The consumer packaged goods industry finds itself at a critical juncture with 2025 on the horizon.
As they exit the post-pandemic period, many organizations are struggling to drive growth amid a complex set of interrelated market conditions, including shifting consumer behaviors, supply chain disruptions, economic uncertainty, geopolitical risk and the impact of climate change on crop yields and population migration. The COVID-19 era’s “new normal” label has evolved into an ongoing state of never normal, requiring agile, data-driven strategic planning and proactive revenue growth management approaches.
Since 2020, brands have been able to drive revenue through pantry loading and price hikes under the umbrella of crisis — first the pandemic, and then the Russia-Ukraine war. That approach, designed to offset higher raw-material and supply chain costs, was a short-term accelerant of market performance, not a sustainable long-term business strategy. It has since reached its limits in the face of fragmentation, macroeconomic slowdown, and escalating costs. Consumers are increasingly price-sensitive, with nearly 80% switching from name brands to private-label goods to save money. Retailers are also pushing back against hikes in efforts to preserve customer loyalty and their bottom line, leading to cases of friction like the three-month price dispute between PepsiCo and Carrefour earlier this year.
As a result, CPG leaders must find alternative ways to fuel top-line revenue growth and profit at a time when they can’t increase prices without reducing market share. A June, 2024 McKinsey Report forecasted that publicly listed CPG companies, on average, will need to deliver 4% to 5% annual top-line growth at 15% to 16% EBITDA to return to top-quartile performance across industries over the next five years. That won’t be easy, considering that CPG industry revenue hasn’t increased by more than 2% year-over-year since 2012, and commodity costs are expected to remain elevated at 20% to 40% above 2019 levels through at least 2025. Achieving heightened levels of growth in this environment will require a multi-faceted strategic pricing approach, one that encompasses the right balance of product portfolio optimization, package size, cost reductions and digital transformation.
Facilitating Portfolio Optimization
A well-optimized product portfolio will be essential for CPG companies to drive profitability in 2025. Organizations should be focusing on portfolio and commercial investment optimization strategies that are designed around two fundamental growth pillars:
- Facilitating existing product innovation and adaptation to meet consumer expectations while minimizing commodity price exposure, and
- Facilitating holistic commercial investments that balance consumer satisfaction (organic growth) with mergers and acquisitions (inorganic growth) to complete product portfolios and gain economies of scale.
Executing both pillars in tandem can create momentum for driving revenue and profit growth without price hikes. Leaning into product innovation and adaptation is critical to aligning portfolio assortments in response to evolving consumer preferences. In May, for example, industry-leader Nestlé broadened its coffee portfolio with the launch of Nescafé Espresso Concentrate, a new product line that appeals to cold coffee-drinking Gen Z and Millennial consumers, and targets a lucrative cold brew segment expected to grow from $500 million in 2022 to $3.1 billion by 2030. The move allows Nestlé to further tap into a consumer demographic that will gradually comprise a significant portion of future sales, while also catering to fiscally conservative buyers seeking to brew expensive barista-style drinks from home.
Meanwhile, pioneering food manufacturers are innovating their product lines to incorporate more personalized nutrition for the increasingly health-conscious consumer — integrating new plant-based offerings, high-quality protein, low- or no-sugar options, and natural ingredients. Other companies have redesigned their packaging to meet consumers’ environmental, social and governance (ESG) expectations, with PwC data showing that more than four-fifths of consumers are still willing to pay more for sustainability despite economic pressures. By placing customer centricity at the forefront of their portfolio-optimization strategy, organizations can build higher levels of brand loyalty that compounds into organic growth. It will also help them navigate the fluctuating demand signals of a changing demographic marketplace, particularly as climate-related human migration patterns shift product and dietary preferences across key geographical segments.
Coupling those organic efforts with an impactful M&A strategy creates a powerful avenue for accelerating top-line revenue. Mars’ $36 billion acquisition of Kellanova in August amplified the candymaker into a marquee snacking company that is positioned to compete with the likes of PepsiCo and Mondelēz International. However, not every acquisition needs to be that large. As we’ve seen throughout 2024, acquiring smaller CPG players from advantageous markets via bolt-on transactions is a quick way to fill portfolio gaps and appeal to a wider consumer market segment. Executing successful M&As in 2025 will be reliant upon strategic foresight into emerging growth pockets, as well as planning and resource-allocation processes that cultivate organizational agility for effective post-merger integration.
Driving Cost Reduction and Efficiency
In addition to portfolio optimization, CPG companies should focus on supply chain optimization to drive cost reduction and efficiency, as well as help offset promotional spending, price rollbacks and other incentives designed to regain market share. That requires a comprehensive analysis of supply chain data and operations to facilitate the efficient production and distribution of products without impacting product quality or essential functions. The savings generated from these profit-driving optimization initiatives should be utilized to strategically reinvest into R&D and technology adoption, creating a self-fulfilling innovation and revenue cycle.
It’s also paramount for CPG leaders to foster a culture of agility within their organizations and create a constructively resilient posture that lends itself well to uncertainty. With so much change happening, teams that can activate insights and recommendations driven by artificial intelligence will help companies to mitigate risk and exploit opportunities better than their competitors. This involves promoting cross-functional collaboration and implementing cohesive decision-making processes across business units, as well as automating scenario-based planning for potential market disruptions.
Deployment of advanced technologies and autonomous management practices is the third piece of the puzzle to increasing CPG profitability. Nearly 60% of CPG leaders polled in PwC’s most recent Digital Trends in Operations survey said they were investing in emerging technologies as a strategic priority in 2024, while more than two-thirds (73%) had plans to incorporate generative AI to support new business models. Efficiencies derived from emerging technologies can help gain competitive advantage through improved consumer targeting, advertising and promotion effectiveness and revenue growth management.
The uncertainty of the current market environment is here to stay. However, change always creates a new set of winners and losers. The successful companies of 2025 will be those positioned to navigate the complexities of the CPG landscape with agility and foresight. By combining portfolio optimization, cost efficiency and technological adoption, CPG leaders can open up new avenues for growth, further differentiating themselves from the pack while driving increased value for shareholders.
Stephen DeAngelis is chief executive officer and founder of Enterra Solutions.