The New Year may be brighter for the CPG industry than the general consensus conveys – and certainly better than 2025 – if promised tax refunds and potential tariff-dividend checks help pad consumers’ bank accounts and if wage growth remains above the inflation rate, predict analysts with William Blair.
While a stronger financial outlook for consumers could reinvigorate retail demand for staples, many shoppers may hesitate to increase their spending broadly initially – opting instead to be “choiceful.” As a result some categories and brands will benefit from shifting consumer preferences more quickly, while others are slower off the starting line or continue to stagnate, William Blair analysts caution.
Depending on where companies and brands fall across that divide they may either have the means to scoop up complementary would-be competitors or they could become acquisition targets, they add.
Consumer sentiment: perception versus reality
The past year was one of the worst years on record for the market performance of CPG staples, which were up only 3% compared to a 16% gain across the broader market, noted William Blair Partner and Research Analyst Jon Andersen. Within that, he added, packaged food underperformed notably – dropping 8% within the S&P 1500 Composite.
“This would put 2025 in the bottom decile of industry performance over the past 20 years. The only year worse on an absolute return basis, being 2008 with the great financial crisis and great recession,” he explained.
He attributed the poor performance in part to consumer sentiment tip-toeing up on “near worst on record,” which caused shoppers to pull back and volumes to decline as prices increased.
“The last three months, retail demand for staples, when you look across the total store, as measured by IRI, shows volumes flat. So, we think the consumer continues to be very choiceful, is the way we describe. So, very sharp focus on value, value defined by price in certain situations, for commodities, basics, but also relative to benefits sought. We’re seeing more affluent consumers shopping discounters at Walmart for again, basic items,” he explained.
At the same time, he added, “we’re seeing people stepping up to purchase products that are differentiated – often at higher price points – when they are highly functional, highly efficacious or hyper-convenient.”
This bifurcation also is playing out across economic classes with those at the top doing well and accelerating and those at the bottom being squeezed by higher inflation and the emerging low-high price environment, added Richard de Chazal, a macro analyst with William Blair.
This K-shaped recover paints a grim picture in which the current narrative is “that the US consumer is deteriorating from the bottom of that K up” and the risk is as the bottom is further squeezed “that’s going to pull this whole edifice down,” he said.
While he said he believes the “bottom of the K is feeling pain,” he added “the narrative around just how weak the consumer is is being a little overdone.”
He pointed to CPG executives characterizing consumers as “resilient,” as well as several economic indicators, including credit quality, which he characterized as “still quite decent.” In addition, while wage growth has “come down a little bit,” he noted it is still growing and even for the lowest income consumer remains above the rate of inflation. Finally, he called out tax refunds in the Trump administration’s One Big Beautiful Bill, which could amount to as much as $700 “in what many consider ‘free’ or unexpected money.”
On top of that, if Congress approves the Trump administration’s so-called tariff dividend checks of $800 to $2,000 then consumers will have a “significant amount of stimulus,” he said.
Against that backdrop, he said, he doesn’t subscribe to the “doom and gloom or flattish economic outlook for 2026,” but rather chooses to take a glass-half-full view of the new year.
“The economic outlook is still pretty good and I actually think there is a decent possibility we get a bit of a re-acceleration in growth over the course of a year,” he added.
Inflation remains a challenge
Despite de Chazal’s stated optimism, he emphasized the coast is not clear and many economic hurdles remain – including inflation.
“I don’t think inflation is going to come down quite as much as is currently expected, which is from 3% to 2.5%,” he said. “I think it is going to be sticky, around 3%.”
This may slow consumer sentiment recovery, meaning the K-shape spending pattern could persist well into the new year.
M&A may reboot as pressures continue
Another “silver lining” from the challenging economy is that CPG staple company valuations “are much more attractive sitting here today than they were a year ago, particularly when we consider some of the secular growth stories in staples and the industry indices in aggregate,” in which food and household & personal care are trading about 30% below long term averages, said Andersen.
This, paired with consumers’ bifurcated spending, may prompt more M&A in the CPG sector in 2026, he predicted.
“There has been more M&A in the industry as evidenced by recent deals including InvestIndustrial’s planned purchase of TreeHouse Foods, Kimberly-Clark’s acquisition of Kenvue, Keurig Dr. Pepper’s transaction for JDE Peets, PepsiCo’s purchase of Poppi and Siete Foods and Hershey’s acquisition of Lesser Evil,” he noted in materials presented to investors.
“We believe such consolidation will continue as strategic and financial buyers survey the landscape and look for attractive valued businesses and brands that can be growth accretive and drive cost synergies,” he added.
Looking ahead: opportunities amid challenges
Ultimately, the current economic climate and consumer sentiment on the CPG staples industry is a mixed bag.
Glimmers of financial relief offer hope for the industry, but spending may not come soon enough for all players – putting them at the M&A mercy of those that consumers view as valuable and worth “choiceful” purchases. Any consolidation, however, could provide long term benefits and stability as companies with an abundance of financial fluidity bolster those without. The benefits of scale that come from these deals could lead to lower prices, helping consumers feel more comfortable and help restart the flywheel for recovery.
