By Ishan Chatterjee, Jörn Küpper, Christian Mariager, Patrick Moore and Steve Reis
The consumer-packaged-goods (CPG) industry’s growth over the past quarter century has been nothing short of exhilarating. CPG companies have launched innovative products to meet an ever-growing array of human needs and desires. They have expanded rapidly into the burgeoning consumer markets of the developing world. And to make this breakneck growth possible and profitable, they have aggressively built global scale along every part of the value chain. These strategies, along with increased margins and weighting of portfolios toward fast-growing categories, have delivered stellar shareholder returns.
But the past is no guide to the future. Over the coming decade, upheavals in global consumer and supply markets are likely to produce as many losers as winners among CPG companies. For example, Asia will overtake the West as the main consumer market, and it will demand new levels of value and innovation from CPG players. Rising Internet penetration could upend traditional sales models. Globalized trading and natural-resource shortages could combine to usher in a new age of supply-chain volatility.
In this article, we profile an analytical approach, developed by McKinsey’s CPG practice, that allows executives to filter the myriad potential future trends to anticipate the few that could truly affect their company’s competitive advantage. We then apply the approach to the CPG industry in aggregate, underlining the forces most likely to move the needle on value creation over the coming decade and pointing to the strategic questions that CPG companies must answer if they are to profit from these forces.
The strategic choices behind the industry’s success
Before assessing the trends of the future, it is worth asking what has driven the industry’s extraordinary performance in recent decades. US-listed CPG companies, for example, have increased total returns to shareholders (TRS) by an annual average of 10 percent over the past 25 years, outperforming not only the broader S&P 500 index but also high-growth industries such as information technology, energy, and telecom (Exhibit 1).
To be sure, this growth has taken place on the back of steadily rising incomes and population, particularly in emerging markets. But leading CPG players have not simply followed economic and demographic trends: they have actively anticipated them in their strategies and investment choices.
To start, the industry has been relentless about new-product innovation. In the US grocery channel, for example, the number of SKUs has grown by 50 percent in just the past seven years.1 Constant innovation, along with a knack for passing on input-cost increases, has allowed the industry to boost its margins significantly.
Further, CPG companies have expanded rapidly beyond their traditional Western bases. Emerging markets have contributed more than half the global revenue of the Coca-Cola Company since 2006, and almost half of PepsiCo’s 2009 revenue was generated outside of the United States. At the same time, CPG companies have aggressively shaped their portfolios to increase the proportion of the fastest-growing and most profitable categories, creating considerable “momentum growth.” Witness Nestlé’s recent acquisitions in high-growth food categories such as baby food (Gerber), pet food (Purina), and frozen pizza (from Kraft).
To make this expansion possible—and profitable—CPG players have invested heavily in building global scale along every part of the value chain, including R&D, marketing and sales, procurement, manufacturing, and distribution. Unilever’s ice-cream business is a salient example: it has rolled up its fragmented brands under the “heart” umbrella brand, established a single global ice-cream headquarters in Italy, and consolidated manufacturing in 16 plants worldwide. Even over the tumultuous last three years, CPG companies have performed well, thanks in large part to their diversified exposure to faster-growing emerging markets and their longer-term pursuit of scale and efficiency.
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