According to a new report from management consulting firm Bain & Company, the consumer products industry experienced significant growth in the past year, with a global increase in retail sales value (RSV) of nearly 10 percent compared to the previous year. However, this growth was primarily driven by price increases rather than increased sales volume, with price increases accounting for 75 percent of the RSV growth in the U.S. and Europe. This imbalance is not sustainable, and future profitable growth in the consumer packaged goods (CPG) sector will rely on emerging markets and volume-driven strategies.
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Bain & Company’s first annual Consumer Products Report highlights the impact of rising input costs on the decoupling of price and volume growth. A survey of over 120 senior consumer products executives worldwide revealed that 82 percent of respondents identified inflation as a major challenge for their business in the previous year, making it the most significant issue for executive teams.
“As inflation slows, a paradox is emerging for consumer companies,” said Richard Webster, head of Bain & Company’s global Consumer Products practice. “While on one hand, prices have risen too much to maintain consumer spending, on the other, they haven’t risen enough to keep up with increasing costs and mounting pressures from retailers. Future growth will require a fundamental reshaping of value propositions, portfolios, and business models.”
Slow growth for top CPG companies
Although the consumer products sector as a whole grew by approximately 10 percent in 2023, Bain estimates that top CPG companies experienced an average growth rate of around 4 percent, marking a reversal of several years of strong performance. Consumers, who are being asked to pay higher prices without receiving additional benefits, are shifting towards more affordable private-label brands or premium insurgent brands that offer better value. They are also waiting for promotions or reducing their overall spending. More than half of the executives surveyed reported a significant impact from consumer spending restraint in 2023.
Price increases offset by rising costs
Despite top CPG companies raising prices by an average of over 20 percent since the third quarter of 2021, this increase has been offset by rising costs of goods sold. As a result, the average EBIT margin for top CPG companies remains close to a 10-year low, and retailers are seeking to share their margin pressures with CPG companies. In response, many top CPG companies have implemented cost-reduction measures such as significant workforce reductions or hiring freezes. However, there are limits to the number of cost-saving measures that can be employed, and a return to volume-driven growth is crucial.
Expanding into emerging markets for volume-driven growth
For many CPG companies, expanding into emerging markets will play a crucial role in achieving volume-driven growth. Emerging markets accounted for the majority of global volume gains in 2023. India, in particular, experienced balanced growth, with RSV increasing by nearly 15 percent since 2022, driven by consumers shifting from local or unbranded products to larger international brands. However, capitalizing on the opportunities in emerging markets will require CPG companies to develop new capabilities.
A widening digital gap
Addressing the widening digital gap is also a pressing issue for CPG companies. Those that have made early investments in digitalization have a competitive advantage in key areas. They can leverage vast amounts of data and advanced AI technologies to develop consumer-facing applications that generate revenue and internal applications that drive cost efficiencies. Significant benefits can be gained through automation, such as AI-generated ad copy variations with minimal human input. While digital leaders are focusing on building differentiated capabilities, most CPG companies still need to allocate significant resources to migrate to the latest enterprise resource planning (ERP) software.
Mounting sustainability pressures
The mounting pressure for sustainability is another important factor affecting the CPG industry. Half of global consumers now prioritize sustainability when shopping and are willing to pay a premium of around 10 percent for sustainable products. Retailers are seeking suppliers who can help them reduce direct and indirect emissions as climate-related disclosures become more regulated in many countries. Despite this growing momentum, only about a third of CPG companies are on track to meet their decarbonization commitments across Scope 1-3 emissions. Bain’s survey revealed a lack of urgency on environmental, social, and governance (ESG) issues, with only 20 percent of respondents considering ESG a priority in 2024, even though nearly two-thirds acknowledged its importance and focused on executing existing commitments.
“I believe that companies poised for success this year are those that take decisive actions to restructure their growth strategies, enhance productivity, and leverage the potential of digitalization,” said Faisal Sheikh, a partner in Bain & Company Middle East’s Consumer Products and Retail Practices. “While this unquestionably stands as the foremost objective for consumer products this year, it must ultimately pave the way for sustained long-term growth. Serving all stakeholders—consumers, customers, employees, and the planet—in a balanced way is key to achieving these goals.”
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