CPGs need a new playbook

NEW YORK — Amid an extended period of underperformance, food and beverage consumer packaged goods (CPG) companies need to revamp their product portfolios, sharpen their value propositions and reassert their brand relevance, according to an analysis by the consultancy McKinsey & Co.

The “old value-creation model” that fueled CPG companies for decades has eroded over the past dozen-plus years as consumer expectations for more value and benefits from food and beverage products have risen and competition from private label and disruptor brands has intensified, according to the report, titled “State of Food & Beverage: Choices CPG Leaders Can Make to Renew Growth” and released in April. 

Though pandemic-related pricing tailwinds provided a temporary lift that “briefly masked” the pressures, volume growth for food and beverage CPGs remains elusive, constrained at less than 1% per year – “far short of what the sector once delivered,” McKinsey said. Since 2023, total shareholder return (TSR) for the biggest global CPG players is down about 7%, whereas the return for the S&P 500 is up 9%.

“Investors are now skeptical of whether F&B CPGs can deliver,” the study said. “Our own research suggests that the long-standing CPG growth model has exceeded its limits. Without a shift in how they generate growth, incumbent CPGs are likely to face sustained pressure on volume and profitability.” 

Growth model breakdown

TSR (on a three-year rolling basis) for F&B CPGs climbed above that of the S&P 500 around 2006 and stayed there until 2012, when it fell below the bellwether index and has remained to today, punctuated by a plunging return since 2021 following a short run-up during the pandemic, according to the report.

“For decades, CPG giants sold products that consumers eagerly bought,” McKinsey said. “These products tasted good and offered convenience and affordability — fueling consistent revenue and margin growth, which in turn delivered top-quartile returns to investors. In the nearly 40 years before the global financial crisis of 2008, CPG players reshaped their portfolios, concentrating on their strongest brands, while expanding into emerging markets that elevated those brands to a global stage. … But the model started to break down in the 2010s.”

Publicly held CPG companies tallied average annual revenue growth of 9% from 2002 to 2012, with constant margins and 22% return on invested capital. Over the next 7 years, however, top-line growth was squeezed by slower population growth and international expansion; “fragmented” consumer attention; and incremental demand gains by discounters, private labels and disruptor brands, McKinsey’s research showed.

Consumers are seeking more functional benefits from packaged foods, such as added protein and lower carbs in bread from brands like Sola.

| Source: Sosland Publishing Co.

“While these pressures marked the early stages of structural change, F&B CPGs still sustained growth through a relatively balanced mix of price and volume expansion,” the report said.

An inflection point came with the pandemic. Surging food-at-home demand raised volumes for food and beverage CPG companies, which started raising prices amid input inflation and margin pressure. Gains in market capitalization improved and enterprise-value-to-EBITDA multiples rose, which McKinsey said reflected “optimism from investors that pandemic-era CPG sales momentum would extend beyond the crisis.” But the consultancy noted that “the gains proved short-lived.” 

Over the 2021-2022 peak inflation period, CPG companies came to rely on price increases to maintain growth, even though margin pressure, receding volumes and contracting multiples “increasingly offset the benefits of this price-led growth,” the report said.

“Throughout 2025, and continuing today, price growth has reverted to historical norms, while volume growth remains constrained,” McKinsey said. “F&B CPGs specifically are underperforming in the US market which, given its scale, is troublesome. Complicating matters, price increases risk further volume declines. Gross margins are still below pre-pandemic levels, and efficiency gains from prior productivity programs have plateaued, leaving CPGs with fewer near-term margin levers to pull. Additional factors, such as climate change-related input price volatility, may intensify pressure on CPGs.”

Consumers recalibrate

McKinsey attributed the changing fortunes of F&B CPGs to “two powerful forces” shaking up consumer grocery spending: affordability and demand for higher-benefit products. The consultancy said in its analysis – which included a global survey of 15,000 consumers across 10 markets – that “alarm bells began to ring across the CPG industry” in 2023, as executives in earnings calls warned investors about “expected growth challenges and looming volume declines.”

US food prices, on average, were 31% higher through the third quarter of 2025 than in 2019, above the 26% rise in the total Consumer Price Index over that period, the report said. Food price growth outpaced inflation in Europe and the United Kingdom in that time frame as well.

More recently, F&B CPG executives have pointed to a K-shaped economy when discussing consumer affordability. McKinsey said US shoppers spent an average of 10% of their pretax income on food in 2024, but that percentage “masks a growing inequality” as lower-income households spend a third of their after-tax income on food versus 8% for the highest-income households. 

“For many consumers, food purchasing has shifted from preference-driven to constraint-driven decision-making,” the study said. “In our global consumer survey, 61% of consumers say price matters more to them today than it did two years ago, and cost and the perception of value are the top two reasons shoppers stop buying a given brand, followed by diminished quality, a limited product range and a lack of new offerings.”

“Shrinkflation” in some product categories also has turned off consumers and nudged them toward alternatives, McKinsey’s survey found. Over 8 in 10 US consumers polled said they consider shrinkflation deceptive, and about two-thirds – namely Gen Z shoppers – have stopped buying shrinkflation products as a result.

Private label has been a key beneficiary. Twenty-eight percent of global consumers surveyed said they buy more private label items now than two years ago, and that number jumps to 34% for US shoppers – the highest share by region, according to McKinsey. Also, among US consumers, 86% cited the value of private labels as better than or equal to name brands, with 77% saying the same for quality and 72% the same for selection. The percentages were similar among shoppers in global markets.

Food CPG companies are facing rising competition from retailer brands with low prices and high quality, such as Walmart’s two-year-old bettergoods line. 

| Photo: Walmart

 “Although value for money and low prices still anchor private label appeal, price is no longer the sole motivator,” the report said. “Consumers also believe private label goods offer equal or superior quality, value and variety compared with branded options.”

McKinsey expects F&B CPGs to encounter heightened private label competition as retailers continue to build multi-tiered assortments and “trend-led” own-brand portfolios with entry-level, core and premium price points plus organic, plant-based and free-from items.

“As private labels increasingly win consumers on both quality and price, national brands can no longer rely solely on speed-to-market or incremental innovation,” the study said. “They must create truly distinctive products that earn their place in consumers’ baskets.”

Paralleling the stronger embrace of private label is rising consumer demand for products delivering “differentiated function, quality or experiences,” McKinsey said. For example, its global survey revealed that about two-thirds of consumers, including US shoppers, are open to paying 10% or more for a healthier option to their usual snack.

“In the years preceding the COVID-19 pandemic, small, independent brands drove a disproportionate share of category growth across US F&B,” McKinsey explained. “That momentum slowed during the pandemic and the inflationary period that followed, as operational disruptions, retailer prioritization of large suppliers and higher input costs created headwinds for smaller players. Now, however, disruptors are again contributing an outsize share of growth. Although small, independent brands (those with less than $100 million in sales) represented just 13% of the US F&B market in 2021, they delivered 15% of the category’s growth from 2021 to 2023. By 2025, they accounted for 35% of category growth.”

Small, independent brands are snaring a sizable share of growth in categories such as sweet snacks, tea, butter and oils, seasonings and sauces, cheese, and functional shakes and powders, “where consumers have been more willing to try new entrants,” the study said, adding that disruptor brands have had the strongest impact in the United States. 

By and large, shoppers purchase disruptor brands – and will pay more for them – because they expect superior functional benefits, the report said. In the US and UK markets, 37% of consumers polled said they buy small brands most often for functionality versus 18% doing so for mainline brands.

“Although large brands have a leg up on quality, the trait has really become table stakes for all players, and functionality is where small brands consistently outperform,” McKinsey said. “As a result, private label tends to win on price, small brands win on function and many large brands find themselves caught in the middle, without a meaningful edge on either dimension.”

The health factor

Much of the perceived functional benefits from food and beverage products focus on health – the “fastest-rising consideration,” McKinsey’s report said. Its poll found that 57% of consumers rank health as a top three factor in deciding which items to purchase, the largest increase in importance of any attribute in the past two years. 

Approximately 75% of shoppers surveyed said they seek fresh fruit and vegetables, and 60% target foods that have more protein and fiber and are nutrient-dense. Half of consumers said they’re avoiding or limiting artificial flavors and sweeteners, alcohol, sugar and highly processed foods.

“Rather than rejecting legacy brands outright, consumers are demanding proof of value: simpler ingredients, clearer benefits and fewer perceived trade-offs,” McKinsey said. “Across markets, more consumers report actively seeking healthy foods than avoiding ingredients or products they see as unhealthy.”

Factoring into the health focus is increasing adoption of GLP-1 drugs for weight loss. McKinsey said these appetite-suppressing medications “could materially alter” consumer dietary and eating habits, “changing what people buy, how much they eat and what they prioritize.” The study noted that early data on GLP-1 users show cutbacks in categories like chips and other savory snacks, sweet snacks and soft drinks in favor of high-protein foods and fresh produce. 

“Although GLP-1 use is relatively low today, especially outside of the United States, it is projected to grow and could be the first instance of metabolic outcomes driving measurable shifts in what consumers buy,” McKinsey said.

CPG action plan

For incumbent F&B CPG companies, the path for growth entails a two-part agenda: reshaping brand/product portfolios to boost exposure to the “right categories and geographies,” and concentrating on “core excellence, brand relevance and productivity,” McKinsey said.

The first part focuses on pursuing mergers and acquisitions as well as divestitures that meaningfully improve the portfolio. 

“When industry growth averages 2 percent, opportunities to outperform may seem limited,” the report said. “But the fact is, growth is unevenly distributed: Within most F&B CPG categories, subsegments tied to health, functionality and premiumization are expanding at rates 200 basis points or more above average. 

“Over time, even incremental shifts in exposure toward these segments — along with shifts away from underperforming categories and geographies — can materially change a company’s overall growth trajectory,” McKinsey noted. “In a slower-growth environment, outperforming structurally depends less on squeezing more from mature categories and more on deliberately increasing exposure to the parts of the portfolio where demand is expanding fastest.”

The second part calls for “coordinated action across the enterprise,” the report said, explaining that leading CPGs must zero in on how their brands win with consumers, bolster the pipeline of new buyers, and drive “the next wave of productivity” to support reinvestment and growth, with the latter aided by the use of artificial intelligence tools.

“Years of price-led growth and cost pressure have eroded the value proposition for many CPG products,” McKinsey said. “These products are neither meaningfully better than the competition nor more affordable, leaving consumers questioning what they are paying for.”