DUBAI — 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 percent 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, for example, price increases accounted for 95 percent 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.
In the inaugural Consumer Products report by Bain & Company, a survey encompassing over 120 senior executives in the consumer products sector globally reveals a significant trend: the divergence of price and volume growth, largely attributed to escalating input costs.
A staggering 82 percent of respondents cited inflation as a pivotal factor affecting their businesses in the preceding year, identifying it as the foremost concern 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.”
Although the overall sector experienced approximately a 10 percent growth in 2023, Bain’s analysis estimates that within a subset of top CPGs, the average growth rate was closer to 4 percent, marking a reversal from several years of outperformance.
As inflation slows, a paradox is emerging for consumer companies. 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.
Richard Webster, head of Bain & Company’s global Consumer Products practice
Consumers, confronted with higher prices and no additional benefits, are shifting towards more affordable private-label brands or premium insurgent brands offering enhanced value. Many are also opting to wait for promotions or reducing their purchases altogether. Slightly more than half of executives said they had been significantly affected by consumers reining in spending in 2023.
Despite leading CPGs raising prices by an average of over 20 percent since the third quarter of 2021, this increase has been offset by a comparable rise in the cost of goods sold. Consequently, the average EBIT margin for top CPGs remains close to a 10-year low, prompting retailers to seek shared margin adjustments 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 leveraging their strengths in emerging markets, which offer the greatest potential for volume growth. Emerging markets accounted for most global volume gains in 2023.
India was a standout example of balanced growth, with retail sales value (RSV) advancing by nearly 15 percent since 2022, aided by consumers switching from local or unbranded products to larger, international brands. However, as emerging markets offer opportunities for growth, many will require new capabilities from CPGs.
A Widening Digital Gap
The 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 percent of labor time could be automated in certain functions through measures such as AI-generated 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 migrating to the latest ERP software.
Mounting Sustainability Pressures
The report also revealed that 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 percent more for sustainable products.
On the other side, 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.
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. 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.
Faisal Sheikh, partner in Bain & Company Middle East’s Consumer Products and Retail Practices
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 existing commitments, only 20 percent of respondents said ESG was a priority in 2024.
“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,” he said. Serving all stakeholders—consumers, customers, employees, and the planet—in a balanced way is key to achieving these goals.