The CPG Complexity Trap: Why Industry Giants Are Losing to Focused Upstarts

How the pursuit of omnichannel everything is killing margins and why strategic subtraction beats algorithmic addition

The consumer packaged goods industry is experiencing its most dramatic reshuffling in decades, but not for the reasons executives expected. While boardrooms buzz about AI transformation and omnichannel excellence, a quieter revolution is unfolding: small, focused brands are systematically outmaneuvering industry giants by doing less, not more.

The numbers tell a stark story. In the first half of 2024, the top 50 CPGs by revenue globally only posted 1.2% year-over-year revenue growth. In the US, as top CPGs' growth stalled, insurgents captured about 40% of the overall growth in consumer products in the first half of 2024, a hugely outsized gain relative to their market share.

This isn't a temporary market correction. It's the emergence of what I call the "CPG Complexity Trap"—where the very strategies meant to drive growth are instead destroying competitive advantage.

The AI Implementation Gap

Walk into any CPG company today and you'll hear executives evangelizing about their AI initiatives. A full 66% of CPG companies have either implemented or are actively scaling generative AI across their operations. McKinsey estimates that gen AI use cases could increase the economic impact of traditional AI by 15 to 40 percent, unlocking an additional $160 billion to $270 billion annually in profit (measured by EBITDA) for CPG companies globally.

Yet here's the uncomfortable truth: no CPG player has truly scaled its gen AI and traditional AI capabilities.

The problem isn't technological—it's strategic. Companies are treating AI like a Swiss Army knife, deploying it everywhere from supply chain optimization to content creation to demand forecasting. But the winners are taking a scalpel approach.

Consider PepsiCo's collaboration with Amazon Web Services to enhance its in-house generative AI platform, PepGenX. The partnership gives PepGenX access to various multimodal and agentic AI models on AWS. Rather than building dozens of AI pilots, they're focusing on specific, high-impact applications that directly serve their core business. Similarly, Coca-Cola's partnership with Adobe to embed AI in design at scale. Project Fizzion, a design intelligence system, learns from designers and encodes their creative intent to automatically apply brand rules across formats, platforms and markets.

The losers are playing AI bingo. The winners are playing AI chess.

The Insurgent Advantage: Why 1.2% Isn't Good Enough

The math is brutal for established players. While CPG giants struggle to grow above inflation, insurgent brands are rewriting the rules of engagement. They're not trying to be everything to everyone—they're trying to be indispensable to someone.

Take the beauty category, where L'Oréal maintains its top spot as the #1 future-ready CPG company. Their secret isn't diversification—it's depth. Rather than expanding into adjacent categories, they've gone deeper into beauty across every price point, channel, and geography. They own the vertical from mass market to luxury, from traditional retail to direct-to-consumer, from North America to emerging Asia.

This focus isn't limiting—it's liberating. When you know exactly who you serve and how you serve them, every decision becomes clearer. Every AI investment, every channel partnership, every product innovation can be evaluated against a single criterion: does this make us better at beauty?

The complexity trap, by contrast, forces companies to make decisions across multiple criteria, multiple constituencies, and multiple success metrics. The result is strategic paralysis disguised as strategic planning.

The SKU Multiplication Fallacy

Perhaps nowhere is the complexity trap more visible than in portfolio management. The conventional wisdom suggests that more options drive more sales. The data suggests otherwise.

Reducing SKU complexity can increase sales growth by 2 to 5 percentage points and margins by 100 to 400 basis points. Yet most CPG companies continue adding variants, flavors, and line extensions, mistaking variety for value creation.

This SKU multiplication is driven by three cognitive biases:

The Innovation Theater Bias: Launching new products feels like progress, even when it cannibalizes existing sales.

The Retailer Appeasement Bias: Retailers demand newness, so companies supply it, regardless of consumer demand.

The Competitive Response Bias: If a competitor launches a variant, companies feel compelled to match it.

But the most successful companies are doing the opposite. They're ruthlessly pruning their portfolios, focusing resources on products that drive disproportionate value. This isn't about having fewer products—it's about having the right products.

The irony is that in an inflationary environment where 55% of businesses flag inflation as an increasing supply chain risk by 55% of businesses (up from 31% in 2023) driven by rising procurement and transport costs, complexity is a luxury companies can't afford. Every additional SKU adds cost without necessarily adding value. Every additional channel adds overhead without guaranteeing reach.

Channel Inflation: The Retail Media Gold Rush

The retail media landscape perfectly illustrates how the pursuit of omnichannel excellence can become a complexity trap. Already, 35% of CPG advertising budgets are allocated to retail media, and that's set to increase to 50% within the next year.

On the surface, this makes sense. Retail media networks offer unprecedented targeting capabilities, leveraging first-party data to reach consumers at the point of purchase. Kroger's partnership with Disney shows how this works—advertisers can now use Kroger's customer data to target specific audiences on Disney's streaming platforms. Walmart has even created a virtual world in Roblox to connect with younger shoppers.

But here's the trap: as every retailer builds their own media network, CPG brands risk becoming digital sharecroppers, paying increasingly higher fees for access to their own customers.

The solution isn't to avoid retail media—it's to approach it strategically. The winners will master 2-3 retail media networks deeply rather than spreading budgets across dozens superficially. They'll build genuine partnerships rather than transactional relationships. They'll use retail media to enhance their brand equity, not just drive short-term sales.

The Geopolitical Squeeze: When Resilience Trumps Innovation

The complexity trap becomes especially dangerous in an era of geopolitical instability. More than half (55%) of respondents cited geopolitical factors as a top concern in 2025, as compared to only 35% in 2023. When it takes 18 months to stand up a production line, whereas it used to take about a third of the time prior to the pandemic, operational simplicity becomes a strategic imperative.

Consider the supply chain implications. Companies with complex, globally distributed operations are more vulnerable to disruption than those with simpler, more localized supply chains. Companies with sprawling product portfolios struggle to reallocate resources when specific ingredients or components become unavailable. Companies with intricate channel strategies can't pivot quickly when geopolitical events close off entire markets.

There's a fundamental tension: Lead times on the supply side are expanding due to geopolitical conflicts, shipping disruptions, and climate change impacts (like the recent water level drops in the Panama Canal), while customer expectations for faster delivery are growing.

The most resilient companies aren't necessarily the most sophisticated—they're the most adaptable. And adaptability requires simplicity.

The L'Oréal Model: How Depth Beats Breadth

L'Oréal's continued dominance offers the clearest example of how focus creates competitive advantage. Despite being over 100 years old, the company operates "with a startup mindset despite its size, incubating new brands and investing in tech startups (through its Bold Ventures fund)."

But their innovation isn't scattered—it's focused. Every investment, every acquisition, every technology deployment serves their core mission: making beauty accessible, personalized, and sustainable. The company developed an AI-powered, at-home system that can recognize color from any picture and prepare a lipstick based on that color. This isn't just a cool tech demo—it's a direct application of technology to their core value proposition.

This focus allows L'Oréal to go deeper into customer insights, supply chain optimization, and product innovation than companies trying to serve multiple categories. They can invest more heavily in beauty-specific AI capabilities because they're not also building automotive AI or healthcare AI. They can develop more sophisticated beauty retail relationships because they're not also managing food retail or electronics retail partnerships.

The contrast is striking. By choosing to do less, they've become capable of doing more.

The Death of Best Practices

The complexity trap is perpetuated by an industry obsession with best practices. CPG executives attend the same conferences, read the same case studies, and implement the same "proven" strategies. The result is a race to sameness, where every company pursues every opportunity with the same playbook.

But best practices are, by definition, what everyone else is already doing. They're the table stakes, not the competitive advantage.

The companies breaking away from the pack aren't following best practices—they're creating next practices. They're not asking "What should we do?" but "What should we not do?" They're not trying to be good at everything—they're trying to be exceptional at something.

Strategic Subtraction as Competitive Advantage

The path forward requires a fundamental shift in how CPG companies think about strategy. Instead of asking "What can we add?" they need to ask "What can we subtract?"

This means:

AI with Purpose: Deploy AI to amplify existing strengths, not to fix fundamental strategic weaknesses. If you're not great at consumer insights, AI won't make you great—it will just make you bad faster.

Portfolio Pruning: Every product in your portfolio should either drive disproportionate profit, enable other products to drive disproportionate profit, or serve a strategic purpose that justifies its existence. Everything else is complexity without value.

Channel Mastery: Better to dominate three channels than to participate in thirty. Better to have deep partnerships with key retailers than superficial relationships with every possible touchpoint.

Operational Simplicity: In an era of geopolitical instability and supply chain disruption, the most sophisticated supply chain is often the most vulnerable. Build for resilience, not complexity.

Focus as Innovation: The most innovative thing you can do in 2025 isn't to launch another AI pilot or enter another channel—it's to stop doing things that don't create value.

The Calculus of Less

The CPG industry is at an inflection point. Two-thirds of the CPG executives we surveyed said productivity was a top three priority for 2025. The companies that recognize the complexity trap and actively work to escape it will emerge stronger, more profitable, and more resilient. Those that continue adding without subtracting will find themselves trapped in a cycle of declining margins and diminishing returns.

The math is clear: in a world where every company has access to the same technologies, the same data, and the same opportunities, competitive advantage comes from what you choose not to do.