Consumer packaged goods (CPG) companies will need to employ different tactics than those used during the recession—divesting non-core brands, conserving cash, and cutting costs—to preserve shareholder value as the economy recovers, according to a new report.

To grow revenues in this new climate, companies will have to focus on innovation to encourage household spending, especially for products in mature segments and to offset reduced spending by Baby Boomers who are nearing retirement, according to the Grocery Manufacturers Association (GMA) and PricewaterhouseCoopers LLP (PwC) 2010 Financial Performance Report, titled “Forging Ahead in the New Economy.”

According to the study, many CPG companies are looking to innovate by reaching consumers in more places or tailoring products for local customer tastes in emerging markets. Additionally, understanding customer priorities is central to innovation as consumers in the U.S. are buying more carefully, buying different pack sizes, taking advantage of volume discounts and trading down to non-premium brands.

The 2010 GMA & PwC Financial Performance Report is the latest installment of the annual industry report issued by GMA and PwC, now in its 14th year, and is compiled from interviews with senior leadership of GMA members (including members of the GMA CFO Committee), publicly reported company financial data, government statistics, analyst reports and other published material on 152 companies in the food, beverage and consumer products sector.

“The CPG industry has a legacy of strong financial performance and resilience in the face of challenging economic times, and 2009 was no exception,” said GMA President and CEO Pamela Bailey. “However, restrained consumer spending and continued fears about the future of the U.S. economy mean that companies will have to harness the innovation for which they are known as they look to grow sales.”

The report found that establishing a foothold in emerging markets—especially in China, Russia, Brazil, India and Southeast Asia—has taken on a sense of urgency for CPG makers as capital flows faster than ever and new competitors can ramp up quickly. The middle classes are growing and forming attachments to new brands and products just as fast. Consequently, product growth cycles in emerging markets have accelerated and the success or failure of a product launch or brand introduction now can be determined in a matter of just 12 or 18 months.

Additional key findings from Forging Ahead in the New Economy include:

—CPG company median shareholder returns stood out as strong relative to the rest of the market.

—With shareholder returns up 49% in 2009 and median EBIT (earnings from continuing operations before interest and taxes) growth jumping 33%, the beverage sector had the best quantitative performance among the three major CPG sectors (beverage, food and household products).

—Median net sales growth sank in all three sectors, and beverage’s 1.6% decline was the first time in five years that the sector experienced negative growth.

—The food sector as a whole cut spending with a nearly 2 percentage point drop in median selling, general and administrative (SG&A) costs as a percentage of sales.

—The food sector’s median five-year shareholder return metric of 6% led the way for all three sectors, with beverage coming in at 5.3% and household products at 2.7%.

—While household product companies saw negative median net sales growth for the first time in five years, they mitigated this decline with the highest one-year median return on invested capital of any of the sectors, the highest median sales per employee and the highest median gross margins.

—The CPG sector lagged the S&P 500 by 5 index points and the Dow by 1 index point in 2009.

“These food, beverage and household product companies are part of a true counter-cyclical industry, as it performs better than other industries during recessions, but tends to balance the scales with slower growth during expansions, as was the case in 2009,” said Susan McPartlin, U.S. consumer packaged goods industry leader, PricewaterhouseCoopers. “This may reflect the fact that CPG companies have been adapting to market conditions and sacrificing a bit of short-term growth to get their houses in order through increasing sales per employee, paying down debt, trimming workforces and paring brand and product portfolios. We expect CPG companies to emerge much stronger as we move through 2010.”

“CPG companies are operating in a new environment, characterized by more cautious, value-driven consumers and volatile commodities,” added Lisa Feigen Dugal, North American consumer packaged goods & retail advisory leader, PricewaterhouseCoopers. “It will be tough to succeed using the same tactics employed during the recession. Novel approaches will be crucial—and that includes creating new trade promotions programs for retailers, rethinking how they spend their media dollars, targeting coveted demographic groups like Generation Y with smart social networking campaigns, reaching customers in more places and tailoring their products for local customer tastes in emerging markets.”