• by Karlene Lukovitz  @KLmarketdaily, February 12, 2007

Consumer packaged goods sales grew 2.5% in 2006--not a banner year, but one more in line with historic norms than 2005's poor 1.6% growth, according to the just-released "2006 CPG Year in Review" report from Information Resources, Inc. (IRI).

Faced with lingering effects from 2005's devastating hurricanes (record oil prices, damaged sugar crops) and other challenges, CPG marketers "worked hard to create growth opportunities," noted IRI Global Chief Marketing Officer Andrew A. Salzman.

Emphasis on functional foods and life-simplifying products, as well as new formats and targeted marketing strategies in the grocery channel, were key factors.

But dollar sales also reflected price increases, as many CPG marketers called a halt to absorbing the rising costs of raw materials, packaging (in part reflecting 05's sweeping new labeling regulations), equipment and plants.

Overall CPG prices climbed 4.1%, and many categories saw jumps between 9% and 15% (granulated white sugar prices jumped 14.8%; garbage bags, 14.1%; baby food, 10.7%; toilet tissue, 10.5%). All of this contributed to a sharp rise in the index of core personal consumption prices (it showed a 2.9% annualized rate in second-quarter 06), which is closely watched by the Federal Reserve.

Among CPG retail channels, drug stores continued to show the greatest growth (4%), recapturing share from mass, grocery and other channels through aggressive Medicare Part D outreach and strong performance in core categories (healthcare, beauty/personal) and convenience foods.

The grocery channel leveraged new formats to eke out a 1.1% gain, after a flat 2005. The mass channel grew 2.5%, but showed signs of maturation: Wal-Mart's 18.5% share of CPG dollar expenditures represented an uptick of just 0.5% versus 2005. Supercenters' growth continues to slow, as do overall channel migration rates.

Category highlights:

Beverages led growth again, with a 4.7% overall gain and healthy increases in nearly every segment--notably, 20%+ gains in energy drinks and ready-to-drink coffees/teas.

House care, driven by innovation in householder cleaner cloths and laundry care, jumped 4.6% (versus 1.3% in 2005).

Pet care (3.9%) and beauty/personal care (3.8%) were close behind. Bakery (3.4%), snacks (2.9%) and frozen (2.9%) also performed solidly.

Healthcare rose 3.3%, driven by anti-smoking tablets (24.8%), anti-smoking gum (17.3%), sleeping remedies (9%) and gastrointestinal tablets (7.8%).

"Light" products are losing ground rapidly, as consumers shift from focusing on weight to focusing on overall health. Low-carb product sales plummeted 49.4%, while all other light products rose just 1.1%.

"This year, we saw a considerable shift in health and wellness priorities among consumers," Salzman told Marketing Daily. "Contrary to the past several years, health is not equated with weight in consumers' minds; consumers are actively looking for better nutrition and health benefits, and this shifting focus is reflected in product and brand performance."

General merchandise continued to slide, posting a 4.7% loss on top of 2005's 8.2% drop.

Key trends for 2007 and beyond spotlighted by IRI:

Continued robust growth of functional foods and beverages (sales are projected to jump from $36 billion in '06 to $60 billion by '09--particularly products offering antioxidants, heart protection, digestive aid or weight loss claims.

A growing number of gourmets, with the market for gourmet food/beverage products projected to grow 11% per year by 2009, to $62 billion.

Significantly growing focus on marketing and merchandising for younger children. The U.S. is officially in the midst of a new baby boom. Over the next decade, kids under age five will increase in number by 10%, and those ages 6-12 by 4% (the number of teens will decrease).

Growing influence of environmental and social issues, leading to increased focus by consumers, manufacturers and retailers on fair trade products, eco-friendly packaging, local sourcing and organic products.

Healthcare as the new retail battleground. The needs of aging baby boomers will drive marketing of prescription and OTC remedies, foods/beverages that offer health benefits, and healthcare information services. Retail trends will include on-site health clinics, online/in-store educational materials, and pharmacy marketing/promotion.

Packaging as in-store marketing vehicle. As displays and other traditional types of in-store marketing become less viable due to the proliferation of products and limited store space, marketers will need to use packaging more effectively to grab consumers' attention and convey product benefit messages.