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By Jack Dwyer, CEO
The consumer sector is on the verge of a transformation that will redefine both consumer staples and discretionary markets. We anticipate a convergence of technology and resilient businesses that has the potential to significantly boost margins and unlock profit. Our analysis suggests AI will not only amplify the competitive advantage of scaled incumbents, but also reshape the playing field. Encouragingly, current valuations don’t yet reflect this imminent shift, presenting an opportunity for investment.
AI: More Than Just Algorithms—It’s About People
AI isn’t just lines of code—it’s about understanding people. Think about your last online shopping experience or a casual scroll through social media. AI is working silently behind the scenes, learning from your behaviour. It’s the reason why your shopping cart seems to anticipate your needs. For businesses, this means moving from guesswork to precision, eliminating inefficiencies, and tailoring the consumer experience.
We’ve already seen how AI-driven personalization has made tech giants some of the most profitable entities on the planet, amassing trillions in market capitalisation. Companies that didn't even exist 20 years ago have surged ahead, riding the technological wave. These disruptors have been celebrated for their agility, speed, and innovation, while incumbents have been criticized as being too slow to adapt.
Consumer Incumbents Are Poised to Thrive
But here’s the twist: in a world increasingly driven by AI, it’s the incumbents that now stand to gain the most. Why? Because the largest companies have the most data. Those operating in industries with high barriers to entry, strong regulatory frameworks, and established brands have the advantage. Historically, these consumer giants have demonstrated a consistent ability to adapt and even grow market share when faced with technological change.
A Proven Track Record of Adapting to Technology
Consumer companies had a strong track record with technological advancements. Proctor & Gamble adopted IBM’s inventory management system in the 1960s, slashing inventory costs by ~50%. Walmart’s implementation of Electronic Data Interchange (EDI) in the 1980s corresponded with a 20x increase in sales. The rise of e-commerce in the 2000s further supercharged these consumer giants. Each time, consumer incumbents didn’t just survive—they thrived.
Why Disruptors Face an Uphill Battle
For startups, disrupting the well-established consumer sector has always been tough. And with AI in the mix, it could become even harder. Without the product, customer base, or data to feed AI systems, many disruptors may find themselves struggling to compete with the well-armed incumbents.
Why Now?
The release of large language models has meant that people, irrespective of budget and technical competency, are experimenting. After all, OpenAI’s ChatGPT had 100 million users in two months – a record.
I was at Davos in January and the hottest topic amongst consumer CEO’s was AI. More interestingly, most of these leaders had little idea about how they would implement AI, what the impact might be or how the regulatory landscape would evolve.
AI Is Now a Corporate Priority
Companies are committing both financial and human capital to find solutions. Over half of large corporations now have a Head of AI according to a study from Gartner and consulting giants like Accenture are heavily investing in AI advisory services for Fortune 500 firms. Corporate boards are allocating significant budgets because no CEO wants to be remembered as the one who missed out on a transformative technology.
A Different Proposition from Past Technologies
Unlike blockchain, the metaverse, and other hyped technologies, AI is seeing broad-based adoption and results. Companies are not only testing AI—they’re actively integrating it. Nvidia’s announcement yesterday of customizable AI workflows for enterprises is one example of how companies can now quickly build AI applications tailored to their data, speeding up development and improving accuracy. Whilst NVDA’s market cap has been on a tear, it’s the users of this technology which still offer value.
Incumbency + Human Capital + Financial Capital = Outcomes
As we research and engage with companies around the world covering food, beverages, apparel, luxury and travel, we are increasingly hearing of more “AI pilot studies”, or additional “use cases.”
We have analysed LinkedIn activity of employees from large consumer companies, consultants, technological providers and more. The change is happening and there are a growing number of “AI thought leaders.” I have spoken with people across the globe as to how they are incorporating or exploring how AI can drive revenue and solve problems in their businesses. We’re seeing more and more consumer companies launching “AI pilot studies” and finding additional “use cases.”
Yet without data, it is challenging to monetise.
At a corporate level, training is accelerating. Colgate, at its Annual General Meeting in May said that it is encouraging a “test and learn culture”, providing employees freedom to engage with and advance their expertise in this area. A testing environment is commonplace among the Silicon Valley titans, but this is the leading manufacturer of tooth-paste founded in 1806 pushing AI engagement and knowledge to its 34,000 staff.
How Consumer Companies Will Use AI
Supply Chains: AI will revolutionize how goods move across the globe, from sourcing to fulfillment. Complex supply chains that have historically been a barrier to entry may now become a significant asset as companies improve efficiency and reduce costs. Consider how impactful this could be for a beverage business with 200 products operating in 130+ countries.
Inventory Management: The pandemic exposed inventory challenges for some of the best in the world, such as Estee Lauder, Nike, Diageo, and Target. Firms will increasingly be able to better forecast demand, increasing agility, preserving costs and margins.
Research: AI-powered chatbots will help employees tap into vast amounts of organizational data, making decision-making faster and more informed, leading to improved product and customer outcomes.
Advertising and Promotion (A&P): Consumer companies spend around 10% of their sales on A&P. AI will allow companies to increasingly personalise marketing at scale, optimising spend and improving return on investment. For example, a beauty brand could use AI to deliver personalised product recommendations and discounts based on skin type, preferences, or past purchases.
Innovation: AI will accelerate product development, reducing time-to-market and helping companies quickly respond to consumer demand. Walmart said last week that they use AI to improve 850 million pieces of data in their product catalogue – a task which would have taken 100x the number of staff, if done manually.
The Numbers Behind the Opportunity
Using our universe of high-quality consumer companies, we ran multiple scenarios.
Current net margins average ~13.7%.
AI-driven improvements could push margins to ~16%, boosting profitability and arguably, valuation multiples.
Under this hypothetical scenario, the average P/Ex moves to ~18x, from ~22x today. This doesn’t account for the compounding benefits AI will bring over time, or the outperformers will believe will emerge. We can discuss scenarios in detail.
If true, the highest quality consumer businesses would be valued at a 10-15% discount to the S&P 500. Historically, these businesses have traded at a premium, given their competitive moats, advantaged products and brands and strong history of delivering shareholder returns.
Scale + Data + Valuation = A Golden Opportunity
We believe the consumer sector is on the brink of an exciting era. With attractive valuations, the potential for significant margin expansion, and the transformative power of AI, the landscape is set for strong returns.