Key challenges retailers and manufacturers in the food business need to be aware of and address
By P Rajan Mathews
Today, a major cause for concern in food business operations is recalls. Pulling products involves a massive, expensive undertaking that can have lasting reputational damage, especially if they pose a risk to health or safety.
It is therefore imperative to focus on fine-tuned food manufacturing and retail operations that can boost efficiency, quality, sustainability, and scalability, besides avoiding the pitfalls of the F&B business. So, more than ever before, food manufacturers and retailers must make their operations their top priority and foremost concern.
Here are some of the key challenges retailers need to be aware of and address:
Changing Consumer Lifestyles
Shifts in consumer behaviour have led to the emergence of consumer traits, which have a significant impact on the industry. These consumer traits include:
- Dynamic and unpredictable consumer tastes bordering on fashion trends
- Weakened brand loyalty as acceptable alternatives proliferate
- More sophisticated consumers wanting no trade-offs between costs, quality and variety
The uncertainty for players in the F&B business is generated by unpredictable consumer purchasing patterns. The huge choices and low boredom thresholds fuel shorter product life cycles and rapid product changes resulting in numerous products, packaging and size variants. This demands higher advertising spends and high-quality expectations from both manufacturers and retailers.
Due to the increasing rates of new product development, the manufacturing and retailing capability for the adoption of rapid new products has risen significantly. But new and frequent launches require shorter production runs, frequent changeovers, and inventory turnaround time, with a greater focus on asset utilization for both manufacturers and retailers.
Seasonality is another factor that manufacturers and retailers need to address. Many products such as soft beverages, ice creams, and beer suffer from unpredictable seasonal sales.
Food operators do not want to miss the chance of attracting new consumers during the season and draw consumers into the market. But the optimum balance between these two depends on product shelf life, cost of stock holding versus the spare capacity, and the flexibility of the manufacturer and retailer. However, efforts to improve forecasting with accurate predictions are difficult.
Emergence of New Distribution Channels
Though consumers are the final arbiters of a product’s success, the distribution channels create significant demands on both manufacturers and retailers. They must keep a variety of distribution channels adequately supplied. The three distribution aspects that must be managed are:
The power of the major multiples: At some companies, the retail customer’s needs are the primary focus and this has resulted in two major issues:
- i) The rise of private & regional brands: It has been found that the success of private labels and regional brands depends on personal disposable income and on the private label’s quality and consistency. In Europe, private labels have the highest market share for bulk and commodity products and are moving towards higher value-added products.
In Europe, over 80% of the population perceives private labels as having the same or better quality than national brands. As retailers move to higher value-added products with private labels, the pressure will be on more differentiation from more technically complex products, more innovation and greater promotional refinement, which will add cost, increase complexity and fragment the market.
- ii) Retailer ownership of critical sales information: The fact that retailers stand between the producer and the end-consumer creates all sorts of complications for manufacturing. The retailer becomes powerful due to:
Better and different information and perspective about consumer trends and attitudes.
Customer Service
Products often compete according to the promotional directive set by the retailer rather than the manufacturer. Operating under different competitive rules to the retailer makes it difficult to have the optimum manufacturing strategy.
The retailer acts as an inventory buffer, disrupting demand and supply information leading to disruption in production schedules.
The growth of food service outlets: Americans spend 57% of their total food budget on eating out, either at a fastfood joint or in a restaurant. In comparison, Europeans still allocate only 25% -35% of their total food expenditure budget to ready-to-eat prepared food, and all indications are that this will continue to grow.
The drivers are working women, less time taken to prepare food and grazing instead of regular meals. Retailers are taking this threat seriously and are introducing quality on-site cafes and restaurants.
Both food manufacturers and retailers will have to adapt to protect their market share and status in retail by way of introducing shorter product cycles, different pack formats, and new demand patterns. Certain food manufacturers and retailers will also need to diversify into food service to protect their market shares.
Competitive activity in smaller retail outlets: Further complications are provided by impulse purchases in smaller outlets such as corner shops and gasoline stations. The price war between retailers and petrol companies has an impact on food logistics. For example, in the UK in 1996, there was an 8% decline in the sales of soft beverages and the major reason was that the retailers attracted gasoline consumers with the price-parity promise activity.
The competition has resulted in several initiatives between retailers and gasoline companies as well – for example, between Sainsbury & Shell and Safeway and BP in the UK. With the current interest in Efficient Consumer Response (ECR), retailers are beginning to focus on shortening the response time and minimizing inventory holding. Going ahead, the system complexity will only increase, resource requirements will be greater, and the opportunity for errors will multiply.
As the relative importance of alternative market outlets grows, production planning, manufacturing, logistics and distribution will have to be equipped to cope with the different but equally important demands from each route.
Consolidation
Consolidation of ownership has occurred in both retail and the food manufacturing sector. At the same time, the growth of major multiples has squeezed out independent stores and small supermarkets, which could not compete on price, thereby also simplifying the distribution lines for food manufacturers. The subsequent price wars that emerged between the surviving retailers put pressure on the manufacturing performance, encouraging acquisition and cost reduction strategies across the industry.
Unfortunately for the F&B industry, the consolidation of power that comes from mergers and acquisitions has not produced leverage because retailers have a choice of suppliers but the brand producers have limited choice in retail outlets. Both sectors of the industry are now in the divergent phase.
Internationalisation
Internationalization is making it more complicated for F&B operators to compete. Large food manufacturing and retailing companies are looking at ways to use their financial strength and brand image in underdeveloped markets; and for all of them, the question of where to produce, procure, and distribute is the critical issue.
Access to raw materials and to the market has a significant effect on the overall performance and location of manufacturers and retailers. So, the issue of ‘local for local’ production and sale or ‘local for global’ is an important part of the food retailing strategy.
As a result of internationalization, the financial growth of F&B players has become dependent upon:
- Taking market share from alternative food sources with different products
- Going up market into higher added value products
- Selling existing products into new territories
In the face of powerful retail outlets and greater international competition, food manufacturers and smaller retailers are forced to excel at both products and customer service. This is against the grain of those who tend to choose one or the other requirement. Ultimately, there comes a point at which the cost of complexity in the industry becomes greater than the returns, and many players feel that too much fragmentation is driving costs up.
What will simplify the market dynamics once again? At the retail end of the supply chain, it could be ECR or perhaps further consolidation. On the manufacturing side, fit and agile food manufacturing companies are looking at three aspects of operations – the supply chain, operational practices, and leveraging the knowledge of people. One way to keep costs stable is to improve the information flow along the supply chain with the help of ECR.
The article is written by P Rajan Mathews, the Chief Brand Mentor, Pro Next Food Brands Pvt. Ltd. As a Food Marketer, Mathews has worked on brand & product management, market research, sales, advertising and sales promotion management, and in converting food commodity products into successful food & beverage brands. It first appeared in the November 2022 issue of Progressive Grocer.
