The consumer packaged goods industry has struggled since 2002 to pass on rising commodity costs to consumers. From 2002-2007, as input costs rose 40%, companies only raised prices 15%, losing $70 billion in margins. Structural shifts like value-conscious consumers and powerful retailers have made it difficult to raise prices. Regaining pricing power will require innovation to create new premium products and reset category prices upward. Maintaining pricing discipline amid volatile commodity prices will also be important to protect margins in coming years.

1. D EC EM B ER 2010
c o n s u m e r pa c k a g e d g o o d s p r a c t i c e
The commodity
crunch in consumer
packaged goods
Richard Benson-Armer, Peter Czerepak, and Tim Koller
Packaged-goods companies have been socked by rising commodity prices. Executives
in other industries can learn from their experience.
For almost 40 years, the US companies maintained profit
consumer goods sector was among margins when input costs rose
the safest of havens for investors. It and enjoyed expanding margins
rewarded them with annual returns when they fell. In fact, we estimate
well above the market average— that between 1996 and 2002, the
second only to those of the energy strategy of passing on commodity
sector—and in a bumper period price increases was responsible for
from 1985 to 2002 outperformed the two-thirds of net margin expansion
S&P 500 index by almost 20 percent in the sector, or roughly $10 billion
annually. Since then, the sector has in value.
barely outpaced the index, despite
persistent attempts by companies The tables turned in 2002. From
to find winning strategies. While that year until 2007, industry players
inadequate cost controls and a passed on price increases of just 15
failure to deliver significant value percent as cumulative commodity
from a wave of mergers and costs grew by 40 percent (exhibit).
acquisitions haven’t helped, one As a result, we estimate that the
factor is the dominant culprit for failure to pass on commodity price
the current malaise: the industry’s increases was responsible, during
response to changing commodity that period, for 75 percent of the
prices. sector’s margin contraction, which
cost about $70 billion.1
Losing control
From 1985 to 2002, consumer- A return to the days of passing
packaged-goods companies commodity price increases on to
regularly passed on to consumers consumers won’t come easily. The
increases in the price of inputs structural shifts that dampened the
(including aluminum, cereals, industry’s pricing power remain:
oil, and paper) while holding the consumers are increasingly value
line on prices when raw-material conscious, and large discounters
costs declined. In this way, these still dominate the retail landscape.

2. 2 The commodity crunch in consumer packaged goods
These retailers, using detailed sectors ranging from consumer
analysis of data available from electronics to industrial chemicals
their point-of-sales systems and to medical devices—currently
shopper research, today have a facing an unfavorable and volatile
sophisticated understanding of the environment for raw-material costs
prices they want and of their ability and pricing.
to demand those prices.
Regaining the initiative
The net result is that the industry Many economists and financial-
continues to face downward market forecasters believe that
pressure on prices. Some of the continued price volatility amid a
solutions aren’t complicated, but general rise in commodity prices
they are extremely difficult to is likely as the world economy
Q1 2011 implement and probably hold recovers, so companies across
CPG lessons for companies—in many sectors may easily destroy
Exhibit 1 of 1
Since 2002, industry players in packaged goods have been
less able toindustry players price increases tohave been
Since 2002, pass on input in packaged goods consumers.
less able to pass on input price increases to consumers.
Consumer-packaged-goods industry,
index: product price index and raw-material price in 1985 = 100
Raw-materials price1 Producer price index
1985–96: companies 1996–99: companies After 1999: companies 2002–07: companies
passed on raw-material maintained prices, although increased prices were unable to pass on
price increases raw-material prices as raw-material prices raw-material price
decreased by ~10% increased increases to consumers
180
170
160
150
140
130
120
110
100
90
0
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
1 Average weighted by sector-specific indexes for raw-material inputs—eg, aluminum, plastics, and raw sugarcane as inputs for
soft drinks—and by weight of sector in overall consumer-packaged-goods market.
Source: Standard & Poor’s Compustat; US Bureau of Labor Statistics; McKinsey analysis

3. The commodity crunch in consumer packaged goods 3
value in the years ahead. Suppose a financially sustainable innovation
that in consumer packaged goods, pipeline, for consumers who seek
commodity prices increase by about a steady stream of new products
20 percent during the next five years, that satisfy new needs, and for
and companies hold prices constant retailers that hope to benefit from
in a quest to maintain market share. greater demand for new and existing
In that case, up to 4.5 percentage products.
points of margin could be lost—or
about 33 percent of current earnings 1
Our analysis excludes 2008 and 2009, when
before interest, taxes, depreciation, the global recession and dramatic market
fluctuations skewed the data.
and amortization (EBITDA). Avoiding 2
See Walter L. Baker, Michael V. Marn, and
this fate will require iron-willed Craig C. Zawada, “Do you have a long-term
pricing resolve, which may be pricing strategy?” mckinseyquarterly.com,
October 2010.
richly rewarded if the environment
turns slightly more favorable. If
commodity prices fall by 5 percent Richard Benson-Armer is
in the next five years but companies a director in McKinsey’s New
hold product prices steady, for Jersey office, Peter Czerepak
example, we estimate that industry is an associate principal in the
margins will increase by around Boston office, and Tim Koller is a
1 percentage point, and EBITDA will principal in the New York office.
jump by 8 percent, reversing the
current trend. Copyright © 2011 McKinsey & Company.
All rights reserved. We welcome your
Conceiving, developing, and comments on this article. Please send them
to quarterly_comments@mckinsey.com.
marketing category-changing
products that consumers crave
has long been the lifeblood of
leading consumer-packaged-goods
companies—and, for that matter, a
priority for companies in a great
many industries. An important
question for all is how to capitalize
on the opportunity that such
innovations present to reset prices
upward across relevant product
categories, as P&G managed to
do when the company introduced
its Swiffer cleaning product.2
Capitalizing on innovations isn’t
easy. But in an industry like
packaged goods, it’s probably
critical for companies that aim for