The food value chain consisting of farmers, distributors, processors and retailers is sliding backwards on operating margin. It is the combination of the "Amazon Effect" and the "3G Effect". (The fierce cutting of costs following the merger of Kraft/Heinz combined with the pressure of changing market fundamentals led by Amazon.) While companies want to drive digital innovation, most are not early adopters and the technologies are not mature enough for the late majority adopter. This results in a dilemma of "what to do?"
Consumers want fresh, local and convenient foods. The focus is on health and wellness with shoppers clamoring for smart labels to see the origin and processing steps of the food value chain.The traditional food manufacturer is focused on a global or mutli-national journey of supply chain excellence that is defined by manufacturing efficiency, standardization and functional excellence. The two are at the crossroads. The business models are clashing.
The end-to-end focus currently at play in the food value chain is not the path forward for the digital transformation that needs to happen. Why? The focus on end-to-end is on enterprise flows. It is inside-out based on a traditional approach to serving the market. The shift requires an outside-in approach to sense the market and build the process flows from the channel back. In the case of food manufacturing, it is essential to tie good planning processes to commodity buying strategies to orchestrate costs through alternate sourcing and buying strategies. Most lack the capability to tie tactical supply planning to procurement buying plans, and use channel data from the channel through the supply chain.
Online food sales today are 4%, and it is expected to account for 8% of sales or $70B by 2021 (source Inmar Willard Bishop Analytics). eCommerce changes the shopping fundamentals. Snacks are 15% online in China for Mondelez. There is no way to trigger impulse buys or leverage traditional tactics like end-aisle displays and in-store promotional artwork. The world of ecommerce changes distribution centers and delivery. It requires a reinvestment in the warehouse to pick the each, consideration of robotics to improve picking flexibility and rethinking order management/delivery to improve convenience. A very different model than case picking and long-haul delivery through over-the-road trucking to retail distribution centers.
Consumers also want wellness. One in six people in the US are sickened by food annually. Shoppers want healthier food and smart labels. Fresh is a major driver. Today's value chains are designed for pre-packaged foods with long shelf lives. In interviews, we find that companies are confused on how to deliver smart labels consistently. They lack the infrastructure.
It is a rocky ride. In Figure 1, we share the industry snapshot of the consumer value chain. While growth averages 4%, it favors fresh and local products. The growth rate is up 2% when 2010 is compared to 2016. However large brands are struggling. Inventory turns are 6.37 down 20% when 2010 is compared to 2016. ROIC is 10% down 3% when 2016 is compared to 2010. The business fundamentals have changed, and the supply chain leaders have been slow to innovate on new business models and outside-in processes. The increased complexity of line extensions is a drag to the bottomline; yet less than 15% of companies are actively working cost-to-serve programs.
In this market, Hershey is weathering the storm the best.
Figure 1. Table of Performance and Improvement
To understand the rockiness of the market, here we share the orbit charts of the food industry. Notice the backward slide of both operating margin and growth. It is a very unpredictable pattern for a rocky ride. In the 2016-2012 period note the upward swing in inventory turns driven by supply chain excellence programs.
Figure 2. Orbit Chart of the Food Industry at the Intersection of Operating Margin and Inventory Turns
As shown in Table 3, each manufacturer is operating at a different place on the effective frontier.
Figure 3. Table of Performance and Improvement of the Food Manufacturers
Figure 4. Orbit Chart of ROIC and Growth
For additional insights check out the attached report.
Ecommerce data sourced from Inmar Willard Bishop Analytics, a Chicago-based consulting firm.
Wall Street Journal, Where the FDA is Going Under Trump, October 16, 2017