A multi-lens approach to finding growth in consumer goods

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Companies might be tempted to deprioritize growth, given the challenging economic environment. But our research shows that growth is even more important in times of economic uncertainty. And companies that grow during downturns tend to outperform when the economy recovers.

Finding growth begins with making the right choices regarding where to play. To make market-beating decisions, leading consumer goods companies mine insights not from a single perspective but rather by using a combination of four lenses: consumer understanding, category and channel value pools, competitive understanding, and capabilities to win. When looking through these lenses, leading companies apply advanced analytical tools and techniques, many of which are powered by machine learning (ML), at more granular levels to generate actionable, forward-looking insights. And they use predictive tools to develop a precise, quantified prioritization of growth opportunities—a “growth road map” that also includes estimates of the financial upside and the capabilities needed to win.

The payoff isn’t trivial. In our experience, companies with a growth-oriented operating model—which leverages this analytics-powered, multi-lens approach to growth—deliver significantly greater total shareholder returns than their peers.

Growth matters

Companies that can grow market share while also expanding their profit margins reap substantial rewards compared with the market. These accretive growers, on average, delivered 13.9 percent total shareholder returns, compared with only 6.2 percent for their peers (dilutive growers) that merely expanded margins without growing revenue ahead of the market (Exhibit 1).

Consumer goods companies that grow revenue while expanding margins deliver higher total shareholder returns.

But profitable growth is difficult to achieve: in 2020–21, only 29 percent of all consumer companies were accretive growers. And it is even harder to sustain: only 6 percent of companies accomplished this feat in four or more of the seven years from 2013 to 2020.1

How to beat those odds? In seeking profitable growth, there are three pathways that consumer sector companies can explore2The growth triathlon: Three pathways to extraordinary growth in the consumer sector,” McKinsey, August 17, 2022.:

  1. Strengthen the core of the business—in most developed categories and markets.
  2. Expand into adjacencies—through innovation or acquisition, in either new categories or new geographies.
  3. Ignite breakout businesses—mobilizing resources behind bold, disruptive bets.

Companies that pursue all three pathways together to maximize their opportunities for success are 97 percent more likely to outperform.

Even when consumer goods companies see these three pathways clearly, however, it can be difficult to make the right choices about “where to play”—which categories, geographic markets, channels, and business models to focus on. Looking through four lenses to understand consumers, category and channel value pools, competitors, and capabilities is a critical step toward answering that question (Exhibit 2).

Combine four lenses to determine where to play.

Many companies are aware of these four lenses but generally emphasize only one or two, rather than generating an in-depth, data-driven view into (and a clear understanding of the implications of) all four. Neglecting one or more lenses often results in growth plans that fail to achieve their targets—for example, because a company didn’t invest enough in a crucial capability or didn’t anticipate a competitor’s moves. Some companies do consider all four lenses but then rely on tools and methodologies that look in the rearview mirror instead of anticipating where future opportunities lie.

Using the four lenses to determine where to play

To derive the full benefit offered by this approach to growth—and properly identify where best to play and how best to succeed—insights from all four lenses should be integrated into a growth road map. The best-performing companies use ML-powered tools that are predictive, pragmatic, and comprehensive, which yield a broader set of growth opportunities and more actionable insights about how to successfully capture growth.

Consumer understanding

The pandemic and its aftermath have spurred dramatic shifts in consumer behavior. But even in the absence of an epochal event, consumer preferences naturally evolve over time. As consumer goods companies try to understand what consumers really want (not just what they say they want), many rely on basic consumer surveys, which can provide useful, big-picture information. However, generating transformative, forward-looking insights—the kind that can help consumer goods companies outperform the competition—requires more granular views of consumer behavior.

Leading companies seek a detailed view of precisely what drives consumer demand, how consumers use a product, and how these things might change in the future. For example, a pure-play snacking company did not look at its $65 billion addressable market at a category level (using category definitions) but instead examined it through the consumer lens of unique snacking occasions—each occasion filled with products from a range of categories that meet consumers’ needs at specific moments. This occasion-based view provided a better understanding of how consumers think about and buy snacks and allowed the company to better target its marketing and innovation to meet consumer needs. Results so far have been promising: since this change in approach, consideration of the company’s brands among consumers who are deciding which snacks to buy is up five percentage points to 80 percent, outpacing all sweet-baked-goods competitors.

Another type of analysis yields a consumer–category–occasion matrix, which can help a company understand the context in which a given product is most likely to be purchased—that is, for which types of consumers and occasions. When shopping for pens, for instance, a consumer might first decide whether the pen will be used for writing, for creative art activities, or for labeling and organizing. The consumer’s other consideration might be whether the pen is for an adult or a child. This type of occasion matrix can help a company estimate the size of occasion-based category segments and also model how these segments might evolve. Based upon consumer behavior trends, will the art occasion double in size over the next five years? Will children be spending more time on art than on other activities five years from now?

A related analysis quantifies “gettable” market share: What percentage of consumers who currently buy another brand could conceivably be persuaded to switch to your brand? And what incremental revenue, volume, and profit gains would result from successfully switching some given fraction of them?

Results from these analyses consistently show that the most attractive current and future demand pockets seldom track with strict, traditional category or even subcategory definitions. Advanced analytics can help spot key functional and emotional needs of consumers across occasions as well as evolutions in behavioral trends. Looking at trade-offs that consumers are making today can help predict their future decisions, allowing companies to identify opportunities that competitors have left untouched.

One snack manufacturer that owned iconic brands wasn’t meeting investors’ growth expectations. Its leaders had a number of growth initiatives in mind but had little clarity about which ones would yield the best results. In conducting the analyses described above, the company came across some eye-opening insights that convinced it to move into specific adjacencies. Although many consumers were buying sweet snacks to eat as an after-dinner treat, that particular market segment wasn’t growing much. On the other hand, a smaller segment—adults buying sweet snacks for their morning commute—was growing more than twice as fast. Drawing on insights like these, the company developed a prioritized portfolio of moves, determined the investments and capabilities required, and translated its growth plans into a five-year financial forecast that it presented to investors. The impact: double-digit growth in revenue and total shareholder returns over a five-year period—well above that of its category peers.

A gourmet-food company capitalized on the shift in consumer behavior during the pandemic and ignited a breakout business by pivoting to an online-only, direct-to-consumer model. It invested in innovative segmentation efforts to better understand consumer needs and improve its ability to target the highest-value customer segments. The company also revamped its website and invested in digital-marketing skill building. These moves transformed the company and yielded double-digit growth.

Category and channel value pools

Most companies have a solid understanding of their current sales performance in the various categories in which they play but have not delved deeply enough into analysis of profit pools. Advanced analytics, applied to a large data set, can help determine where value sits in a given category today, how profit pools might evolve in the future, and what the drivers of value are. Leading companies use algorithmic modeling to forecast how their businesses will evolve and assess how well they’re set up to capture growth from profit pools.

Companies should examine industry shifts: which new business models are growing profit pools and which categories and geographies will drive value growth in the future. Companies should not stop at estimating revenue and profit pools for themselves but should also assess how the value chain flows between competitive companies and retailers.

When a beverage company undertook a rigorous, analytics-driven category assessment in 2020, it began by creating “one source of truth” that compiled all of its existing and potential areas to play in, including multiple country views. An initial, internal view of sales data was extended to include a market view by combining multiple external data sets into one baseline. The company then added further external inputs (for example, macroeconomic data, consumer sentiment data, and financial indicators), applied state-of-the-art multivariate ML techniques, and estimated future pockets of growth while also identifying spaces and locations where its brands had not become leading entrants. As a result of this analysis, it discontinued several underperforming products and refocused on top performers.

Competitive understanding

A comprehensive review of the competitive landscape can help a company identify where it is comparatively strong or weak. Benchmarking your company’s financial performance across multiple dimensions—including market performance, operating performance, analyst consensus, and environmental, social, and governance metrics—while examining the key asymmetries of other competitive consumer goods players and the strategies they have employed to achieve profitable growth can illuminate a route forward.

To understand the key asymmetries of a competitive player, companies can undertake a full review of the competitor’s activities regarding major line items to model a “shadow profit and loss.” This exercise provides a quantified view of competitors’ strengths, weaknesses, cross-portfolio funding sources, and so forth. Strategies can then be developed based on insights into competitors’ likely future holistic strategies instead of focusing on an isolated strategic element or engaging in retrospective market performance analyses.

In analyzing the growth of competitors, it’s useful to disaggregate that growth into its individual components. How much of the growth was derived from mergers or acquisitions? How much came as a result of momentum in a sector or category? And how much was due to strong execution (delivering growth above what category momentum provided)? What is the company’s “right to win” in this space? A data-driven analysis of the growth and profitability of past top performers—both established players and emerging disruptors—can lead to actionable insights. It’s instructive, too, to study the fastest-growing consumer goods companies and assess their winning formulas in each of the three growth pathways: the core, adjacencies, and new businesses.

One beauty company studied its peers’ growth to see how much came from M&A, how much came from category momentum, and how much came from superior execution. When it identified execution as the key factor that was accelerating its peers’ growth, the beauty company reallocated resources away from M&A and launched a new initiative to improve its capabilities in execution-oriented domains (such as revenue management, marketing, and innovation).

Capabilities to win

Even as they look outward to gauge growth opportunities, consumer goods companies should also look inward to develop refined self-assessments. A company can move forward with confidence only after it has attained a deep and accurate understanding of its own capabilities. In which domains is it prepared to succeed now? And in which must it overcome self-generated obstacles to its success? What steps should it take to close capability gaps?

Industry benchmarks and best practices are crucial for assessing a company’s capabilities in important domains such as innovation, revenue growth management, and e-commerce. High-growth companies conduct detailed capability assessments by domain, comparing their maturity levels with best-in-class players and learning best practices in commercial excellence.3Winning with commercial excellence: Ten lessons for consumer goods,” McKinsey, June 30, 2022.

As a large American beverage distributor embarked on a five-year strategy journey, it found it immensely helpful to gather its commercial team leadership for a comprehensive self-assessment. This led to an interesting discussion, which surfaced differences in perspectives between the commercial vice president (VP) and his direct reports. Having focused on frontline efficiencies and execution over the past five years, the VP’s team was focusing its next five-year vision on strategic planning and capability building in digital and analytics (including elements such as microsegmentation of customers and analytics-based order building). The VP, while acknowledging the focus required in those areas, identified remaining gaps in frontline execution, which, if addressed, could be quick wins in the following one or two years. This exercise helped the company sharpen its near-term priorities while also defining key impact metrics to track within its five-year vision.

As consumer goods companies weather the challenges of the moment, they will likely benefit from maintaining a resolute focus on achieving profitable growth—a proven path for boosting shareholder returns. Using advanced analytics to answer questions about “where to play”—while applying the four lenses outlined here (consumers, categories, competition, and capabilities)—can help an organization assess and prioritize opportunities while allocating its resources efficiently and effectively in service of a well-conceived strategy. Mastering the three growth pathways is the other hurdle: companies should again take a multipronged approach, developing a growth road map that strengthens their core categories and markets, expands into adjacencies, and launches entirely new businesses on the way to sustainable, profitable growth.

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