Pump up the volume: Actionable approaches for CPG growth

The challenge of declining consumer packaged goods (CPG) unit volumes is an increasingly critical concern across the industry. Over the past three and a half years, U.S. retail channels have seen a staggering drop of 25 billion units, representing an 11% decrease from the total 2020 food and beverage unit volume. This significant decline has raised alarms within the industry.

Traditionally, unit growth has been a cornerstone of the CPG growth model. The question is whether that is sustainable given recent volume trends and our expectation that CPG volumes will continue to decline.  The conclusion we draw is clear: The CPG growth algorithm is broken. The 11% reduction in unit volume spans across various categories, and projections indicate that this downward trend is likely to persist over the next five years.

These volume declines are no passing phase. Understanding the key drivers behind this trend and addressing its critical challenges are essential for CPG leadership teams as they navigate this new reality.

Key drivers of volume declines

Consumers under pressure

Grocery prices have surged by 20% since the pre-pandemic era, placing a significant strain on consumers. Additionally, revolving consumer debt has reached unprecedented levels, while real average weekly earnings for full-time employees have seen a meager increase of just 0.4% over the past year. This economic pressure has made consumers more value-conscious across all income segments. The result? The permissive pricing environment of the post-COVID years has ended, leading to a resurgence in high levels of promotional spending and, consequently, pressuring profit margins.

Shift to away-from-home

Despite the higher costs, dining away from home continues to gain popularity over at-home consumption. This trend has already surpassed pre-pandemic levels and shows no signs of slowing down. Even with similar inflation rates for food at home (20%) and away from home (18%), the shift persists. Projections indicate that the away-from-home share will grow by another 300 basis points, exceeding 61% in the next 3-5 years. Depending on the category, this shift could put considerable additional volume at risk.

Emergence of GLP-1

The rise of GLP-1 medications, which are used to manage weight and diabetes, is another critical factor. These medications are expected to reduce overall calorie consumption significantly. A recent study estimates a reduction of approximately 10 trillion kilocalories annually by 2030. Furthermore, consumers on GLP-1 medications are projected to spend less on food, with an estimated $48 billion reduction in annual food and beverage spending through 2034.

Elevated private label

US consumers are increasingly turning to private labels as they seek better value. Retailers are responding by investing in unique offerings across various value tiers, from good to best. We expect this shift to result in private labels capturing an additional $100 billion in market share over the next 3-5 years. Even after this growth, there will still be a significant private label share gap compared to the UK and Western Europe.

What to do

The implications of the current trends are clear: many CPG companies are likely to face flat or declining volumes over the next five years. This forecast carries significant consequences for the industry. To counterbalance it, consider the following actions:

1. Take an unvarnished look at true brand strength. Conduct an assessment using willingness to pay as your guide. Double down on your power brands and relentlessly shed brands that consumers don’t see as differentiated. If you’re not in the top three in your category, consider strategic options.
2. Re-evaluate your innovation process. Drive truly differentiated new product offerings and put mechanisms in place to identify and kill losing propositions early in the process. Focus innovation on convenience, functionality, and either better-for-you or indulgence.
3. Ensure leading revenue growth management. Ensure leading capabilities across trade promotion optimization, pricing, price-pack architecture, and product portfolio. Prioritize investment in and leverage AI to enable better results at scale.
4. Consider an operating model reset. Examine processes and pressure-test what work is being done and who is doing that work. Redesign core processes and the organization with integrated AI from the start. Variabilize your manufacturing and supply chain fixed cost base where possible, leveraging co-manufacturers and 3PLs strategically to reduce your footprint. 
5. Drive enterprise level margin management excellence: CPGs will need to drive more than 5% gross productivity per year. For most, this will require developing new capabilities. An effective margin management capability includes a number of key elements: 
   • Adopt a three-year time horizon. Your productivity pipeline needs to go beyond the annual planning cycle.
   • Find the big rocks to enable focus and priority on needle movers. Avoid the trap of 100s of small projects.
   • Include the commercial organization and processes. Avoid viewing productivity as solely the realm of operations.
   • Live and die by process discipline. Ensure structured standard processes across BUs and functions; follow them precisely.
   • Embed a productivity mindset all the way to the frontline and reward improvement.

By addressing these areas, CPG companies can better navigate the challenging landscape and position themselves for sustainable growth.