Food manufacturers have had a challenging 2020. With pandemic shopping being all of the rage, one would think the food business is booming. However, there have been two trends that have worked together to tamp down many food manufacturers –
- The increase in grocery sales has been heavily tilted towards consumer staple products. Premium and specialty products have been mostly left out.
- Food-service and restaurant customers are disappearing. In the past nine months, more than 110,000 restaurants have closed permanently. That is 17% of the overall restaurants in the U.S.
I work as an outsourced CFO for multiple clients in the food manufacturing and retail space. I can speak firsthand to the struggles that some have gone through.
Along with sales pressure, many food manufacturers are facing issues in their supply chain. For instance, one beverage manufacturer I work with has seen their cost of packaging materials (specifically aluminum) substantially increase. This client also now is competing with Coca Cola and Molson-Coors for supply.
The overall outlook of investors in this industry remains optimistic in the long-term. For the first time in three months in November, investment in food manufacturer related construction projects increased by 20%. I can speak first hand as I have a client on the retail food space that is getting ready for their second round of investment in Q1 2021.
The challenges to food manufacturers of 2020 lead to opportunities in 2021. The appetite (no pun intended) for premium and specialty products remains strong. Food manufacturers that embrace trends and change for the positive could see substantial rewards towards the back half of 2021.
Reorganizing The Sales Team
A strong sales team is more important than ever during this period. Food manufacturers need to have a comprehensive plan to balance their sales teams and point them in the right direction.
Foodservice and restaurant sales have fallen by an average of 36%. I speak from experience that many of my clients have seen similar drops in their foodservice industry sales. That means that food manufacturers must reassess their sales channel strategy.
Food manufacturers typically have three distinct revenue channels: Food Service, Retail, E-Commerce. In the past, the majority of focus has been on foodservice and retail. Most of my clients have been able to at least hold even in their retail sales channel. However, growth has become increasingly competitive. Many brands I work with are now examining non-traditional retailers and being creative in their product placement. This strategy can’t be under looked. Creative brands will find opportunities in new places.
E-commerce has become more prevalent in the food space. This started a few years back, but was fast forwarded based on the pandemic. Amazon’s grocery service has taken off. Kroger has broken into the top 10 U.S. e-commerce companies. Consumers are now becoming more comfortable making their food purchases online. Food manufacturers need to recognize this opportunity and begin to refocus resources.
Typically, food manufacturers focus on two e-commerce strategies. The first is a strategy through their current website. Selling through the current website reduces costs and increases control over the process. Most companies would benefit from engaging a consultant to help optimize their process. I have been amazed by my clients at how impactful strategies such as retargeting and site optimization can be.
The second e-commerce strategy is selling the product through resellers sites such as Amazon. Amazon has a lot of positives (views) and negatives (costs) that must be weighed. Still, there are other options such as Walmart and niche sites that can be utilized.
Other e-commerce sellers may be aimed at similar customer bases. These present partnership opportunities to sell product. Too many food manufacturers get stuck on Amazon. Not enough look for other sites that might cater to niches audiences they would be well served to be in front of.
Lastly, other opportunities should be examined. For instance, food manufacturers may want to research co-packing opportunities. I believe there could be a huge potential for co-packing in 2021. Just like food manufacturers, retailers are looking for ways to increase sales and profits. I have witnessed this firsthand on both sides of this strategy with clients I work with.
Retailers that sell private label products mark them up to realize 40-50% profit margins (compared with 25%-35%). As a result, many retailers of all sizes may see this as a viable alternative. One food retail client of mine is going to route in Q1. You’d be surprised to learn they are less than $10 million in sales.
An aggressive sales team will build out the case for co-packing and private labeling. This business case can then be used to educate prospects and close deals.
Lastly, sales teams need to be “right-sized”. All businesses need to benchmark their sales and marketing expenses as a percentage of sales. Many of my clients are coming to the realization now that their sales team is just too large. This realization is driven by the number activity and opportunities. It does not take as many people to investigate and prospect fewer opportunities. Every business must have a target for their sales and marketing expenses and closely monitor this monthly.
Critically Access Manufacturing Costs
Cutting costs is always easier said than done. I had many conversations with my outsourced CFO clients this year about cutting budgeted costs. There is always some low hanging fruit to cut. However, once those expenses are identified, cutting costs often means sacrificing resources.
However, (un)luckily for food manufacturers, there is often waste in the manufacturing processes that can be addressed.
The first area to address is the utilization and labor costs. Utilization is a concept very well known in the service industry, but not as much elsewhere. Too many food manufacturers operate without defined schedules. This leads to manufacturing taking longer than they should, which results in wasted labor expenses. Production and labor schedules should be very well defined.
Every food manufacturer should know how long it takes to produce their product. They need to create standards and hold their production team to those standards. There are other processes, such as cleaning, that must be accounted for. But overall, there is often dead labor in the manufacturing process. I have led two different manufacturers through his process recently. Each time we found out that there was excess labor.
Product costs should also be reviewed. Often, food manufacturers complete their material unit costs when they start. However, many don’t update costs as they change over time. I have many clients whose costs are 20-30% higher than they thought they were (3-5% increases each year add up).
Other food manufacturers failed to compute their initial costs correctly. For instance, material that gets wasted during manufacturing were never contemplated. These are real expenses that can get lost when computing unit costs.
Lastly, shipping costs should be analyzed. Too many food manufacturers don’t review their shipping costs. Shipping can only be reduced to a point. Still, shipping should be minimized as much as possible. This might mean setting different order minimums, exploring packaging options, or building shipping prices into the product.
Reviewing labor, shipping, and material costs can often result in saving money. This includes reducing headcount, switching suppliers, or increasing prices. The key to identifying savings is having a comprehensive plan to work through.
Defining Value for Customers
While the pandemic may wind down over the next several months, the economic ramifications will likely last longer. A trend that will continue is consumers looking for value. Premium brands will need a renewed focus on value as consumers adjust their purchasing habits.
How does this translate to food manufacturers? Value must become a staple in everything they do. They must look internally at what provides value to both them and their customers. Marketing campaigns must demonstrate how products create value. Each step of the manufacturing process must be examined under this lens.
Let’s take a step back and define value in this context. Value is the benefits from a product relative to the amount a customer believes it is worth. Let’s unpack that definition.
To create value, a company needs to know whom they are creating value for. This means a company must identify who their customer is. Often, companies have more than one customer segment they target. Multiple segments are acceptable, but each must be defined. Once the customer is defined, a company can more easily determine what is valuable to them.
Upon completing this process, a food manufacturer can begin to assess their entire company to determine what changes may need to be made. A beverage manufacturing client of mine recently did this process and was able to reduce packaging costs without changing their overall product. They determined they were offering too many options to their customers that didn’t create value. As a result scaled back their offerings which reduced the need for different packaging.
Derek Hibbard of Food Engineering Magazine recently profiled a dairy producer who utilized the concept of Total Cost Ownership. The detailed approach is similar to what we described above and led to overall cost savings for the producer.
Beyond 2021
Most food manufacturers are focused on 2021 (in truth, most are focused on the next six months). However, beyond that horizon, there are significant opportunities for growth. Food manufacturers with a vision and strategy will find a drastically changed landscape beyond 2021 to capitalize on. By taking steps now to increase revenue streams and channels, right-size costs, and define a strategy around value, food manufacturers are creating a stronger organization. This type of organization can emerge from a down economy in a strong position for growth and investment.
About Krieger Analytics
My name is Matt Krieger, and I am the founder of Krieger Analytics. We are a virtual CFO and bookkeeping services partner for small businesses and franchisors. Our goal is to completely outsource your accounting department from bookkeeping to virtual CFO services. I am also the owner and franchisor of a concept called Monkey Bizness, in Denver, Colorado. I know what running a business entails.
As a small business owner with a finance and strategy background, I realized the benefits that a virtual CFO could bring to smaller organizations. Most franchisors and small business owners don’t have a need (or budget) for a full-time CFO or bookkeeper. To better fit my clients, Krieger Analytics is a part-time resource. While most think of CFO’s being involved in finance and accounting (we are), we are also involved in much more. We partner with clients by coaching, giving them clarity into their business, and creating growth strategies. Conversations are free, so don’t hesitate to reach out to me at [email protected].