Food manufacturing: six steps to create value

Those steps are: tackling the balance of power issue with retailers head on, finding the latest and price-inelastic demand and being first to market, making efficient and targeted use of commercial investment, presenting a holistic, value-creating mid-term strategy to retail partners, and linking performance of functions to the delivery of operating profit growth.  

‘Balance of power’

Value creation in the food sector is tied up in the ‘balance of power’ between manufacturers and retailers. Retailer consolidation suggests that if the retailer strategic agenda is oriented around cost cutting, rationalisation, and consolidation, individual categories can suffer from lack of interest and investment, feeding a race to the bottom dynamic.

Manufacturer moves to shift the balance of power are critical. These can include consolidating the supplier base to exercise more power in retailer negotiations, bypassing retailers completely with a direct to consumer capability, or moving away from reliance on a few retailers to a more diversified distribution base. Witness Young’s recent troubles driven by the loss of the Sainsbury’s contract.

Operating profit

The value creation potential of manufacturing businesses is tied to the operating profit growth potential of their geography, category, brand, and pack portfolio. The ideal portfolio should be optimised across volume, pricing, cost of goods, complexity cost, and growth potential.

Businesses should change common practice and make portfolio optimisation decisions holistically – by re-evaluating the total portfolio shape regularly – rather than marginally – by evaluating the contribution of a single stock keeping unit (SKU) on a stand-alone basis.

Commercially attractive marginal business, which creates positive gross profit, can drive complexity in other parts of the system that impact total business operating profit.

Latent demand

Consumer tastes and preferences are changing dramatically, yet large food groups are often outsmarted by smaller, more nimble competitors in innovation. A step-change in innovation capability is necessary, by building a clear understanding of pockets of latent, price-inelastic demand, and moving quickly to secure the benefits of first mover advantage. This can include acquiring promising smaller businesses or organic plays that take the company into new attractive spaces. Innovation plays done well have the potential of delivering material and incremental operating profit growth.

Targeted investment

In businesses caught in a race to the bottom dynamic, the mix of commercial investment shifts from consumer-focused spend to trade spend, such as listing fees, as suppliers are pitted against each other by retailers. Furthermore, above the line marketing spend is often cut in businesses under performance pressure.

A new approach is needed, on the one hand preserving but placing a larger constraint on total size of marketing budgets, while on the other hand working hard to direct marketing activity to consumers through better targeted and frequently less expensive channels, such as in-store activity coupled with social media campaigns.

Holistic strategy

Despite a lot of talk about joint business planning, manufacturers still frequently fail to make clear strategic and economic arguments to retail partners about how to create value for both parties.

Recently, a primarily own-label player in an increasingly commoditised food category considered options for re-setting its relationship with the major multiple retailers. 

Management believed that a new branded category leadership agenda could fundamentally reverse the category dynamic. For the manufacturer, a shift to a higher share of branded SKUs would simplify its portfolio materially in terms of SKU count, improve manufacturing efficiency, lower production costs, and free up funds for additional, targeted commercial investment in-store.

The increased focus on brands would deliver a better and clearer platform for price tiering and category premiumisation when compared to the own label business, while also create a more equitable manufacturer-retailer power dynamic.

Retailers stood to materially gain as well. They were invited to let the manufacturer invest in the in-store category experience on their behalf, as long as the push towards branded share of business was respected. New, innovative branded propositions would drive incremental sales by bringing much-needed new consumers into the category.

Finally, retailers had a clear financial incentive to support the strategy of ‘rebranding’ the category because the manufacturer would deliver higher margins on branded vs own-label products. So the new strategy delivered attractive economics for both parties – a true win-win.

Link performance to profit growth 

It is critical that the metrics used for measuring and managing performance support the strategy and encourage the right behaviours. When commercial teams are incentivised with volume metrics, they can make decisions that can, over time, divert resources away from more material plays and introduce cost-driving complexity.

A holistic approach to performance management is therefore required, which enforces clear line of sight between the performance of all functions and their contribution to the core metric of operating profit growth.

Experience suggests that these six steps are transformative in nature, and therefore by definition difficult. They can take executives from a mode of selling an underperforming food asset at almost any price to a place of confidence about future value creation.

• Christine Delivanis is a partner at Marakon, a boutique management consultancy, and leads the European Consumer Goods practice. She has 17 years of experience advising executives in the consumer goods sector.