What trends are influencing the food and beverage industry?

0:00Duncan Miller: Not many companies so far are truly seeing the full benefits of AI. What we as McKinsey are recommending is that rather than doing trials and experiments everywhere, rather full focus on single domains and really trying to get the full benefit within one domain to truly see the benefit.

0:27Roberta Fusaro: That's McKinsey Senior Partner Frank Sanger. The erosion of value in the consumer goods industry is accelerating. Sanger joins me and Senior Partner Duncan Miller to talk about how adopting AI and making other smart moves could help fund the next wave of growth in food and beverage. This is the McKinsey Podcast, where we help you make sense out of the world's toughest business challenges. I'm Roberta Fissaro, your host for today. Frank, Duncan, thanks so much for joining the podcast today.

1:01Frank Sänger: Thanks a lot for having us. Thank you, Roberta. It's a pleasure to be here.

1:05Roberta Fusaro: McKinsey's State of Food and Beverage report is out, and it's available on our website. According to the report, the CPG food and beverage sector lost close to a trillion dollars in enterprise value. What accounts for this loss? Maybe, Frank, we could start with you.

1:22Duncan Miller: The food and beverage sector has been a very high-performing industry for a long time. And even in the early 2000s, it was very successful with generating lots of growth momentum, revenue growth, let's say, like in the range of 9 % or so. While in the 2010s, that actually dropped quite dramatically to something around 3%. So that actually when a structural shift has already started. This was a bit masked by the COVID pandemic, but then, let's say, continued after, where simply due to less population growth and geographic expansion, actually, companies have not been able to keep up that growth momentum over time.

2:09Duncan Miller: That at least is one major source.

2:11Frank Sänger: I think that's exactly right, Frank. And it's very interesting. The trillion is obviously a headline-grabbing number. if you kind of unpack it actually just a little bit in the more recent history, a lot of that was expectations. So as Frank said, in the 2010s, folks in the early 2000s, folks were really driving sustained volume growth in their categories. In simple terms, in the 2020s, that fell off. And as everyone, I think, knows much of the revenue growth was price and mix led. And investors, frankly, said this industry has to grow volumes in order to sustain high valuations. So the valuation drop-off was significant.

2:53Frank Sänger: Actually, we've seen in 2026, some of the leaders begin to restore volume growth, which is restoring confidence in a few organizations. But the key thing is volume growth and whether this industry can sustain the trajectory that's enjoyed for many decades. The consequence of these change expectations

3:10Duncan Miller: that Duncan mentioned is basically that also EBIT multiples dropped. And just as an example, over the past year, It dropped from something like 17x to something like 14x of the leading food and beverage companies.

3:24Roberta Fusaro: That's a significant drop, right? It's a significant change. We can talk a little bit more about the volume play. One of the more interesting themes coming out of the report for me was that consumers are simultaneously trading down and then also trading up, right? They'll buy private label pasta, but they'll splurge on functional beverages or premium snacks. How do you make sense of that seemingly contradictory behavior?

3:53Frank Sänger: Yeah, so I mean, there's been a trend for a while of people spending on indulgence and then also saving money elsewhere. obviously with the massive food inflation and beverage inflation that we've seen over the past few years 20 to 30 plus percent in some geographies that challenge has become actually more acute so we've seen a more meaningful shift in what was already a behavior evident in the markets in the past few years and look the in terms of dining out um and food delivered to the home. Obviously, it's much easier than it ever was to make that happen. But when you actually look at the affordability squeeze, for example, in the US, the poorest households, food is now north of 30 % of what they spend on.

4:40Frank Sänger: So people are really paring back. And beneath that, candidly, private label has gotten a lot better in the US. It's always trailed Europe. Europe's always been ahead, but private label has got a lot better. So people are both looking to indulge and do things that are at least delicious in terms of food away from home, which is great, but also looking to pare back. So more cooking at home, more leftovers, and then a shift to private label in the US, which is always much less mature than other parts of the world.

5:13Duncan Miller: Private label, as Duncan said, has become much better quality products, much better convenience. And at the same time, actually, smaller brands, disruptor brands, are basically also fulfilling unmet needs that the big brands have not been able to fulfill. So basically, the big brands are a bit squeezed from both angles.

5:37Roberta Fusaro: That gets at the next question that I had, Frank, was around scale, right? Traditionally, it's been one of the biggest competitive advantage in food and beverage. And you've got small brands, relatively small brands that are capturing disproportionate growth. What are the small brands doing differently that the incumbents are struggling to replicate?

5:57Duncan Miller: In my mind, the scale benefit still exists for the big brands and they still own that. But the thing that, let's say, small brands are very good at is actually being probably better in being consumer back and, let's say, coming up with value propositions that, let's say, the bigger companies, the bigger brands are not fulfilling and be much quicker in responding to changing consumer needs. I would argue. Yeah, just to build, that's exactly right.

6:31Frank Sänger: Just to build on that a little bit, a couple of other things changed that favored the small. So obviously acquiring very targeted customer groups through digital media is now much more straightforward for a small brand. If you see the biggest brands and you actually see the biggest brands that are outperforming, it's not just the brand is great, the product is great, but it's actually that their distribution system gives them real advantage which the small brands struggle with because physical retail in food and beverage, whether it's click and collect or otherwise, is still an incredibly important part of how consumers get product.

7:07Roberta Fusaro: The discussion we've had so far where we talk about private label and this sort of sense of loyalty to brands. I mean, the assumption was that strong brands naturally commanded loyalty, but your research suggests that food and beverage consumers, they haven't stopped caring about brands, but they've become more selective. Talk a little bit more about sort of maybe getting into the mind of the consumer and what's changing there. Big brands historically have had the disproportionate share of growth.

7:38Frank Sänger: As Frank said, that shifted towards small brands in the last five years. If you just think about how categories have evolved, tea, as an example, used to be sweetened tea and unsweetened tea. Now there's 17 different variations of tea, matcha, probiotic, oolong, a thousand things. And it is just tougher for a big brand to span all of those partitions in the marketplace, which just structurally creates the room for the smaller brands to come in and do their thing. The other thing I would say that has really happened with the consumer is everyone has always said we want to have better product and healthier product.

8:17Frank Sänger: And that used to be a trade-off between taste. Some of the smaller brands have actually, you know, in the last few years, come up with great tasting, better for you products. And if you look at the innovation rates in some categories from the larger players, much of the innovation hasn't been new to market products. It's been renovation, restaging, and all that sort of stuff. So what's really happened is many changes have enabled the small brands to sort of grow and there's space in the category. The consumers now don't just want taste and convenience, but they want better for you and functional food and beverage.

8:55Frank Sänger: And smaller brands have jumped in with this kind of fragmented marketplace and really done a great job. There are still many things that will make life difficult for the small brands. I highlighted distribution earlier, but that's what's really created the room in the marketplace.

9:10Roberta Fusaro: Also, thinking about consumers, thinking about different consumers, so did you see any differences between older and younger consumers and sort of how they're looking at food and beverage, their purchases in the food and beverage sector?

9:26Duncan Miller: Younger consumers are much more health conscious than older consumers are and are not willing to compromise on exactly those benefits. And that drives some of these changes that Duncan has described. Millennials are much more focused on healthiness. I mean, if I think about my boys as an example, they're super focused on these type of health benefits, protein, fiber, and all these things.

10:01Roberta Fusaro: Same with my boys, yeah.

10:02Frank Sänger: Yeah, the only thing I would say is if we think about boomers, they are still, despite their advancing years, not quite as willing to sacrifice taste and convenience for health benefits. So they're still like, I want the stuff that's delicious and easy, but they also do cook more at home. So it's kind of that's one of the other big, big differences. And then to state the obvious, Gen Z is highly influenced by digital media in terms of what they choose, much more so than other generations, although it is catching up, particularly on the health and wellness side.

10:40Roberta Fusaro: No, that makes sense. Shifting to digital and shifting to a topic that we can't help but talk about AI, the report argues that AI in food and beverage isn't just about cutting costs, right? It's about funding growth. And I think that's kind of a different framing than we often hear. Can you talk a little bit about what that looks like in practice?

11:05Duncan Miller: I think one of the important things is that actually we talked about the capital market at the very beginning. The capital market actually honors growth for CPG and food and beverage companies much more than margin expansion. And as a consequence, it's super critical that, let's say, food and beverage companies do drive growth. And actually, the benefit from just margin expansion is much smaller. Hence, it's important to reinvest ultimately some of the savings, quote unquote, from AI into actually accelerating growth in order to creating much more value for the company. Yeah.

11:49Frank Sänger: And in addition to just saving money to invest in growing volume, what I would say amongst the CPG food and beverage leaders is that they are already investing in AI to actually enable growth itself. So there are real leaders on the marketing domain who have used AI to fundamentally transform how they market to consumers and generate demand. There are real leaders on the revenue management domain who are really fundamentally not just using AI to figure out how much price to take and where to take it, but also using AI to figure out where the pockets of volume are in terms of how they can price and promote and so on and so forth.

12:30Frank Sänger: And then equally in the sales domain, particularly for those who can control their distribution, what the recommended order quantity is, the right assortment on the buyout level, both with organized trade and the fragmented trade. So we're already seeing the leaders in CPG actually drive real growth with AI in the real world, not just in pilot. So it's going to be important both as a source of funding, as everyone gets more efficient, McKinsey included, by the way. But it's going to be equally as important as an actual driver of growth at the front line and with consumers. And there's good traction so far and some very impressive work by some of the largest CPGs and some small ones, too.

13:13Roberta Fusaro: There are many folks who are kind of starting to get it right. What are some of the obstacles for those CPG companies that maybe aren't as far along on the journey?

13:22Duncan Miller: Maybe a bit of a perspective on AI, what I'm seeing with the CPG companies. I would say, I mean, literally every CPG company is, let's say, heavily investing in AI, experimenting with AI. I think the biggest challenge is that only a few are truly able to scale and deploy at scale in the company. Not many companies so far are truly seeing the full benefits of AI. why everybody's believing in it but so far it doesn't fully end up in the pnl and one of the the core reasons why that's the case is because basically due to experimenting in all sort of areas we we don't see the full impact and and what we as mckinsey are recommending is that rather than doing trials and experiments everywhere, rather full focus on single domains and really trying to get the full benefit within one domain to truly see the benefit.

14:37Frank Sänger: That's exactly right. I mean, we have been in a period of pilotitis. By the way, that's not just unique to CPG and food and beverage, many other industries as well. And as Frank said, picking a domain, ideally one that's going to drive the top line and in particular the volume part of the top line, and actually going after that domain properly and fulsomely, maybe one or two domains, so revenue management, marketing, or sales. But really scaling. That's really the key. Focus, scale, and fund.

15:07Roberta Fusaro: You know, I had asked you a question about differences in age groups, demographics, but did the report surface any differences among consumers in different geographies? You know, thinking about this era of the global brand and is it over and were there any geographical differences that the report underlined?

15:31Duncan Miller: Of course, there are different nuances that you see in the geographies. As an example, cooking from home has a different scale in Europe as it has in North America. Private label discount plays a different role in Europe versus North America. health consciousness and glp1 as an example are much more advanced in the u.s as as it is anywhere else in the world right um so i think there are many nuances and i do think that what small brands we talked about small brands before do very well they're really targeted with regards to some of the very specific consumer demands in different geographies obviously

16:19Frank Sänger: in an increasingly complex geopolitical world that has given room for regional brands versus global sort of brands to sort of rise up in a few categories. That's the only other factor that plays out very differently regionally, as well as national taste.

16:35Roberta Fusaro: Yeah, that sounds good. We're coming up on time, and I wanted to kind of maybe get this one last question, this sort of overarching question. If we sit down and have this conversation again, in three years. What will determine the winners, those who emerged as the top performers in CPG, food and beverage? Will that big factor be AI, their portfolio choices, product innovation, or something else?

17:06Duncan Miller: I would say all of the above. I would mention three things in particular. I think one is really very smart portfolio choices with regards to categories, health, functional benefits, geographies, being laser focused on where the true growth can be coming from. So that's one thing. I think the second one, we talk a lot about, let's say, product and product innovation. So what's really driving value for the consumer? It can be affordability on the one hand side, but also be premium and better ingredients, health, taste, etc. on the other side. So winning on product is the second one in my mind. And the third one is funding that growth through AI.

18:02And AI will be making the difference in my mind.

18:07Frank Sänger: That's exactly right. On the only point I would add is on innovation. I mean, the numbers are stark. If you look in the rearview mirror on history in terms of how much innovation from the larger players has been true product innovation, I think consumers' expectations are now extremely high and they actually want both. They're not prepared to sacrifice taste for quality and health. So you actually have to be able to deliver on all three. And then from a revenue management standpoint, do so affordably for some parts of the population. And also, where there are premium benefits, you really can charge a premium.

18:44Frank Sänger: So for me, innovation is the most important thing for CPGs to get right. And almost all of them are already working on this topic, whether it's kind of restaging their portfolios for permissibility or really thinking through how they can drive real volume growth with true product innovation. But that for me is the most important thing because product is going to win, particularly as the world shifts to generative search, because that is unforgiving on product quality. And so it's going to become ever more important for CPGs to really win their on-product performance.

19:21Roberta Fusaro: Right. So, okay, so I lied because I have one last question. For an executive who's reading the report, what's one big assumption that maybe they have now that they should let go of? Is there something in the report that will sort of be an aha moment for executives who take a look at it?

19:42Frank Sänger: Again, from my own conversations, and Frank may feel similarly, I think many of the executives that we work with are already acutely aware of what's going on in the world and are working on as much of the agenda as they can possibly work on. For me, the one big assumption that you're going to need to let go of is historic equity and product configuration used to be your moat. The new moat is going to look very different. It's going to be a combination of true product superiority in combination with good brand equity, but also at an affordable price where it matters. And then I just underscore my point on distribution.

20:22Frank Sänger: I think the ground war, as it were, as opposed to the air war for brands is going to be as important moving forwards.

20:31Duncan Miller: The one thing I would add is companies will not win on cost. You need to drive growth, and that will make the difference.

20:42Roberta Fusaro: It's been a great conversation. Again, Frank, thank you so much for joining.

20:47Duncan Miller: Thank you, Roberta. It was a pleasure joining you.

20:49Roberta Fusaro: And Duncan, thanks for taking the time.

20:52Frank Sänger: Thank you, Roberta, for such great questions. It was a lot of fun.