America’s ‘other’ economy tells a different growth story

Investors should pay attention to the struggles of the consumer packaged goods industry

Published6 hours ago

The data centre boom dominates all discussion of the US economy. It drives the irrepressible stock market, lifts demand for electricity and keeps companies that make everything from generators to cooling systems working flat out. Investment in computer equipment contributed 0.9 percentage points of growth to annualised real GDP in the first quarter, when total growth was 1.6 per cent.

We should not be hypnotised by one booming sector, however. There is another US corporate economy that looks very different: focused on consumption, not investment; viciously competitive; struggling for investor attention and hardly growing.

For a lens on this other economy, look to the consumer packaged goods industry. These companies sell goods we all need, from detergent to cereal, under strong brands and with sophisticated marketing. But they are growing at less than the rate of GDP. Data from Adam Josephson of Sakonnet Research shows that average sales volumes at 15 of the largest US staples companies — Coca-Cola, Procter & Gamble, Hershey — have been negative in 13 of the last 18 quarters. Including dividends, the S&P 500 household products and food products sectors have returned 2 and minus 6 per cent respectively over the past five years.

What’s the trouble? It’s a long list. Middle- and lower-income consumers are under increasing pressure. The extent to which the US economy is “K-shaped” — with the rich and the companies that serve them thriving as the rest decline — has been exaggerated. But real wage growth has recently turned negative, and consumption, while still growing, has been on a slowing trend since the beginning of the year. CPG companies are not the only ones feeling the squeeze: in the auto industry, for example, unit sales are moving sideways at about 16mn units a year, well below the pre-pandemic level.

It doesn’t help that the population of post-immigration America does not grow, or that the proliferation of GLP-1 drugs has reduced demand for snacks. Furthermore, the CPG industry pushed prices up hard during the 2021-22 inflation surge, and has reached or exceeded customers’ tolerance levels.

But it is the rise of alternative brands that hurts the most. E-commerce and social media have lowered the barriers to entry for “disrupter” or “insurgent” brands. Much of the retail industry has consolidated behind huge companies such as Walmart and Costco while the perception that store brands like Costco’s Kirkland label are of low quality has faded.

Nicolas Willemot, who leads the consumer products practice at Bain, argues that consumer spending in the US is growing, but store and insurgent brands capture 70 per cent of the growth. The big CPG players need to work harder at giving consumers what they want at the right price. But much of their attention in recent years has been taken up by cost-cutting and consolidation.

The US-Brazilian private equity fund 3G Capital led the trend for aggressive cost cutting. It led initially successful investments in Kraft Heinz and AB InBev, among others. Even Warren Buffett was drawn in by the pitch, partnering with 3G on the Kraft Heinz deals. But subsequent poor growth and share performance have convinced the industry of the limitations of the approach. Similarly, investors have made clear their scepticism of consolidation, sending the shares of Kimberly-Clark tumbling after it announced plans to buy the Johnson and Johnson spin-off Kenvue last year, and doing the same to McCormick when it announced a deal to buy Unilever’s food business in March. Financial structure is not the CPG industry’s problem, and it won’t be the solution either.

What does all this tell us about the “other” economy? On the good side, the consumer is quite well served. The CPG industry, and its retail neighbour, are wildly competitive on price and innovation. But investors’ and companies’ hopes that financial engineering and restructuring are a path to industrial revival have been dashed. Growth everywhere is hard to come by — the economy is not a zero-sum game, but it is closer to one than it was a few years ago.

Much of America works in industries that look more like consumer goods than tech. This explains a lot of the apparent mismatches in the US economy: between the low employment rate and lousy consumer sentiment, between firm GDP growth and industry surveys. The distance between the exuberant, investment-led tech economy and the cut-throat, consumption-led “other” economy is widening. Keep an eye on both.