacturing at RELEX Solutions, looks at the impact of tariffs on beverage manufacturers.
Tariffs have become a significant economic factor for beverage and consumer packaged goods (CPG) companies, influencing production costs and business strategies. For example, Coca-Cola has considered shifting from aluminium to plastic after a 25 per cent tariff was imposed on imported metals under the Trump administration. Tariffs on imported goods have increasingly become a financial challenge for beverage and consumer packaged goods (CPG) companies. These tariffs drive up production costs, impacting everything from raw materials to packaging.
When tariffs are imposed on imported raw materials like fruits, sugar, or aluminium, companies face higher production costs. For example, a beverage manufacturer that depends on imported fruit or sugar will see an increase in ingredient prices. Similarly, tariffs on packaging materials such as aluminium or plastic can further raise costs for beverage and CPG companies. This price increase forces companies to reconsider their packaging choices, though switching to alternative materials is a complex decision. Tariffs can fluctuate unpredictably, making it difficult for companies to plan for long-term packaging strategies.
As costs rise, companies face the dilemma of how to handle price increases. One option is to pass the added costs onto consumers through higher prices. However, this may decrease demand and sales, leading to potential losses. On the other hand, companies might absorb the costs to maintain competitive pricing, which directly impacts their profit margins. Having a flexible pricing strategy is essential to manage these trade-offs effectively.
Another consequence of tariffs is the potential loss of market share. If domestic competitors are less affected by tariffs, they can capture a larger portion of the market, harming the profitability of companies that rely on imported goods. Furthermore, price changes driven by tariffs can shift consumer preferences. For instance, a switch from aluminium to plastic packaging might alienate environmentally conscious customers, even if the change is driven by external factors like tariffs.
In response to these challenges, companies need to adopt scenario planning, to remain competitive and maintain profitability. Scenario planning is crucial for businesses navigating tariff uncertainty. Running simulations for various tariff levels—ranging from modest increases to extreme scenarios—helps companies assess cost implications, diversify suppliers, and develop contingency plans. By anticipating outcomes, businesses can make informed decisions rather than react to disruptions.
Furthermore, automation and advanced technologies enhance resilience. A food manufacturer shifting from an offshore facility to an automated domestic production line can boost productivity, reduce waste, and create workforce upskilling opportunities. Automation improves efficiency, allowing businesses to adapt quickly and focus employees on value-added tasks.
Finally, to manage tariff risks, businesses should assess supply chain vulnerabilities. Leveraging automation and AI enhances efficiency, optimises inventory, and identifies alternative sourcing. Scenario planning helps companies prepare for tariff impacts and develop contingency strategies. Building a resilient supplier network through regional hubs and reducing single-country reliance strengthens supply chains. Prioritising sustainability reduces waste, lowers emissions, and enhances long-term stability. Navigating tariff uncertainty requires a proactive strategy. By adopting technology and diversifying sourcing, businesses can build resilient supply chains for long-term success.
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