The economic disruptions brought about by the COVID-19 pandemic and high inflation have significantly transformed the way consumer-packaged-goods (CPG) companies achieve sales growth. Before 2020, pricing and volume were the main drivers of sales growth, with pricing taking the lead. However, the prolonged period of high inflation has led to a greater shift towards price-driven growth, with volume either declining or remaining relatively flat for most consumer goods categories.

Navigating the Changing Landscape of CPG Sales Growth

Price Elasticity during Inflationary Times

In the years preceding 2020, most CPG companies achieved mid-single-digit net-sales growth. Our analysis of the top 32 publicly listed CPG companies showed that this growth was driven slightly more by price than by volume. In 2020, the pandemic caused growth to stagnate. In 2021, both price and volume increased by about 3 percent. In 2022, the situation changed significantly. Hyperinflation pushed prices up by more than 10 percent, while volume decreased. Despite this, overall net sales remained high due to the steep price increases. In 2023, inflation eased, reducing net-sales growth, but volume did not return. So far in 2024, price growth has been much lower, and volume continues to decline. This shift towards price dominance in sales growth has attracted the attention of analysts and investors who are sensitive to volume losses. Company executives have been working to reassure investors about their plans to achieve a more balanced and sustainable mix of price and volume-driven growth.

Rebooting Revenue Growth Management

In recent years, CPG companies have faced challenges in delivering total shareholder returns. Investors are concerned about whether companies can balance price and volume to drive higher growth rates. As inflation recedes, the potential of the pricing lever also decreases. Therefore, more sophisticated revenue growth management (RGM) capabilities are needed to continue to drive net-price realization and growth. Companies can improve their chances of achieving more balanced net-sales growth by reactivating all four RGM levers: pricing, promotions, assortment, and trade investment. Here are five areas that companies should focus on:- Set grounded aspirations for multiple cycles: Central banks' projections suggest that inflation could return to pre-pandemic levels within a few years. CPG companies should use these projections as a reference point when planning their price realization strategies. They should aim to achieve a 2 percent price-mix realization coupled with a modest volume increase of 1 to 2 percent, depending on the growth dynamics of the category. Top-performing companies should strive to exceed this baseline.- Get to know your consumers better: Despite positive macroeconomic indicators, companies should pay close attention to consumer and household sentiment and behaviors. Consumer price index data shows that inflation has had a significant impact on household budgets. A recent McKinsey ConsumerWise survey shows that US consumers have become more cautious about spending and are changing their shopping behavior. Companies need to understand how their core consumers might respond to price-related moves and adjust their RGM strategies accordingly.- Develop a chessboard of moves with RGM levers: Many companies set ambitious net-sales-growth targets but lack a clear plan for success. Using the right RGM tactics in the right proportion for the right brand and on the right channel can help companies stand out. There is a premium to be captured by getting this right. Companies should understand the relative net elasticity effect of different RGM tactics and tailor their strategies accordingly.- Double down on tech capabilities: Effective data strategies and AI can help companies navigate the complexities of consumer behavior and market dynamics. However, many CPG companies struggle with implementing the right technology. Advanced tech solutions such as high-accuracy predictive and automated technology, supported by robust shopper analytics, can help companies develop optimal pricing and RGM strategies. For example, a food company increased the sophistication of its methodology by adding new shopper analytics and developing a high-accuracy, AI-enabled predictive and prescriptive simulator.- Find new ways to engage retailers: The dynamic between CPG companies and retailers creates a healthy tension that leads to efficient outcomes for consumers. However, this tension can also be challenging. CPG companies can proactively engage with retailers through retail media networks (RMNs) and data acquisition. By integrating their sales and marketing teams and using RMNs to run integrated omnichannel campaigns, companies can improve visibility and value for consumers. They can also take advantage of granular data on SKU sales across all sales channels to build more robust models and have more strategic discussions with retail partners.The current landscape is challenging for CPG companies looking to increase net sales. The era of "easy pricing" is over, and unit consumption growth is a pressing concern. RGM practitioners can help their companies navigate these challenges by using a clear-eyed and tailored approach that sets realistic aspirations in the context of the macroeconomic conditions. By using smarter AI and generative AI, companies can better align stakeholders and engage retailers, leading to greater price and volume growth. Companies that excel in RGM could achieve a 1.2 to 1.5 times net-price realization above baseline inflation while boosting consumption at category-level rates. This is a worthy goal that companies should strive to achieve.