The consumer packaged goods (CPG) industry, known for decades of reliable growth and stable returns, is at a critical turning point. With slowing revenues, rising costs, and fragmented consumer preferences, CPG companies are adopting artificial intelligence (AI) to drive innovation, improve efficiency, and restore growth.

“AI is no longer just a tool for operations; it’s central to our strategy,” says Michael Johnson, CEO of Global Foods Inc., one of the world’s largest CPG conglomerates. “AI enables us to better understand consumers, streamline supply chains, and make faster, smarter decisions.”

The End of the Old Growth Model

For years, CPG companies operated on a proven formula: build strong brands, expand into new markets, and manage costs to fund marketing. This model provided steady annual growth of around 5%, making the industry a favorite among investors.

But that approach no longer delivers. Over the past decade, growth in the CPG sector has slowed to just 2% annually, according to a report from McKinsey & Company. Companies have relied heavily on cost-cutting to boost profitability, but this has failed to meet investor expectations for growth.

“Cost-cutting alone won’t keep companies afloat,” explains Jessica Moulton, senior partner at McKinsey. “What investors want is a dual approach—driving growth while enhancing efficiency.”

Warren Teichner, another partner at McKinsey, adds: “Traditional methods aren’t working. Companies need new approaches that integrate portfolio optimization and performance enhancement.”

Four Disruptive Trends Shaping CPG

Several key trends are forcing the CPG industry to rethink its business models.

1. Global Economic Slowdown

Historically, favorable macroeconomic conditions—rising populations and growing wealth in emerging markets—fueled much of the CPG industry’s expansion. Today, those conditions are eroding. Global population growth has slowed to 0.9% per year, and wealth creation in developing markets has dropped nearly 50% since the late 1990s.

“Emerging markets were a major growth driver for CPG, but that’s no longer the case,” says Dr. Anika Patel, chief economist at the International Consumer Goods Forum. “Companies need to rethink their strategies.”

McKinsey projects inflation-adjusted global consumer goods growth to rebound to 3% to 5%, but this is only half the rate seen at the start of the 21st century. Most of this growth will come from developing markets, although their contributions will be more geographically dispersed.

2. Fragmented Consumer Preferences

The rise of digital technologies has fractured consumer attention and preferences, allowing smaller brands to capture market share by targeting niche audiences.

“Consumers today expect personalization and authenticity,” says Maria Gonzalez, chief marketing officer at PureEssence Organics. “They want to buy from brands that align with their values, which has created opportunities for smaller players.”

Between 2016 and 2019, small U.S. brands—those generating less than $150 million annually—accounted for 50% of market value growth despite making up only 11% of overall revenues. These brands have successfully positioned themselves as premium alternatives, especially in natural and organic products.

Though the pandemic disrupted this trend, consumer demand for uniqueness and authenticity remains strong. “Big CPG firms need to decide whether to compete in these niche markets or risk losing relevance,” warns Linda Green, senior analyst at MarketInsights Research.

3. Pressure from Retail Giants

Retail titans like Walmart and Amazon continue to exert substantial pressure on suppliers, demanding lower prices and better terms, which squeezes CPG margins.

“Negotiating with these retail giants is more difficult than ever,” notes David Lee, CFO of FreshWave Beverages. “Their buying power allows them to push for lower costs, putting additional strain on our operations.”

This forces CPG firms to rethink their channel management and pricing strategies.

4. Rising and Unpredictable Costs

Global supply chain disruptions, fluctuating commodity prices, and geopolitical tensions have all contributed to an increasingly volatile cost environment.

“Traditional cost-management strategies don’t cut it anymore,” says Elena Rodriguez, director of supply chain operations at GlobalHome Products. “To manage these challenges, we need real-time data and predictive analytics.”

AI: The Game Changer

In response to these shifts, CPG companies are turning to AI to improve operations and long-term strategies.

“AI enables us to analyze data at a scale and speed that was previously impossible,” says Kevin Thompson, director of digital transformation at BeautyLux Inc. “This capability is critical for understanding consumer behavior, refining our marketing, and streamlining operations.”

Supply Chain and Operations

AI is improving supply chain visibility and efficiency. Advanced AI algorithms predict demand patterns, optimize inventory, and anticipate disruptions from weather, geopolitical factors, or bottlenecks.

“We’re using AI to better manage inventory and reduce waste,” says Susan Miller, head of operations at CleanLiving Household Goods. “By leveraging AI, we’ve cut inventory costs by 15% and improved order fulfillment.”

A recent study by Gartner found that companies using AI-driven supply chain solutions can reduce costs by up to 20% while increasing service levels.

“Efficiency isn’t just about cutting costs—it’s about building a supply chain that can adapt to changing conditions,” says Mark Stevens, supply chain strategist at Accenture.

Personalized Marketing

Consumers today expect personalized marketing and seamless interactions with brands. AI is central to CPG companies’ efforts to deliver targeted content and product recommendations.

“AI helps us create marketing campaigns that resonate with specific consumer segments,” notes Rachel Adams, chief digital officer at GlobalCare Skincare. “This allows us to offer relevant promotions and increase engagement.”

Jason Liu, marketing director at FitLife Nutrition, agrees. “Using AI to identify micro-segments in our audience boosted conversion rates by 25% in our latest product launch.”

Product Innovation

AI is driving faster product innovation by predicting emerging consumer needs and identifying new product features that are likely to succeed.

“In the past, it could take us 18 to 24 months to develop a new product,” explains Laura Chen, VP of product development at SnackWorld International. “Now, with AI-powered consumer insights, we’ve reduced that timeline to under a year.”

AI tools can analyze social media trends, product reviews, and market data to simulate consumer responses and forecast product success.

“AI allows us to evaluate product concepts before they hit the market, minimizing failure risk and improving product launches,” says Dr. Thomas Müller, head of R&D at HealthPlus Supplements.

A Dual Strategy for Success

AI fits within a dual strategy of portfolio optimization and performance enhancement.

Portfolio Optimization

AI-driven analytics give CPG companies insights into consumer behavior, market trends, and competitive dynamics, helping guide decisions on mergers, acquisitions, and divestitures.

“Data analytics are now a key part of our M&A strategy,” says Alan Richards, head of corporate development at HomeEssentials Corp. “By using AI, we can identify acquisition targets that align with long-term growth opportunities.”

Performance Enhancement

AI is delivering major improvements in operational efficiency, from demand forecasting to pricing.

“Accurate demand forecasting is critical for reducing waste and improving supply chain performance,” explains Ms. Rodriguez. “AI models that incorporate historical sales, weather patterns, and economic indicators are improving forecast accuracy.”

AI-driven dynamic pricing models also help companies optimize revenue in competitive markets.

“We’ve seen a 10% increase in revenue by using AI to adjust pricing in real-time,” says Mr. Lee of FreshWave Beverages.

Overcoming Challenges

While AI offers significant potential, its implementation comes with challenges, including data integration and resistance to change.

“AI systems are only as good as the data they’re trained on,” cautions Mr. Thompson of BeautyLux. “Ensuring data accuracy and consistency across platforms is essential to unlocking AI’s full potential.”

Additionally, companies must overcome internal resistance. “Effective communication and training are critical to ensuring that employees embrace AI,” advises Linda Martinez, CEO of Nature’s Best Foods.

What’s Next for CPG?

As the CPG industry moves into 2024, AI will continue to play a pivotal role in determining which companies succeed.

“Those who invest in AI and integrate it into their operations will thrive,” asserts Mr. Johnson of Global Foods. “Companies that fail to adapt risk being left behind.”

The pace of AI development is accelerating, and continuous investment is necessary to stay competitive.

“AI’s capabilities are expanding rapidly,” says Dr. Patel. “To stay ahead, companies must be agile and ready to embrace the latest technologies.”

The future of the CPG industry will be shaped by those that use AI to drive innovation, efficiency, and growth.