Rebalancing the Portfolio: Navigating Risk and Opportunity in the Deteriorating Consumer Brands Sector

The consumer brands sector, once a cornerstone of stable returns for investors, is now grappling with a confluence of financial headwinds. From 2023 to 2025, the industry has seen a marked shift in profitability dynamics, driven by exhausted price-increase strategies, margin compression, and evolving consumer behavior. For investors, this presents both a cautionary tale and a strategic inflection point.

The Unraveling of Price-Driven Growth

According to Deloitte's outlook, global consumer products sales growth in 2024 slowed to 7.5%, with 75% of that growth attributed to price increases rather than volume gains. This overreliance on pricing power, a tactic popularized during the inflationary period of 2021–2023, has now backfired. Consumers, particularly in developed markets like the U.S. and Europe, have grown resistant to price hikes, trading down to private-label products or delaying purchases, according to Bain's report. Meanwhile, emerging markets such as India have shown resilience, with retail sales value (RSV) growth reaching 15% in 2024, driven by a shift toward international brands, Bain noted.

The financial toll is evident in profitability metrics. In Q2 2025, the Consumer Discretionary Sector reported EBITDA margins of 7.63%, a decline from previous years despite a 9.58% revenue increase, according to PCE's report. This margin compression reflects higher operating costs and the sector's struggle to balance price, volume, and product mix.

Risk Factors: A Perfect Storm

Three key risks loom large for consumer brands:
1. Price Sensitivity and Consumer Polarization: High-income households are driving 14% growth in categories like CPG and limited-service restaurants, while low-income consumers see only 3% growth, according to Numerator's report. This polarization forces brands to either cater to premium segments or compete on affordability, often at the expense of margins.
2. Supply Chain Volatility: Geopolitical tensions, including potential U.S.-China trade barriers and the renegotiation of the USMCA, have added uncertainty to global supply chains, a risk Deloitte highlights. Input costs, though easing, remain a drag on gross profit margins, which for categories like beauty and cosmetics hover between 50-70%, according to Onramp's benchmarks.
3. M&A Caution: M&A activity in the Consumer & Retail sector slowed in Q1 2025, with 1,229 transactions closed compared to 1,264 in Q1 2024. Median EBITDA multiples fell to 8.6x, signaling investor wariness, PCE reported.

Mitigation Strategies: From Cost-Cutting to Digital Reinvention

To counter these risks, leading brands are adopting a dual approach:
- Volume-Driven Growth with Precision: Companies are shifting toward volume-based strategies, but success requires targeted demand generation. For example, AI-driven analytics are being used to optimize product portfolios and personalize promotions-an approach Deloitte has emphasized.
- Transformative Efficiency: Digitization and automation are no longer optional. Deloitte highlights that "transformative efficiency" through AI and robotics is critical for reducing operational costs and improving agility.
- Portfolio Rationalization: Brands are pruning underperforming SKUs and focusing on high-margin categories. Shrinkflation-reducing product sizes while maintaining price-has emerged as a controversial but effective tactic to manage affordability without triggering consumer backlash, as noted in RevenueML's analysis.

Sector Reallocation: Where to Invest and Where to Avoid

For investors, the key lies in reallocating capital toward companies that demonstrate adaptability.
- High-Potential Sectors:
- Emerging Markets: India and Southeast Asia offer untapped volume growth as consumers shift to global brands, Bain's report highlights.
- Premiumization: High-income consumers are willing to pay for premium products, particularly in beauty and wellness, according to Onramp's benchmarks.
- DTC and E-commerce: Direct-to-consumer models enable data-driven personalization and recurring revenue streams, RevenueML's analysis suggests.
- Caution Zones:
- Commodity-Driven Categories: Brands reliant on price competition, such as basic groceries or household staples, face margin erosion.
- Overleveraged Retailers: Companies with high debt loads and thin margins are vulnerable to further cost shocks, PCE warned.

Conclusion: A New Equilibrium

The consumer brands sector is at a crossroads. While the era of easy price-driven growth has ended, the path forward lies in balancing innovation, efficiency, and consumer-centric strategies. For investors, the priority is to identify companies that can navigate this transition-those that leverage AI, prioritize volume with precision, and adapt to polarized consumer preferences. As the sector realigns, patience and strategic reallocation will be key to unlocking long-term value.