Opportunities and Challenges for the Food Beverage & CPG Industries

Opportunities and Challenges for the

Opportunities and Challenges for thefor the

Food, Beverage, and CPG Industriesfor the

Food, Beverage, and CPG Industries

John BlanchardResearch Director

Food , Beverage , and CPG IndustriesARC Advisory GroupARC Advisory Group

[email protected]

Challenging TimesChallenging Times

Food, beverage, and CPG manufacturers find themselves caught between slow growth, risingthemselves caught between slow growth, rising

costs, waning pricing power, accelerated regulatory and customer requirements, and a growing

percentage of sales from a limited number of p gpowerful and demanding retailer, and increasingly

limited capital, human, and even material resources

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© ARC Advisory Group

Challenging TimesChallenging Times

How do we improve margins and increase profitable

growth to sustaingrowth to sustain shareholder value?

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Business EnvironmentBusiness Environment

♦ F d d d t f t d dili i i♦ Food and product safety due diligence increasing• Concerned consumer • Yearly food borne illness statistics

• Global terrorism• Global sourcing & rapid high volume distributionGlobal sourcing & rapid high volume distribution

• These facts plus product counterfeiting are producing• New industry and company food safety initiatives• Increased regulatory and customer requirements

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♦ I i t l ti♦ Increasing government regulations• US Bioterrorism Act

• FDA and USDA regulations• CBP/CT PAT• CBP/CT-PAT• DHS

Customs- Trade Partnership Against Terrorism

• Truth in labeling laws

• FDA & USDA mandated HACCP programs

E. coli

Listeria

St h

Foreign Matl

Recall Reason

for fish, meat, poultry, and juices

• Environmental regulations: land, water, air

StaphSalmonel

Allergen

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♦ Increasing share of market controlled by a limited number powerful retailers, manufacturers, and suppliers

♦ Increasing global competition for everyone

♦ Mature US and European markets with limited growth opportunities

♦ Seeking opportunities in high growth emerging markets

2 8 .0 %

2 1%2 2 .5% 2 3 .0 %

$6 .8 b25.0%

30.0%

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$7.0

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17.2 % 16 .3 % 17.0 %

$1.8 b$1.0 b $1.0 b

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$0 3 b$0 .9 b

$0 3 b$0 .9 b $0 .4 b5.0%

10.0%

15.0%

20.0%

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orp.

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Genera

l MGen

eral M

i

Share of Business at Wal*Mart Dollar Sales

+Data sources did not indicate whether Sam’s Club data was included or not in the reports.

Rapid Change, More Complexity, Limited ResourcesRapid Change, More Complexity, Limited Resources

♦ Global sourcing of more limited, higher cost, more exotic ingredients

♦ Value health and environmentally conscious and demanding new♦ Value, health, and environmentally conscious and demanding new consumer

♦ Lots of consumer short (fads) changing purchasing patterns

♦ Rapidly changing demographics and new geographies (small♦ Rapidly changing demographics and new geographies (small bodegas)

♦ Increasing number of SKUs and new product introductions

♦ Increasing percentage of sales from promotions♦ Increasing percentage of sales from promotions

♦ Increasing importance of packaging

♦ Limited resources

♦ Available capital

♦ L b l d kill t

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♦ Labor pool and skill sets

♦ Water, energy, ingredients, packaging materials

More Sustainable ManufacturingMore Sustainable Manufacturing

♦ Driven by retailer initiatives• “The challenge of creating a low-carbon society will

require a revolution in thought and action – arequire a revolution in thought and action – a revolution in green consumption.” - Terry Leahy –CEO Tesco

♦ Driven by business and regulatory y g yrequirements

• As a part of their effort to eliminate waste and improve efficiency, Pepsico has been applying eco-friendly technology in packaging, deploying solarfriendly technology in packaging, deploying solar energy and methane gas recovery technology, and testing hybrid vehicle programs in their delivery fleets

♦ Driven by limited resources for manufacturing in most♦ Driven by limited resources for manufacturing in most parts of the world

♦ Driven by the “green” consumer/shareholderA 50% f id “ ” i h i h i

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• A recent survey over 50% of consumers consider “green” in their purchasing decisions and 20% are ardent “green” even concerned over how a company treats its employees

Sustainable ManufacturingSustainable Manufacturing

♦ To the consumer♦ To the consumer• Product availability• Environmental

responsibility

Environment& Resource

Friendlyresponsibility

♦ To the employee and his/her family

FriendlyProducts

/ y

♦ To the local community

♦ To many segments of

Environment & Resource

Friendly Plants

Environment & Resource

Friendly Supply Chain♦ To many segments of

manufacturing

♦ To Wall Street

PlantsSupply Chain

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Response to Changing Business EnvironmentResponse to Changing Business Environment

i i l “Margins rise while returns are flat”♦ Initial Strategy• Mergers, acquisitions, divestitures, outsourcing• Product portfolio rationalization/optimization

“Margins rise while returns are flat”

Product portfolio rationalization/optimization• Productivity initiatives

• OEE, TPM, continuous improvement

• Supply chain optimization programs• Supply chain optimization programs

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Now Food, Beverage, and CPG Manufacturers Are AskingNow Food, Beverage, and CPG Manufacturers Are Asking

♦ How do I address the fluctuating price and availability of commodities?

♦ How do I reduce my energy and other utilities costs and ensure the long term availability of these resources?

♦ How do I find and evaluate new technology that will support innovation and speed time-to-market?

♦ How do I reduce my manufacturing cycle time?♦ How do I reduce my manufacturing cycle time?

♦ How do I come up with new ideas or equipment that is multi-tasking and that can reduce change over time?

♦ Wh t th b t t i t t f t f t i♦ What are the best metrics to support future manufacturing requirements?

♦ How do I support my ever expanding manufacturing and business automation systems and networks?

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business automation systems and networks?

Response to Changing Business EnvironmentResponse to Changing Business Environment

♦ Strategy Going Forward –

“An agile, innovative enterprise to sustain growth and improve

margins”

• Global “super branding”• Expansion of distribution channels• Process automation and integration of• Process automation and integration of

manufacturing & business processes enterprise-wide

• More sustainable & flexible manufacturing & supply h ichains

• Develop a more innovative and extended organization and culture (people)

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Operational excellence is no longer enough.

Its power to differentiate has eroded.

Rory A. M. DelaneySenior Vice President

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Strategic TechnologyGeneral Mills

A Discipline of Innovation Emerging A Discipline of Innovation Emerging

Innovation is generally recognized as the principle driver of growth and shareholder value

• An increased rate of change has made an ability to change more valuable

g

• Methods and tools are emerging to vastly improve innovation success rates

• Companies need new insights to achieve p ggrowth

• Companies are “globalizing” their innovation processes. A “follow the sun” process is p pemerging

• Companies are also utilizing more external resources to drive innovation

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A Discipline of Innovation Emerging A Discipline of Innovation Emerging

Innovation is generally recognized as the principle driver of growth and shareholder value

• Companies involving suppliers earlier in design phase of new products and processes

g

• Some OEMs are driving innovation faster than their clients – even in non-traditional areas of their business• Patented product packaging a e ed p oduc pac ag g• More functions on a single unit or machine• More continuous on-line quality verification• New environmentally friendly technology• Packaging end line provider• Packaging end line provider

• Sustainable manufacturing and limited resources in emerging markets will

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resources in emerging markets will drive innovation even faster

Where Are We Today?Where Are We Today?

♦ Few food, beverage, CPG manufacturing sites have their processing, packaging, warehousing, logistics, and business systems networked together with bi-and business systems networked together with bidirectional electronic exchange of information

♦ Over 67% of packaging lines do not measure performanceperformance

♦ All respondents felt there was room for improvement in on-line quality verification, with almost two thirds saying there was significant room for improvement

ARC Insights & Manufacturing Performance Surveys 2007

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Increased Need for On-line Quality VerificationIncreased Need for On-line Quality Verification

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Where Are We Today?Where Are We Today?

♦ One of the primary reasons for purchasing production management software is compliance

♦ Leading edge companies depend upon production management software to optimize margin and qualitymanagement software to optimize margin and quality

ARC Insights & Manufacturing Performance Surveys 2007

♦ Some factors inhibiting adoption of technology• Lack of ease of use for operatorsLack of ease of use for operators• Cost and complexity of maintaining technology• Lack of resources to evaluate new technologies• Long standing purchasing & amortization policies

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• Long standing purchasing & amortization policies

What Do We Need To Do?What Do We Need To Do?

♦ A More Comprehensive Plan to Meet Business and Regulatory Requirements includes:Regulatory Requirements includes:

• Increased emphasis on performance monitoring , continuous improvement, and flexibility

• Improved electronic tracking and tracing from the source to the consumer

• Improved manufacturing plant security• Increased on-line quality verification and Quality by

Design (QBD)• An “in depth” sustainable manufacturing strategy• An automation strategy that recognizes the commonality

in both business and regulatory requirementsA f l l bl

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• A focus on people – your most valuable resource

It’s Not Just About TechnologyIt’s Not Just About Technology

“To sustain the productivity surge, today's managers must develop incentives that encourage their workers-as well as

themselves-to be more creative, self-starting, educated, and willing to experiment. Jobs that call for simply following recipeswilling to experiment. Jobs that call for simply following recipes

will become scarcer, and demand for an innovation-driven workforce will continue to grow.”

“……..It took 40 years for businesses to figure out how to redesign their factories and processes so that electricity could deliver a productivity payoff. Managers cannot afford to wait

decades to harness the greater productivity offered by today's

“Productivity's Technology Iceberg” March, 2004 by Erik Brynjolfsson,Professor of Management

decades to harness the greater productivity offered by today s IT advances. …….

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Professor of Management MIT Sloan School of Management

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Opportunities and Challenges for the Food Beverage & CPG Industries

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