Portfolio and performance: Priorities for CPG leaders

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What will it take for the consumer goods industry to turn its fortunes around? Once a leader in total shareholder returns (TSR), the industry has fallen from the top to the bottom quartile in TSR performance.  Four megatrends that have led to this reshaping of the P&L [profit and loss] are:

1. Overall macroeconomic has slowdown. Population growth has been stagnating, and wealth expansion is slowing in both developed and developing markets. Developing markets are critical here because they have been 70 percent of the growth of the overall CPG industry over the past couple of decades.
2. Consumer fragmentation, driven mostly by the shift to digital. At this point, 75 percent of all advertising spend is digital, which is a sea change for the mass-market brand-building model that CPGs used to use. While many have been doing a lot to change and evolve their models, they haven’t done as much as some other industries have, so CPG is behind in its use of digital channels. That makes it harder for them to get their brands in front of consumers.
3. Mass-merchant squeeze. Supermarkets have been the most important trading partner for most consumer goods players for a long time, but overall they have been losing share.  This has resulted in supermarkets struggling with their own profitability, which has made them tougher trading partners. They’re pushing down prices, becoming tougher negotiators, using more buying alliances, and investing in private label quality and promotion.
4. The issue of escalating and volatile costs. We’re clearly still in an inflationary period; it’s lessening but not reversing. And we have ongoing rates of crop failure and other sources of cost driven by climate change. It is expected that costs will remain elevated above 2019 levels for some time.

How should companies stay abreast of the evolution of these megatrends? It calls for action on six topics.

The first is portfolio reshaping, which is about getting more exposed to high-growth categories and geographies through resource allocation, and also how you use M&A and divestments to refresh your portfolio. Leaders need to reallocate 5 percent of their resources each year for this reshaping.  A second benchmark is to have 20 to 30 percent of your revenue coming from new sources—new categories or geographies—every decade.

That brings us to Agenda 2: performance. The first topic here is “truly scaling commercial excellence,” and the benchmark is to be taking share in 80 percent or more of your revenue. The next topic is “the marketing revolution.” We are all talking about the ways in which generative AI [gen AI] can empower marketers to drive more relevant marketing and a much greater level of personalization so that digital is at least 75 percent of their marketing spend and half their digital marketing spend is gen AI-assisted.

The next topic is “owning the premiumization and category expansion in your categories”—having two times your fair share when it comes to the premium segment in your categories and new category growth. And the final topic is “reinventing productivity.” All players need to be thinking about their next 250 basis points of cost reduction, which is going to require more automation and more demand management than in the past, because a lot of the more obvious levers have already been pulled.

It’s useful for executive teams to assess where they are today: “Compared to this benchmark, where would you say you stand today? Which of these would move the needle the most for you?” We are not saying that, to lead, a CPG needs to excel at all of these topics. Instead, it needs to make good progress, be in good shape, and then it needs to pick a few where it’s really going to stand out in front.

3 key takeaways from the article

1. What will it take for the consumer goods industry to turn its fortunes around? Once a leader in total shareholder returns (TSR), the industry has fallen from the top to the bottom quartile in TSR performance.
2. Four megatrends that have led to this reshaping of the P&L [profit and loss] are: overall macroeconomic has slowdown; consumer fragmentation driven mostly by the shift to digital; mass-merchant squeeze pushing them to down prices, becoming tougher negotiators, using more buying alliances, and investing in private label quality and promotion; and finally escalating and volatile costs.
3. To sail smoothly or enabling the companies to sail through these mega trends requires actions on six topics: portfolio reshaping to ensure that 20-30 revenue comes from new sources, performance-truly scaling commercial excellence, the marketing revolution driven by AI, owning the premiumization and category expansion in your categories and finally reinventing productivity.

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