Included in our Supply Chain Matters Predictions for Industry and Global Supply Chains (available for no-cost complimentary downloading in our Research Center) are what we predicted would be certain extraordinary industry-specific challenges. The packaged consumer product goods and food industry, specifically large, global branded firms and their supply chains, has been included in our list for the past three years. As we approach the mid-way point of 2015, the crisis of “Big Food” has now reached its most disruptive and dynamic point, with consumers sending a very clear message regarding healthier food choices and more natural ingredients in their buying preferences.
The crisis has had acute market, channel, investor and operational implications which continue to cascade among cross-functional CPG supply chain and product management teams. Rather than reminding our readers residing in the industry of the constant pain points they already know and deal with each week, we would rather provide help in providing perspectives on helpful ways to manage in such an environment.
Our previous commentaries have noted that setting continuous improvement goals predicated on months of key performance indicator history, or industry benchmarks is not going to cut it. Managing from the rear-view mirror perspective is not going to cut it. The crisis of big food is moving at unprecedented transformational light speed, which we will touch upon later.
As large CPG firms continue to serve up grim or disappointing financial results as a result of these forces, as well as others, Supply Chain Matters offered three important strategies for our CPG industry readers. They included a critical need for increased product innovation and quicker introduction of new products in spite of continued pressures to reduce costs. Volatile and rapidly changing global markets require that Sales and Operations Planning (S&OP) teams anticipate such market changes with the ability to sense and respond on a more timely basis. The focus clearly turns toward an outside-in perspective, allowing the supply chain to respond as quickly as possible to market opportunities or threats. Today, natural and organic foods have a high online presence including online outlets such as Amazon Fresh. Finally, supply chain segmentation strategies, those that orient supply chain resources to the most influential customers, most profitable market segments or highest customer growth opportunities are now ever more essential.
As more global food companies turn their attention to acquiring more organic, sustainable and/or ethical food supply chains, we offered pointers for more effective supplier management, specifically an emphasis toward longer-term buying agreement that assist smaller suppliers in the required investments needed to produce healthier food. We noted how industry observes pointed to Hain Celestial, Pacific Foods and Chipotle Foods as good examples for these strategies.
In this commentary, we call reader attention to two industry focused articles published this month that are now drawing very wide interest and attention among traditional print and social media channels. They offer similar industry observations but slightly different tactics, because their prime industry audience is different.
The AdvertisingAge’s arictle Big Food’s Big Problem: Consumers Don’t Trust Brands, addresses the current crisis from a branding lens concluding that:
“Quite simply, big brands are losing one of their most valuable assets: consumer trust. And the fight to regain it will shape the industry for years to come.”
The article cites Boston Consulting Group and IRI data indicating that some $18 billion in sales have shifted from large to smaller CPG firms from 2009 to 2014. Major retailers, convenience foods and restaurants are responding to consumer desires are now shifting supply chain sourcing, retail assortment and merchandising strategies away from processed to feature more natural and organic food products on shelves or on menus. On the subject of acquisition of other more desirable brands as a strategy, the message is avoiding some major mistakes incurred by the likes of Kellogg with its acquisition of Kashi. It further advocates for a hands-off strategy in terms of blended marketing strategies.
What we believe is an even more profound article, one that we highly recommend, was one published by Fortune, The War on Big Food. We view this article as one with a perceptive product operations and supply chain perspective, in addition to branding.
Need more facts related to industry change- the article cites a Credit Suisse equity analyst as declaring that the top 25 U.S. food and beverage companies have lost an equivalent of $18 billion in market share since 2009. A former Con Agra executive who know runs a natural foods company is quoted: “I’ve been doing this for 37 years and this is the most dynamic disruptive and transformational time that I’ve seen in my career.”
Fortune observes that almost all big CPG companies are radically re-thinking their own product recipes while some are attempting to buy their way into the natural space through acquisition. Brought forward on a positive acquisitions theme are the positively perceived strategies of Campbell’s in its strategies with Boathouse Farms, General Foods in its acquisition of Annie’s Foods. The most important takeaway here was a perspective of acquiring more agile talent and resources and allowing the new entrant to continue to be independent in marketing and distribution strategy needs. The CEO of yogurt producer Stonyfield Farms notes that major food companies can bring their acumen, deeper pockets and global supply chain scale “but they should stay the heck out of their brand.” Rather than homogenize acquisitions into the huge supply chain, the acquired company determines best competitive strategy in its market segment.
Positive examples of rethinking existing recipes are Nestle and Hershey with their new ingredient approaches to current iconic brands. In the case of Hershey, it was helping longstanding suppliers understand that the company was committed to GMO-free or growth hormone free milk products. An important takeaway- for now, Hershey is reportedly willing to adsorb the added costs for the ingredient changes while it looks for savings elsewhere.
A final important takeaway of the Fortune article came from Hain Celestial’s CEO who admitted to the magazine that he is often grilled on a regular basis on margin growth. His reply to Fortune: “ If your products are non-GMO, organic and have no artificial ingredients you’re always going to give up 10% to 15% on margin.” He questioned whether other big CPG companies are really willing to leave such margin on the table. That perspective is ever more echoed by the post Heinz-Kraft merger and the notion of 3G Capital’s current assault on the industry.
For this author, the most important and powerful analogy describing current global CPG and food industry supply chains is indeed winning short-term battles to satisfy activists while losing the longer-term war of the brand and of the supply chain’s efficacy in fulfilling consumer needs. The supply chain’s goal is in the end, delivering satisfaction and service for product consumers.
In times of crisis, one has to invest in accelerated transformation, more agile business processes and better technology to accomplish such objectives. Many years of investment made up processed food supply capabilities and distribution channels and similar longer-term investments will be required to augment and sustain fresher, organic and artificial ingredient free supply chains. Work with and continue to educate your senior management teams in the balancing both short and long-term needs.
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