One of the front-page articles in today’s published edition of the Wall Street Journal, Big-Name Food Brands Lose Battle of the Grocery Aisle (Paid subscription required) reports that a growing number of food retailers are electing to feature more strategic aisle placement to fresh and prepared products rather than large packaged-food brands. In essence, the report indicates that such building trends are complicating efforts to break out of a multi-year decline in organic sales growth, with more longer-term implications. We quickly add that from our perspective, such trends will place more pressures on existing CPG industry supply chains.
In our 2017 Predictions for Industry Supply Chains (Available for complimentary downloading in our Research Center), we elected to include Consumer Packaged Food (CPG) and Beverage supply chains in our industry-specific predictions. We have included this industry in our industry-specific predictions for the past three years and the industry supply chain stakes continue to become far higher.
Consumers have not wavered in their more health-conscious view of food and beverage consumption and their shopping preferences continue to shun traditional processed foods. This latest WSJ report observes that increasing numbers of food retailers who are always challenged with the need to maximize shelf space and foot traffic are now opting to allocate prime store space to fresh food, prepared meals and local brands that have garnered the new loyalty of health-conscious consumers. As industry participates are all too-aware, without store strategic placement, consumers tend to avoid the center aisles of grocery stores, which adds more fuel to declining sales trends.
The latest WSJ report cites market data from Nielson indicating that volume sales for packaged food products fell 2.4 percent in the first quarter of 2017. Further cited are the latest annual volume numbers indicating that packaged food product volume declined 0.4 percent annually, as compared with growth of 1.7 percent for fresh meat, 1.9 percent for fresh produce and 4 percent for prepared foods. These are not the types of sales trends that branded CPG product managers want to experience, and they continue to magnify the ongoing challenges for large CPG producers and their associated supply chains.
Compounding the challenges are the two largest retailers, Amazon, and Wal-Mart, each demanding more price concessions from the large CPG brands, each threatening volume reductions if their lowest price demands are not met. That obviously leads to a delicate balancing act to appease both retailers, for different strategic reasons.
This week, three of the largest CPG producers, Mondelez, Kraft Heinz and Kellogg will be reporting financial performance numbers for the latest quarter and many Wall Street eyeballs will to paying close attention. Some are already setting expectations for another tough year for the industry.
Declining profits and meager sales growth continues to spawn activist investors to influence certain CPG, food, and beverage firms to consolidate. The prime disruptor in this industry remains Brazil based 3G Capital and specifically Heinz-Kraft Foods, demonstrating what is often described as a blitzkrieg of cost cutting predicated on zero-based budgeting tenets, with an acquisition model described in the analogy of a swimming shark with tendencies of buy, squeeze and repeat with the next target.
Meanwhile, speculation abounds as to what will be the next target for Kraft-Heinz. Names such as Mondelez International, Campbell Soup, Coca Cola Company, General Mills, Kellogg, and others are being tossed about.
The Supply Chain Implications
In the middle of such forces are CPG focused industry supply chains that continue to be pressured for additional cost reductions and productivity savings. This continues and at a more intense pace. At the same time, visionaries continue to believe that the future still comes from process and technology enabled innovation and in sourcing, planning and marketing healthier and more organic food products.
This latest WSJ report observes that companies like Hershey and PepsiCo are actively collaborating with retailers to help re-think the center of the store for product placement and for boosting sales growth.
As noted in our industry-specific prediction, many food supply chains have heavy requirements for continuous new product introductions and in developing distribution strategies that accommodate an entirely different customer fulfillment need. Coupled with that is satisfying consumer needs for visibility into all levels of the food supply chain and specifically where food has originated.
All the above remain the primary agenda for CPG, food, and beverage supply chains in the coming year. The winners are supply chain leaders who educate senior management on the differences of supply chain as a cost center vs. a business innovation enabler. They will also be those that can keep a laser focus on the end-goal, meeting and accommodating far different consumer preferences with changed thinking and distribution methods. By our lens, industry supply chains that invest in talent that can bring forward new creativity, collaboration and thinking for a supply chain model that leverages both online and in-store buying needs will likely benefit.
Again- Stating the Obvious
We again re-iterate what was stated in our prediction. The wave of activist investors surrounding the CPG food and beverage industry is destructive to supply chain capability and innovation, and the timing could not come at the worse time. CPG industry supply chains and their network of food suppliers require the ability to support a business need for healthier and more organic food choices for consumers. This wave of zero-based budgeting and cost cutting will not likely achieve that objective, and we as consumers, will have limited choices for healthier food.
It is a race to the bottom with notions that the survivors gain the spoils.
One must wonder what the end-state really implies, short-term investor rewards or industry supply chains with very little capability to support required process, technology, and product innovation.
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