Why the CPG Industry is Struggling – And How It Can Bounce Back

The consumer packaged goods (CPG) industry, which produces everything from snacks to personal care products, has faced many challenges lately. This sector, once known for its stability and growth, is now under pressure. Companies struggle to maintain profitability and keep up with changing consumer demands, new technology, and rising costs. But all is not lost. The industry can regain its footing with some intelligent moves and fresh thinking.

The Problem with “Business as Usual”

In the past, the CPG industry was driven by steady demand, growing markets, and traditional advertising. Brands simply needed to secure retail space, run mass-market campaigns, and offer products that met consumer needs. But times have changed, and so have consumers.

For one, there’s the digital shift. More people are shopping online, and about 75% of advertising spend now goes to digital channels, which makes it harder for companies to stand out if they’re still relying on old-school marketing. In addition to rising consumer expectations for healthier and more sustainable products, CPG brands are under pressure to adapt or lose market share.

Big Challenges Facing the CPG Industry

1. Slowing Economic Growth

Economies worldwide are slowing down, and population growth has stalled in many areas. In the 2000s, China accounted for about 30% of the CPG industry’s growth, but today, that number has dropped to 12-14%. That’s a big hit, especially when many companies based their growth plans on a continually expanding global market. Plus, as household incomes grow, consumers start spending more on premium goods instead of basic consumer products, which means companies have to offer higher-quality, more appealing products to capture attention.

2. Fragmented Consumer Preferences

The digital age has made consumers more selective and less loyal to traditional brands. They’re looking for “better-for-you” and “better-for-the-planet” products, pushing CPG brands to focus on health and sustainability. But making these changes requires significant investment in both production and marketing, which adds strain to already thin margins.

3. Retailer Pressure

Supermarkets, the long-time partners of CPG brands, have lost some ground themselves, particularly to online retailers and discount stores. As they work to regain profitability, supermarkets are pushing CPG brands harder on pricing and squeezing out more of their own store-brand products. This means that CPG companies are under more pressure to deliver high-quality goods at lower prices—a tough balancing act.

4. Rising and Unpredictable Costs

Costs are also on the rise due to inflation, fluctuating commodity prices, and climate-related issues affecting supply chains. The costs are now expected to be 20-40% higher than they were in 2019. With these rising expenses, brands need to find ways to manage costs without sacrificing quality or innovation.

The New Role of Wellness and GLP-1 Drugs

On top of these challenges, the wellness trend is more than just a phase—it’s a new standard. Consumers are increasingly interested in health-focused products, driving demand for options that promote wellness. Adding complexity to this trend is the rise of GLP-1 medications, which treat obesity and type 2 diabetes. These drugs are projected to reduce CPG sales by around 1% since they affect what consumers are buying, as people may change their eating habits and lifestyle choices. CPG companies will need to pay close attention to these shifts to avoid being left behind.

The Impact of Venture Capital Slowdown

Interestingly, the recent pullback in venture capital (VC) funding could turn out to be a good thing for the CPG industry. Fewer new brands will enter the market, meaning that established and emerging companies can focus on building more capital-efficient and scalable business models. This climate could also lead to a healthier mergers and acquisitions (M&A) market, where stronger, well-established brands buy up smaller innovators, creating a more stable and sustainable industry landscape.

What Needs to Change?

To adapt, CPG companies must shift from traditional ways of doing business to a more flexible, digitally integrated approach. Based on research, there are a few key moves that companies can make to thrive in this new environment.

1. Shift Product Lines and Investments

Companies should shift resources away from low-growth areas and toward segments with higher potential, like premium or health-focused products. For example, large CPG companies might aim to get 20-30% of their revenue from new product lines every ten years to stay fresh and relevant.

2. Build New Business Areas

Expanding beyond traditional products can help CPG brands diversify their revenue streams and lower risks. For instance, some companies are investing in wellness and technology-focused products, which appeal to health-conscious consumers and have higher growth potential.

3. Scale Up Commercial Operations

To stay competitive, companies need to be smart about pricing, promotions, and customer service. Leveraging advanced data tools, such as AI, can help brands understand consumer preferences better and adjust strategies accordingly.

4. Focus on Premium and Niche Markets

It’s no longer enough to produce a lot of one type of product simply. Companies need to focus on premium options that offer higher margins and explore new product categories that appeal to specific consumer needs, such as wellness and eco-friendly products.

5. Improve Efficiency

There’s much room for improvement in cost management, especially when it comes to automation and better demand forecasting. Companies can improve profitability and invest more in product innovation by finding ways to cut costs without reducing quality.

The Value of Digital and AI Transformation

In today’s environment, digital tools and AI aren’t just nice-to-have features—they’re essential. Research shows that digital transformation could significantly boost CPG companies' profits. For example, using AI for things like social media analysis and personalized recommendations helps companies understand what consumers want and make quicker, smarter product development decisions.

AI is especially valuable in understanding consumer demand and managing relationships with retailers and distribution channels. For example, food and beverage brands could benefit greatly from AI-powered promotions that make sure products are available when and where they’re needed, reducing out-of-stock issues and waste.

Additionally, CPG companies are finding that partnerships can add value to their AI efforts. By sharing data with retailers, manufacturers, and logistics partners, brands can improve their insights into consumer behavior and streamline operations. Some beauty brands are already seeing results by integrating AI-powered tools for virtual product try-ons and personalized recommendations, allowing them to better engage consumers.

Moving Forward

For CPG companies, the road to recovery will involve a careful assessment of their current capabilities and market positions. Brands will need to evaluate where they stand relative to industry benchmarks and focus on initiatives that match their strengths.

In the current market, the companies that succeed will be the ones willing to embrace change, take advantage of digital tools, and stay adaptable to shifting consumer demands. By focusing on premium products, leveraging AI for better decision-making, and adapting to changing retail dynamics, CPG brands can start building a more sustainable future.

The Takeaway

The CPG industry’s recent struggles reflect big shifts in the economy and consumer habits. But with the right moves, the sector can bounce back. While there are challenges, there are also plenty of opportunities for brands willing to innovate. By investing in technology, focusing on consumer preferences, and building stronger, more efficient operations, the CPG industry has a clear path to regain its footing and even thrive in the years to come.