The growth triathlon: Three pathways to extraordinary growth in the consumer sector

| Article

Delivering exceptional growth, even in the short term, is a tall order. More difficult still is to do it profitably, year after year. Yet demanding investors continue to expect—even in the face of global conflict, and with margins under pressure from inflation and supply chain disruptions—that consumer companies will deliver continuous, profitable growth above the historical average of 3 percent.1

Is there one winning strategy guaranteed to achieve that kind of growth? As avid sports fans and avowed stat heads, we decided to “Moneyball” this question, investigating in the same way a baseball scout might use advanced statistics to assess a shortstop. After we sifted through the data to figure out what really drives success, we discovered that—at least when it comes to profitable growth outperformance—being a mere single-sport athlete is not enough. One can’t be just a swimmer, a runner, or a cyclist. Consumer companies instead need to think and execute like triathletes.

There’s no literal swimming, running, or biking involved here, of course. The three events in the consumer sector triathlon are three proven avenues for growth, each of which demands sustained focus and commitment:

  1. Companies must expand the core of the business.
  2. They need to expand into adjacencies, through innovation or acquisition, in either new categories or new geographies.
  3. They must ignite breakout businesses.

In the past, a company might have gotten away with pursuing just one of these pathways, but that’s no longer sufficient. Neglect any of these important routes to growth and a company risks falling behind the competition. Excel at all three, and the company becomes a consumer sector triathlete—on its way to faster, more lasting, more profitable growth.

Who is growing? How fast? And how profitably?

Across the consumer sector, average growth from 2009 to 2019 was 3 percent. As Exhibit 1 shows, smaller companies (with $300 million to $3 billion in annual revenue) grew fastest, at a rate of 5.2 percent. It was far more difficult for large companies to grow: companies with more than $10 billion in annual revenue grew at only 2.4 percent.

Rapid growth in the consumer sector is rare, with faster growth typically coming from smaller and midsize companies that have headroom to grow.

Achieving rapid growth helps to beat the odds, but growth alone won’t satisfy demanding investors. Companies are expected to grow quickly while also expanding margins.

Within the consumer sector, about 30 percent of companies were able to drive extraordinary growth of greater than 6 percent CAGR between 2009 and 2019. But if one looks more closely, only about 40 percent of those fast-growing companies—or just 12 percent of all public companies in the consumer sector with more than $300 million in annual revenue—grew faster than 6 percent per year while also expanding EBIT margins. Let’s call that elite 12 percent the “extraordinary accretive growers.” Their combination of rapid growth and expanding margins rewarded investors with median total shareholder returns (TSR) of about 20 percent a year. That’s 2.5 times greater TSR than the median for the rest of the sector.

What about companies that grew quickly but at the expense of margins? Companies that were able to achieve annual growth of more than 6 percent but paired that growth with flat or declining margins weren’t nearly as lucrative for investors as their elite peers. These “nonaccretive” growers delivered only a little more than half the TSR of the extraordinary accretive growers (Exhibit 2).

Consumer companies with extraordinary accretive growth achieve total shareholder returns significantly higher than their peers.

Profitable growth outperformance is the trophy here, but it’s no easy feat. Only 11 percent of small companies, 15 percent of medium companies, and 10 percent of large companies in the consumer sector managed to achieve extraordinary accretive growth over the decade (Exhibit 3). Medium-size companies might have benefited from some measure of structural advantage by virtue of having sufficient scale and agility to compete but also ample room to grow.

Within any size segment, only 10 to 15 percent of companies achieve extraordinary accretive growth.

We’ve established that extraordinary accretive growth is challenging but worth it. How can consumer companies achieve it?

When we study what distinguishes the extraordinary accretive growers from their peers, a pattern emerges. We frequently see that they don’t do just one thing well, but instead execute along three distinct growth pathways. Much like triathletes who are naturally gifted runners—but don’t neglect their training as swimmers and bicyclists—companies with aspirations for accretive growth might be naturally inclined to develop one particular growth pathway but are better off pursuing all three at once.

The three events in the consumer sector triathlon are growing via expanding the company’s core, growing via adjacencies—including new categories and new geographies—and growing via breakout businesses.

Let’s explore each in more detail.

Expanding the core: Don’t neglect the fundamentals

Expanding the core, which constituted 82 percent of consumer sector growth between 2009 and 2019, is often a company’s most critical driver of growth. However, it is also often underappreciated. Throughout the past decade of working with many consumer companies, large and small, we’ve observed that most companies—even those that hold a leading share in a category—tend to underestimate the potential for growth remaining in their cores. Meanwhile, few companies are able to achieve their growth goals without growing their core categories and geographies. Strengthening the core means a company is 62 percent more likely to achieve above-market, accretive growth.

Many companies, especially large ones, tend to think of their cores as static and frozen. That’s a growth-killing error. The core must be dynamically maintained, and a company must be willing to actively manage and routinely reevaluate the components of its core.

How can a company fully exploit its core’s growth potential? It might expand the universe of consumers it serves or increase the number of occasions when it serves them. It might mold itself into a truly world-class marketer or innovator. It might master the various aspects of revenue growth management: pricing, promotions, assortment, and trade investment. Growth through price alone might work for a year, but extraordinary accretive growth over a decade requires a healthy mix of transaction growth, revenue per unit growth, and overall volume growth.

Among large consumer companies, Coca-Cola has been a recent standout. The Coca-Cola system has a clearly defined core in soft drinks with strong brands. The company has been able to grow this core further by, in part, leaning on advanced analytics. By collecting abundant data, tracking it weekly, and mining it for insights, Coca-Cola can optimize revenue growth management. It can determine which products and promotions to offer—or even the best spot to place a cooler in a store—with each tactic carefully tailored to different segments of outlets and shoppers. The company’s analytical expertise helps it predict the effects that these choices will have on sales volume and ROI. From 2019 to 2021, employing this approach, Coca-Cola grew US retail sales from its core soft drinks by 22 percent.

Another exemplar of core growth is the Swiss chocolatier Lindt. The company shifted focus to its two premium core brands (Lindor and Excellence) and to seasonal occasions such as Christmas and Easter. It bolstered its premium image with above-the-line marketing featuring regional “Master Chocolatiers.” The acquisition of the premium North American chocolate brand Ghirardelli rounded out Lindt’s core offerings. As a result of moves such as these, from 2009 to 2019, Lindt’s EBITDA margin grew to 20.5 percent, from 15 percent. At the same time, revenue grew by more than 6 percent per year, primarily due to the pricing power that came from focusing on premium offerings.

Adjacencies: Growth might be just a step away

Many companies can grow by expanding into the next concentric circle of opportunity. That might mean related categories, new geographic markets, or both.

New categories

Done well, entering a new category can leverage a company’s assets and capabilities to compete in faster-growing and more profitable realms. Done poorly, entering new categories can lead to significant value destruction—as well as organizational distraction, loss of board confidence in future deals, and decreased investor faith in the company’s ability to grow beyond its core. While the risks are real, the potential upside is meaningful: companies that move into new categories successfully are 23 percent more likely to achieve above-market, accretive growth.

It’s critical to enter only adjacent categories that are sufficiently related to the current core. Companies must carefully gauge how relevant their capabilities will be compared with incumbents in the adjacent category. Many companies we’ve worked with have, at various times, overestimated the magnitude of their relevant advantages. (Debiasing techniques, such as “premortems,” can be used to mitigate this risk.2Behavioral science in business: Nudging, debiasing, and managing the irrational mind,” McKinsey, February 27, 2018; and Gary Klein, Tim Koller, and Dan Lovallo, “Bias busters: Premortems: Being smart at the start,” McKinsey Quarterly, April 3, 2019.)

As one leader in consumer packaged goods told us, “The surest way to fail in a new category is to pull it into the mother ship. The second surest way is to leave it totally alone.” In devising plans for how the new category entrant will operate, companies must find a happy medium between leveraging core assets and offering autonomy. This could mean integrating functions such as finance and procurement for greater efficiency while ensuring that unique approaches to brand marketing and innovation don’t lose their distinctive spark. Other pitfalls include entering adjacencies with unrealistic expectations or without lining up the top-performing talent and sufficient investment levels required to accelerate growth.

When Italy-based Ferrero found its core offerings of chocolate and sugar confections facing fiercer competition, it sought new growth in the adjacent biscuit category through both innovation and acquisition. Ferrero developed variants of its own core products (for example, Nutella hazelnut spread begat Nutella Biscuits) and acquired iconic but underperforming biscuit brands (such as Keebler, acquired from Kellogg’s). Among smaller companies, Kodiak Cakes has identified a slew of new products as the next step beyond its core. Between 2019 and 2021, Kodiak doubled its retail sales, but only 26 percent of that growth came from its core dry mixes. The additional growth resulted from, among other efforts, more than sextupling its sales in new grocery categories such as muffin cups and granola bars.

For companies hoping to build adjacencies quickly, inorganic expansion is likely the best strategy for achieving rapid scale. McKinsey research suggests that programmatic mergers and acquisitions—an approach that employs a steady series of deals that adhere to a carefully honed theme instead of relying on intermittent “big bang” deals—can be particularly effective. Programmatic M&A yielded more excess returns from 2010 to 2019 than did “selective” and “large deal” approaches, both of which yielded negative returns on average.

New geographies

Geographic expansion has been a critical growth driver, particularly for large companies, over the past two decades. The recent upheaval caused by lockdowns in China, as well as by Russia’s invasion of Ukraine, has led companies to reexamine their ambitions for international growth. However, companies that are nonetheless able to move into new geographies successfully are 22 percent more likely to achieve above-market, accretive growth.

Large companies often already compete in many markets, but they can seed new growth by mining local “brand jewels” from their core markets and transplanting them in new geographies. For medium-size companies, many of which might be at the beginning of their international growth journeys, internationalization starts by focusing on a limited number of promising markets. Companies sometimes feel compelled to enter many markets at once, but evidence suggests that new-market entry is generally harder and slower than anticipated. Likewise, the logic of “if we can win just 1 percent of a big market, we’ll have a big business” is tantalizing but dangerous. Successful companies concentrate on their initial geographic growth forays, as they recognize that those successes will build confidence for subsequent expansions.

Breakout businesses: Disruptive bets can deliver big growth

Technological innovation and digitization are creating opportunities for disruption. Novel business models can provide access to new value pools while disintermediating the competition (or, in some cases, staving off disintermediation themselves). Promising business model disruptions can evolve even further—into outright ecosystems that generate network effects and stickier consumer and customer relationships. Launching disruptive businesses is the least established and most dynamic of the three growth pathways, but we can already discern a few lessons.

Disruption through platform building—employing either a direct-to-consumer or business-to-business model—is a popular gambit and can be a winning play. But across consumer subsectors, only a small number of platforms tend to achieve meaningful scale. There are often clear number-one and number-two players—with a long tail of competitors battling over the remaining 20 to 30 percent of the market.

Very few consumer companies have the scale and resources to build a robust platform on their own. When companies do choose to be the architect or builder of a platform, they must articulate a clear ambition and coalesce behind it. It’s vital for a company to decide whether and when it is willing to disrupt its own business by, for example, hosting competitive brands on its platform. Companies that choose to simply participate on a platform instead of building it are more likely to thrive if they can act as “kingmakers”—joining the platform early and securing favorable terms such as autonomous pricing power, access to platform data, or exclusivity within a category.

There is no single guaranteed method of disruption, but a variety of success stories can offer inspiration. McDonald’s, a digital laggard until relatively recently, is now rapidly transforming itself into a digital behemoth—at first by partnering with existing food delivery apps and then by launching its own platform and using delivery partners for fulfillment. The company’s ballooning digital presence enabled a digital loyalty program that garnered 26 million members within nine months of its launch. By the second quarter of 2022, roughly five years after its initial forays, McDonald’s saw more than 30 percent of sales come via digital channels.

By reframing itself as a pet care company instead of a pet food company, Mars Petcare looked beyond its roots in traditional pet food to create a reenforcing digital and physical ecosystem featuring veterinary clinics, diagnostic health tools, smart collars that track pet activity, and direct-to-consumer subscription pet nutrition services. As a result, the company doubled its business in ten years, with increasing multiples. It is now the largest operator of veterinary clinics in the United States.

If there is one rule about disruption, it’s that investors won’t be satisfied with mere talk. They wait for results. It’s unwise to assume that simply announcing an intent to disrupt will lead to higher valuation multiples.

Sustaining extraordinary accretive growth in the consumer sector is challenging and only becomes more difficult as a company expands. Ongoing impediments such as geopolitical instability and supply chain tangles don’t help. Looming crises such as recession and hyperinflation wait in the wings, ready to thwart growth ambitions.

Investor expectations for growth in the consumer sector exceed its historical performance. But relentlessly pursuing three pathways in parallel—the tried-and-true core, promising adjacencies, and game-changing disruptions—will bring a consumer company closer to winning the gold medal in growth.

Explore a career with us