The COVID-19 pandemic drastically upended the consumer and retail landscape, forcing consumer-packaged-goods (CPG) companies into a largely reactive mode. In response to unprecedented shifts in consumer behavior and market dynamics, many CPG companies focused on short-term survival over sustainable growth. Though the pandemic recovery remains uneven across regions and has been complicated by the Delta variant surge, forward-looking CPG companies will need to reorient their strategies and return to the fundamentals of long-term growth.
The past year has proved to be a strong outlier for the CPG industry. However, the period immediately preceding the pandemic established clear patterns and implications for what will continue to drive CPG growth in the decade ahead. Our research looks at the success factors of CPG companies in the prepandemic landscape and confirms that profitable growth is directly linked to value creation (see sidebar, “About the research”).
So what does our analysis teach us about profitable growth?
It is possible to achieve organic growth and margin expansion at the same time—28 percent of CPG companies did so, and they achieved nine times the total returns to shareholders (TRS) of others.
There are no excuses. Winning CPG companies exist across all sizes, all categories, and all geographies.
Above all, the companies that achieve profitable growth differentiate themselves through superior execution.
As CPG companies begin their planning cycles with emerging trends in mind, they should renew their focus on predictive analytics to spot future pockets of growth and upgrade the core commercial capability areas that will enable them to out-execute the competition: portfolio and innovation strategy, data-driven marketing, revenue growth management, holistic omnichannel sales strategy, and in-market execution.
The imperative of profitable growth
One thing is clear: profitable growth feeds directly into value creation. Accretive growers—companies that outperformed their peers in both real organic growth and margins—saw an average TRS of more than 18 percent (Exhibit 1).
While total growth matters, our analysis shows that organic growth contributes more to the TRS outperformance of accretive growers than inorganic growth does. Furthermore, organic CPG growth provides greater returns than margin expansion. Dilutive growers deliver 1.6 times the average TRS of accretive laggards (7.9 percent compared with 4.9 percent). However, companies that were able to achieve both organic growth and margin expansion delivered nine times the average TRS compared with all others (18.2 percent compared with 2 percent)—though strong TRS performance was not limited to these companies alone. These findings suggest that accretive growers are better positioned to overcome rising costs, withstand inflationary pressures, and drive consistent top-line growth.
The difference between the accretive growers and the rest of the field has always been substantial, but the gap widened considerably last year compared with previous years. Unsurprisingly, these companies sustained their TRS outperformance during the crisis year. In 2020, accretive growers in our sample generated an average TRS of 22 percent, compared with 11 percent for all other companies.
Lesson 1: Growth does not have to come at the expense of profit
There does not always have to be a trade-off between growth and profit. In fact, more than one-quarter of the companies in our database were accretive growers that achieved organic growth and margin expansion at the same time (Exhibit 2).
CPG companies that generate both organic growth and margin expansion have a clear advantage. Our research shows that accretive growers stand to capture an incremental 5.0 percentage points in real organic growth compared with accretive laggards, but also 3.6 percentage points in margin improvement compared with dilutive growers. As we discuss below, the key to achieving both growth and profit is to build distinctive commercial capabilities, allowing accretive growers to reach the “efficient frontier” of profitable growth.
Lesson 2: It’s not who you are; it’s what you do
Accretive growers vary in size and exist across all geographies and categories (Exhibit 3). Profitable growth is an attainable goal regardless of the starting point.
Accretive growers come in all sizes: small, medium-size, large, and giant companies. Large CPG companies were slightly more likely to be accretive growers (40 percent likelihood compared with 28 percent average). This finding suggests that these companies can benefit from executing at scale, as long as they are agile enough to respond quickly to external shifts. We also found accretive growers across every category and all regions, with strong cross-section representation of beauty and home-care categories in the emerging Asia and Europe regions.
Lesson 3: Growth is about out-executing your peers
Execution is the main (and accelerating) differentiator for CPG companies that achieve the most profitable growth (Exhibit 4).
Our analysis disaggregates the factors that generate growth into three levers: momentum (better exposure to the fastest-growing markets and categories versus competitors), execution (gaining or losing share from competitors), and M&A (inorganic growth). Seven years ago, when we applied a similar analysis to the packaged-food industry, we found that momentum accounted for the largest share of growth and that execution was rarely a differentiator for accretive growers. However, the most recent analysis shows a meaningful shift in the underlying factors of organic growth.
Execution has emerged as the strongest driver of growth for CPG companies. In 2019, accretive growers demonstrated a 5.0 percentage-point differential in organic growth by pulling the right commercial levers and gaining market share within their category (up from 4.6 percentage points in 2018). Even more important, execution plays a role in generating profitable growth. Compared with dilutive growers, accretive growers delivered a 0.6 percentage-point differential in organic growth as a result of efficient execution.
Momentum remains a critical factor and accounts for 1.6 percent of growth across the entire sample. It is now even more important for leading CPG companies to optimize beyond markets and categories and rebalance their portfolios at a more granular level—by identifying, and innovating in, pockets of growth at the subcategory level; targeting geographical hot spots (regions or cities) with selective portfolios; and gaining greater exposure to winning sales channels.
Building the capabilities to execute
- The importance of execution will only grow in the decade ahead, given the influx of new competitors, new technologies, and the accelerated pace of market disruptions.
To win in the next normal, CPG companies should continue to fire on all cylinders for growth by scaling quickly, building partnerships, and pursuing M&A opportunities—with a strong emphasis on execution as a key differentiator. While our research focuses on the years immediately preceding the pandemic, the importance of execution will only grow in the decade ahead, given the influx of new competitors, new technologies, and the accelerated pace of market disruptions.
We believe the winning model lies in predictive growth—an analytics-driven, consumer-centric approach that follows a three-step process: predict, transform, and sustain. Taking this approach, CPG companies should double down on the following five growth priorities that will enable them to out-execute the competition:
- Increasingly agile innovation. Leading CPG companies will deploy agile and lean innovation models while leveraging rapid test-and-learn approaches and advanced analytics to capture emerging and evolving consumer trends. They will bring innovation to market quickly (launching a new product in months, not years) and shift toward new channels (moving from marketplaces to direct-to-consumer [D2C] strategies).
- Reset of data-driven marketing. Leading CPG companies will lean into rapid but thoughtful redeployment of marketing resources after navigating major shifts during the crisis and current waves of change, including the end of the cookie era and the growth of retailer media networks. They will proactively reset their data strategies—considering the role of D2C and first-party (1P) data access, supported by a marketing technology partnership network—to build deeper consumer relationships and deliver the right message, through the right channel, at the right time.
- Precision revenue growth management. Leading CPG companies will holistically address all four value levers of revenue growth management (RGM)—pricing, promotions, assortment, and trade investment—and use them to navigate the ongoing challenges of commodity costs. They will develop more precise RGM strategies using advanced analytics techniques, such as consumption occasion research and predictive P&L modeling for pricing actions based on net elasticities. They will see successful sell-in of initiatives to retail through win-win solutions, compelling consumer insights, and in-store activation initiatives.
- Investment in connected digital commerce. Leading CPG companies will develop a granular view of omnichannel growth opportunities and place big bets on digital commerce—reassessing the role and value proposition of D2C (aligned with the digital-marketing strategy), social commerce and online communities (as they begin to expand beyond Asia), and, increasingly, eB2B to serve traditional channels and partners digitally. Beyond individual channels, they will consider the connected ecosystem of touchpoints and their ability to manage a single consumer experience.
- Relentless focus on in-market execution. Leading CPG companies will leverage cutting-edge analytics and sales-force tools to curate and manage the optimal proposition for each point of sale—bringing to life the assortment, pricing, and promotion initiatives developed through precision revenue growth management everywhere the shopper wants to interact with the brand (physically or digitally). In D2C channels and with priority customers, winners will integrate technology into the customer experience through self-serve solutions or digitally enabled store assistants to create a seamless, personalized customer experience.
As we emerge from a period of volatility and uncertainty, consumer-goods companies should turn their focus to achieving profitable growth. Drawing from the lessons of the past, the winning companies will focus on relentless execution, underpinned by a set of core commercial capabilities. Consumer-goods companies that develop an execution edge will continue to drive value creation and financial performance in the years to come.
About the author(s)
Camilo Becdach is a partner in McKinsey’s Southern California office; Ryan Murphy is a partner in the Atlanta office; Mauro Ometto is an associate partner in the Geneva office; Nora Ottink is a partner in the Amsterdam office; and Samantha Phillips is an associate partner in the London office.
The authors wish to thank Simon Land, Max Magni, Imran Manji, Felipe Sanabria, and Björn Timelin for their contributions to this article.
This article is one of a series of perspectives on profitable growth in the CPG industry. The next article in the series will highlight insights into the differentiating capabilities that accretive growers have built within their organizations.