When Defense Eats the Economy: Why Consumer Goods Executives Can’t Ignore the $2.7 Trillion Military Surge

The last time military spending consumed this much of the global economy, consumer goods companies didn’t exist as we know them today.  

But there was one preview of what happens when defense and consumer markets collide. In 1989, Pepsi found itself in the improbable position of accepting Soviet warships as payment for cola syrup. The USSR gave PepsiCo 17 submarines, a cruiser, a frigate, and a destroyer because it lacked hard currency but needed its cola fix. Pepsi quickly sold the fleet for scrap and moved on. Today’s collision between defense and consumer markets won’t end so neatly. 

Military spending hit $2.7 trillion globally in 2024, up 9.4% in one year. The United States leads at $997 billion, Europe surged 17% to $693 billion, and Japan’s budget jumped to a record $55.1 billion. Germany became the fourth-largest military spender globally at $88.5 billion, while Poland now dedicates 4.2% of GDP to defense. India’s defense budget reached $78.8 billion for 2025-26. These aren’t one-time purchases or temporary increases. This is the new baseline. 

The Problem Hiding in Plain Sight

Consumer goods executives watch their customers trade down and blame inflation. McKinsey reports that 75% of US consumers traded down in Q1 2025, and companies point to economic uncertainty. But there’s another culprit eating away at consumer purchasing power. Governments worldwide are redirecting trillions from consumer-supporting programs to military budgets, and this reallocation creates consequences that compound. 

When governments spend on defense instead of social programs, consumers lose twice. First, they lose the direct support of childcare subsidies, infrastructure investments that create jobs, and social safety nets that enable spending. Second, they face higher prices as defense contractors bid up the cost of everything from aluminum to logistics networks. Global public debt approaches 100% of GDP, and defense increases will come from borrowing, not taxes, which means inflation will worsen before it improves. 

The mathematics are brutal for European consumers. Germany must increase defense spending to meet NATO’s evolving targets, potentially reaching 5% of GDP by 2035. That’s €80 billion annually by 2027 alone according to Goldman Sachs, money that won’t fund healthcare, education, or unemployment benefits. Belgium, currently spending 1.3% of GDP on defense, faces the same pressure. Multiply this across 23 NATO members now meeting the 2% threshold, all pushing toward 5%, and you understand why 54% of European consumers are pessimistic about their economies. 

Your Supply Chain Betrays You

Procter & Gamble announced 7,000 layoffs citing tariff uncertainty, but tariffs are just the symptom. The disease runs deeper. P&G’s suppliers may increasingly choose defense contracts over consumer goods orders because military contracts offer what consumer companies can’t match: guaranteed multi-year volumes, cost-plus pricing that ensures profits, and payment backed by governments that print their own money. 

The competition for resources has gone global in ways that often blindside consumer companies. China’s new Dual-Use Items Catalogue, effective January 2025, restricts exports of materials that serve both civilian and military purposes. These aren’t just weapons components. The catalogue covers specialty chemicals used in everything from cosmetics to electronics, advanced semiconductors that power both smartphones and missile guidance systems, and industrial equipment that could manufacture either car parts or tank components. Companies must now prove their materials won’t end up in military applications, a bureaucratic maze that delays shipments and increases costs. 

Large consumer products companies manage thousands of SKUs across multiple global vendors, and each vendor now weighs every order against potential defense contracts. A plastics manufacturer can supply packaging for snack foods with quarterly volume fluctuations and constant price pressure, or fulfill a five-year contract for military equipment cases at guaranteed margins. An aluminum supplier can serve beverage companies demanding just-in-time delivery and rock-bottom prices, or lock in decade-long agreements for aircraft components. The choice becomes obvious, and consumer companies lose. 

The U.S. Department of Defense uses over 200,000 suppliers, most of which also serve civilian markets. When defense orders arrive, these suppliers don’t just prioritize military contracts. They restructure entire operations around them. Production lines get dedicated to defense specifications. Quality control staff get reassigned to meet military standards. R&D budgets shift toward defense applications. Consumer companies discover their longtime suppliers have become defense contractors who occasionally accommodate civilian orders. 

Government Markets Eat Consumer Markets

When governments become the biggest customers, market dynamics break. U.S. military exchanges operate a parallel retail universe worth $9-10 billion annually, selling everything from electronics to groceries at 15-20% below civilian retail prices. They pay no sales tax and ignore minimum advertised pricing policies. The Patronage Expansion Act recently added millions of veterans and caregivers to this subsidized system, creating a privileged class of consumers who never need to shop at Walmart or Target again. 

The pattern repeats globally with staggering scale. India’s Canteen Stores Department serves 4.5 million military personnel and retirees through 3,500 retail outlets, making it one of the world’s largest retail chains. AAFES operates across Europe, running everything from the massive Kaiserslautern Military Community Center to commissaries that import American products duty-free, bypassing European retail entirely. Japanese Self-Defense Force exchanges operate outside normal retail regulations too. Each system removes millions of consumers from civilian markets while giving defense-connected suppliers guaranteed distribution channels that bypass normal retail competition. 

The U.S. military’s retail dominance extends beyond exchanges. The Army is privatizing dining facilities at Fort Bragg, Fort Carson, Fort Stewart, Fort Drum, and Fort Cavazos, creating guaranteed revenue streams worth billions for food service contractors. These contractors can sell premium meals and alcohol, exempt from the nutritional standards and procurement rules that govern civilian institutional food service. Junior enlisted soldiers pay approximately $460 monthly for meals whether they eat them or not, creating captive markets that consumer food companies can’t access. 

U.S. federal agencies spent $30 billion on food purchases from 2018-2022, with the Agricultural Marketing Service and Defense Logistics Agency controlling 90% of these purchases. India’s defense establishment controls massive agricultural procurement for its 1.45 million active personnel, setting prices for rice, wheat, and dairy across South Asia. European defense ministries coordinate food purchases worth billions for forces stationed across member states. When governments buy at this scale, they don’t just purchase products. They set prices for entire agricultural commodities. A wheat contract for military rations affects global bread prices. A dairy purchase for European bases influences cheese markets from Wisconsin to New Zealand. Consumer goods companies discover they’re bidding against entities with nearly unlimited budgets. 

The Cascade Effect

These disruptions reinforce each other in ways that trap consumer companies. Higher defense spending drives government debt, which reduces funding for consumer support programs, which decreases purchasing power. Simultaneously, defense competition drives up costs for materials, talent, and logistics, yet consumer companies can’t raise prices because their customers have less money to spend. Twenty-eight percent of American consumers believe the economy will be worse twelve months from now, and they’re shopping accordingly. 

The middle class that drove global consumer growth for two decades faces this squeeze from both directions. In Europe, governments must balance defense commitments against social stability. The EU estimates defense spending increases could reduce fiscal flexibility through 2028, precisely when aging populations need more healthcare and pension support. In Asia, defense buildups compete directly with the infrastructure and education investments that created middle-class prosperity. The optimistic consumer spending projections that underpin every CPG company’s growth strategy assume a world that no longer exists. 

Building New Strategies

Consumer goods executives need different frameworks for this militarized economy. The old assumptions about efficiency, globalization, and consumer growth no longer apply. New strategies must account for permanent resource competition with defense sectors. 

Regional Self-Sufficiency

Unilever invested €100 million building an in-house fragrance operation to escape supplier dependence entirely. Walmart has diversified its supply chain, moving 30% of China-sourced imports to Vietnam, India, and Mexico, accepting higher costs for supply certainty. The era of single-source global suppliers has ended. Companies now need multiple regional production hubs, each capable of serving local markets independently. Nearshoring to Mexico for North American markets, friendshoring to Vietnam for Asian distribution, and building European production for EU consumers aren’t efficiency losses anymore. They’re insurance policies against a world where your Chinese supplier suddenly can’t export dual-use materials, your German supplier prioritizes NATO contracts, or your Indian supplier gets locked into domestic defense procurement. 

Talent Retention Through Purpose

Defense contractors attract talent with stability: government-backed contracts, steady funding, and job security consumer companies can’t match. But stability isn’t everything. LinkedIn’s 2025 Workplace Learning Report shows companies that prioritize career development see measurably better retention, especially among younger workers who value growth over security. Consumer companies should stop trying to match defense sector stability and instead offer what military contractors never can: the chance to build brands that billions use daily, work environments free from security clearance restrictions, and career paths unconstrained by government bureaucracy. A software engineer at a defense contractor might spend years on a single missile guidance system. The same engineer at a consumer company could launch products reaching millions in months. Make that difference clear, and the right talent will choose purpose over paychecks. 

Partner with Defense

Instead of viewing defense as pure competition, recognize it as a source of innovation that consumer companies can leverage. Military research drives breakthroughs in materials science, logistics optimization, and preservation technology that have civilian applications. The internet, GPS, and microwaves all came from defense research before transforming consumer markets. Today’s military investments in autonomous vehicles, advanced materials, and supply chain resilience will create tomorrow’s consumer innovations. Partner with defense contractors on dual-use research. License military-developed technologies for civilian applications. Hire engineers and scientists rotating out of defense projects who bring expertise in cutting-edge technologies. 

The Permanent Shift

This isn’t temporary disruption waiting for normalcy to return. The $2.7 trillion defense economy represents a permanent reallocation of global resources that will define the next decade of consumer markets. Governments facing existential security threats won’t reduce military spending. Suppliers with guaranteed defense contracts won’t return to volatile consumer markets. Workers building weapons systems won’t shift back to making washing machines. 

Consumer goods executives who recognize this reality can adapt. They can secure regional supply chains before global ones fracture completely. They can lock in talent before defense contractors absorb entire graduating classes. They can position themselves as essential suppliers to both civilian and military markets. Those waiting for the old world to return will discover that world no longer exists. 

The Pepsi-for-warships trade became an amusing historical footnote because it was an anomaly, a bizarre one-time transaction everyone could laugh about. Today’s collision between defense and consumer economies won’t end with laughter. It ends with companies either finding their place in this militarized economy or becoming casualties of an economic battle nobody declared but everyone’s funding. 

About the Author

Milos Tucakovic is a Managing Partner at Stanton Chase Belgrade. He is also Stanton Chase’s Consumer Products and Services Global Sector Leader. 

He brings 20 years of executive search expertise and nearly 40 years of experience in human resources and management. A licensed A&DC Assessor, Miloš also coaches CEOs and General Managers on leadership development.

Miloš is a member of the Knowledge Committee of Serbia and previously taught management at the Academy of Applied Studies – College of Hotel Management in Belgrade for 16 years.