Consumer Products Sector at a Crossroads After a Year of Tremendous Growth; With No Room Left on Price, a Return to Volume Growth Will Be Critical in 2024
Bain & Company’s first annual Consumer Products Report finds 75% of global growth was due to price increases in 2023, with emerging markets offering the most opportunity for volume growth in 2024
The consumer products sector has enjoyed a year of tremendous growth, with retail sales value (RSV) for the industry globally rising by close to 10% year over year in 2023. While that surge is nearly double the 10-year average growth rate, three-quarters of it is likely due to price increases rather than volume gains. In the US and Europe, price increases accounted for 95% of RSV growth. That imbalance isn’t sustainable, and emerging markets will be key to driving profitable, volume-driven growth for consumer packaged goods (CPGs) in the years ahead.
Bain & Company’s first annual Consumer Products Report includes a survey of more than 120 senior consumer products executives around the world and underlines just how much rising input costs have contributed to the widespread decoupling of price and volume growth. Some 82% of respondents said inflation had a major impact on their business in the previous year, making it the biggest issue of all 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.”
Though the sector overall grew about 10% in 2023, Bain estimates that across a subset of top CPGs, average growth was closer to 4%, in a reversal of several years of outperformance. Consumers—asked to pay more without getting any extra benefits in return—are switching to more affordable private-label brands or more premium insurgent brands that offer greater consumer value. They are also waiting for promotions or just buying less. Slightly more than half of executives said they had been significantly affected by consumers reining in spending in 2023.
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And while leading CPGs have increased prices by more than 20% on average since the third quarter of 2021, that has been blunted by similar growth in the cost of goods sold. For top CPGs, the average EBIT margin remains near a 10-year low, and retailers have been looking to share their own margin pain with CPGs.
To ease the pressure, half of top CPGs reduced headcount significantly last year or froze hiring, following ongoing cost-reduction measures. But there are only so many cost levers that can be pulled. With no room left on price, a return to volume growth will be critical.
For many CPGs, part of the answer will involve flexing their muscles in emerging markets, which offer the greatest room for volume growth. Emerging markets accounted for the vast majority of global volume gains in 2023. India was a standout example of balanced growth, with RSV advancing by nearly 15% since 2022, aided by consumers switching from local or unbranded products to bigger, international brands. However, as emerging markets offer opportunities for growth, many will demand new capabilities from CPGs.
A widening digital gap
Digitalization of business processes has become more urgent, as performance gaps widen between CPGs that made early investments and those that did not. Digital leaders will have an advantage in key areas over the coming years. They will be best placed to capitalize on vast pools of data and maturing generative AI technologies to develop both consumer-facing use cases that add revenue and internal applications that generate cost efficiencies. The gains are likely to be significant. For instance, as much as 40% of labor time could be automated in certain functions through measures such as AI-generation of ad copy variations with minimal prompting. And while leaders are moving to build differentiated capabilities, most CPGs will still need to focus significant resources on the migration to the latest ERP software.
Mounting sustainability pressures
Half of global consumers now say sustainability is one of their top four considerations when shopping and that they’d be willing to pay about 10% more for sustainable products. And retailers are looking for suppliers that can help them reduce their own direct and indirect emissions as climate-related disclosures move to a more regulated and mandated basis in many countries. Despite this broad momentum, only about a third of CPGs are on track to meet their Scope 1–3 decarbonization commitments. Bain’s survey, meanwhile, showed only muted urgency on environmental, social, and governance (ESG) issues. While nearly two-thirds of executives who cited ESG as a priority are focused on executing on existing commitments, only 20% of respondents said ESG was a priority in 2024.
“This year’s winners will be the companies that make bold moves to reset their growth agendas, while increasing productivity and capitalizing on the opportunities presented by digitalization,” said Charlotte Apps, executive vice president of Bain’s Consumer Products practice. “While this is undeniably the top priority for consumer products this year, that short-term imperative still must lead to longer-term sustained growth. A balanced approach to serving all stakeholders—consumers, customers, employees, and the planet—is a powerful way of achieving those twin goals.”
