“Rescuing the Decade: A Dual Agenda for the Consumer Goods Industry” by McKinsey & Company, provides a comprehensive analysis of the challenges facing the Consumer-Packaged Goods (CPG) industry and outlines a dual agenda for improving business performance.

You can read and download the full report on McKinsey’s website or NeoForm’s LinkedIn page.

Below is a detailed summary of the key points and recommendations:

1. Industry Overview and Challenges

• Historical Performance: The CPG industry was a top performer from 1980 to 2012, delivering 9% annual revenue growth and stable margins. However, growth has slowed significantly since 2012, with revenue growth dropping to 2% annually. The industry has relied on cost reduction to maintain earnings growth.
• Current Challenges: The industry faces several headwinds, including macroeconomic slowdown, consumer fragmentation, mass-merchant squeeze, and escalating costs. These factors have disrupted the traditional CPG growth formula, leading to declining shareholder returns.
• Profit and Loss (P&L) Restructuring: Despite cost reductions and improved ROIC (Return on Invested Capital), investor confidence in the sector’s ability to generate sustainable growth has declined.

2. Megatrends Impacting the CPG Industry

Four key megatrends that will shape the industry over the next decade:

1. Macroeconomic Slowdown: Population growth has stagnated, and developing-market wealth expansion has slowed. Global CPG growth is expected to rebound to 3-5%, half of what it was in the 2000s.
2. Consumer Fragmentation: Digitalization has fragmented consumer attention and preferences, allowing smaller brands to capture market share. Large CPG brands are losing relevance, with only two CPG brands remaining in Interbrand’s top 50 global brands in 2022.
3. Mass-Merchant Squeeze: Supermarkets have lost market share to e-commerce, discounters, and warehouse formats. This has put pressure on CPG companies to adapt to new retail dynamics.
4. Escalating and Volatile Costs: Commodity prices are expected to remain high, and climate change will increase the risk of crop failures, leading to supply chain disruptions and higher costs.

3. Dual Agenda for Rescuing the Decade

To address these challenges, authors propose a dual agenda consisting of Agenda 1 (Portfolio) and Agenda 2 (Performance).

Agenda 1: Portfolio

• Portfolio Reshaping: CPG companies need to reallocate resources to high-growth categories and geographies. This involves reallocating at least 5% of resources annually and using mergers, acquisitions, and divestitures (M&A&D) to strengthen growth exposure. Companies should aim to refresh 20-30% of their revenue every decade through M&A&D.
• New Businesses (Second Leg): CPG companies should explore new business opportunities beyond their core categories, such as ecosystems and services. For example, Mars expanded its pet food business into pet care, offering veterinary services and genetic testing. Companies should aim for new businesses to contribute at least one-third of revenue within ten years.

Agenda 2: Performance

• Commercial Excellence: CPG companies must excel in key areas such as revenue growth management (RGM), digital routes to market, and e-marketplaces. RGM programs can generate 3-5% return on sales, making it a critical near-term opportunity.
• Marketing Transformation: CPG companies need to embrace digital marketing and leverage generative AI (gen AI) to enhance marketing capabilities. Gen AI can be used for insights generation, product innovation, content creation, and media optimization.
• Premiumization and Category Expansion: Innovation is crucial for growth, especially in premium segments and developing markets. CPG companies need to reinvest in consumer-centric product design and improve their innovation operating models to reduce time to market.
• Productivity Reinvention: Automation and digital technologies (e.g., gen AI, robotics, autonomous vehicles) can drive significant cost savings across the supply chain, back-office, and commercial functions. CPG companies should also focus on demand management and rightsizing market service levels to reduce costs.

4. Enablers for Success

• Digital Transformation: The CPG industry has lagged in digitization, but digital transformation is now critical for future growth. Companies should focus on building digital capabilities, leveraging gen AI, and adopting agile operating models.
• Operating Model and Culture: A cohesive operating model that supports end-to-end decision-making and a culture that excites and retains talent are essential for executing the dual agenda.

5. Key Questions for Management Teams

The document concludes with several questions for CPG leaders to consider:

• Megatrend Exposure: How has your business been impacted by megatrends, and how will it be impacted in the future?
• Aspiration and Gap: What earnings growth is needed to achieve financial goals, and how difficult will it be to achieve?
• Agenda 1: How much portfolio reshaping is needed, and how quickly should you act? What new business opportunities excite you?
• Agenda 2: Are you tracking market share gains/losses? What commercial capabilities do you need to outperform? Do you have a plan for the next 250 basis points of cost reduction?
• Acting Fast: What immediate steps should you take to address these challenges?

6. Conclusion

The CPG industry is at a critical juncture, facing significant challenges but also opportunities for transformation. By adopting a dual agenda focused on portfolio reshaping and performance improvement, CPG companies can reignite growth, improve profitability, and regain investor confidence. The key to success lies in embracing digital transformation, driving innovation, and building a culture that can adapt to rapid change.

Thanks to McKinsey and authors for sharing this insightful report.