U.S. consumer packaged goods sector faces growth squeeze as investors focus on tech

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Ciaran Ryan

15 hours ago

U.S. consumer packaged goods sector faces growth squeeze as investors focus on tech — Growth squeeze for CPGs

While data centre investment is driving much of the current U.S. growth narrative, a large swath of corporate America is seeing a far weaker operating environment. Consumer packaged goods companies are contending with soft demand, heavier competition and limited investor enthusiasm even as the broader economy continues to expand.

Highlights

Average sales volumes at 15 major U.S. staples companies were negative in 13 of the last 18 quarters, with S&P 500 household and food products sectors returning 2 per cent and minus 6 per cent over five years, including dividends.
Weak real wage growth, slowing consumption, lower population growth, GLP-1-related snack demand drop, and tough e-commerce competition are squeezing packaged goods volumes and pricing power.
Store and insurgent brands are capturing 70 per cent of U.S. consumer product growth, undermining large incumbents, while investors react negatively to consolidation plays like Kimberly-Clark's Kenvue and McCormick's Unilever food deal.

Consumer staples struggle for volume growth

As reported by Financial Times, the consumer packaged goods industry offers a contrasting view of the U.S. economy, with major staples groups expanding more slowly than GDP and often failing to grow volumes. Data cited from Sakonnet Research show average sales volumes at 15 of the largest U.S. staples companies have been negative in 13 of the last 18 quarters, while the S&P 500 household products and food products sectors have returned 2 per cent and minus 6 per cent, respectively, over the past five years including dividends.

The pressure comes from several directions. Middle- and lower-income consumers are under strain, real wage growth has recently turned negative and consumption growth has been slowing since the start of the year. The sector is also dealing with weak population growth after immigration effects fade, lower snack demand linked to GLP-1 drugs and lingering consumer resistance after companies raised prices sharply during the 2021-22 inflation surge.

Competition has intensified as e-commerce and social media lower the barriers for smaller challenger brands. At the same time, retail concentration around groups such as Walmart and Costco, along with stronger acceptance of store brands, is making it harder for established packaged goods companies to defend pricing and shelf space.

Competitive pressure reshapes investor expectations

Nicolas Willemot, who leads Bain's consumer products practice, says consumer spending in the U.S. is still growing, but store and insurgent brands are capturing 70 per cent of that growth. That leaves large incumbent companies needing to sharpen pricing and product offerings after years in which cost-cutting and consolidation absorbed much of management attention.

The limits of financial engineering are becoming clearer to investors. 3G Capital's aggressive cost-cutting model influenced deals at Kraft Heinz and AB InBev, but weaker subsequent growth and share performance have undermined confidence in that playbook. Markets have also reacted coolly to consolidation plans, with Kimberly-Clark shares falling after its Kenvue bid was announced last year and McCormick facing a similar response after announcing a March deal for Unilever's food business.

The divergence between tech-led investment growth and the more mature, consumption-led parts of the economy helps explain why strong GDP data can coexist with weak sentiment and uneven industry surveys. For investors, the message is that much of corporate America still looks more like consumer goods than technology, and that growth in those sectors remains difficult to secure.

In our earlier article on Colgate-Palmolive’s shares under sustained selling pressure, we noted the stock slipping below key short- and medium-term moving averages despite the company renewing its long-running research partnership with The University of Manchester. The piece highlighted mixed technical signals and oversold conditions, suggesting near-term volatility around support levels even as the company maintained a longer-term strategic focus.

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