Opportunities Challenges for Food Beverage and CPG

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  • 1. Opportunities and Challenges for theFood, Beverage, and CPG Industries John Blanchard Research Director Food , Beverage , and CPG Industries ARC Advisory Group jblanchard@arcweb.com
  • 2. Challenging Times Food, beverage, and CPG manufacturers find themselves caught between slow growth, rising costs, waning pricing power, accelerated regulatory and customer requirements, and a growing p percentage of sales from a limited number of g powerful and demanding retailer, and increasingly limited capital, human, and even material resources 2 © ARC Advisory Group
  • 3. Challenging Times How do we improve margins and increase profitable growth to sustain shareholder value? 3 © ARC Advisory Group
  • 4. Business Environment♦ F d and product safety d dili Food d d t f t due diligence i increasing i • Concerned consumer • Yearly food borne illness statistics • Global terrorism • Global sourcing & rapid high volume distribution • These facts plus product counterfeiting are producing • New industry and company food safety initiatives • Increased regulatory and customer requirements 4 © ARC Advisory Group
  • 5. Business Environment ♦ I Increasing government regulations i t l ti • US Bioterrorism Act • FDA and USDA regulations • CBP/CT PAT CBP/CT-PAT • DHS Customs- Trade Partnership Against Terrorism Recall Reason • Truth in labeling laws E. coli Foreign Matl Listeria • FDA & USDA mandated HACCP programs Staph St h Allergen for fish, meat, poultry, and juices Salmonel • Environmental regulations: land, water, air 5 © ARC Advisory Group
  • 6. Business Environment♦ 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 30.0% 2 8 .0 % $8.0 $6 . 8 b $7.0 25.0% 2 3 .0 % 2 2 . 5% 2 1% $6.0 20.0% 17. 2 % 17. 0 % $5.0 16 . 3 % 15.0% $3 .6 b $4.0 12 . 0 % 12 .0 % 13 .0 % 10 . 5% 12 .2 % $3.0 10.0% $1.8 b $1.8 b $1.4 b $2.0 5.0% $1. 0 b $1.0 b $0 . 9 b $0 .9 b $0 .4 b $1.0 $0 . 3 b $0 .3 b 3 0.0% $0.0 ) s) tte p. G gg n e s ey x r t ze af lo ro Le am or P& m ill e l lo sh ev Kr lo gi Sa C ra Ke G .S er C er R l ia Sa x. H En cl D (E (In s s i ll i ll M M al +Data al sources did not indicate whether Sam’s Club data was included or not in the reports. er er en en G G Share of Business at Wal*Mart Dollar Sales 6 © ARC Advisory Group
  • 7. Rapid Change, More Complexity, LimitedResources ♦ Global sourcing of more limited, higher cost, more exotic ingredients ♦ Value health, and environmentally conscious and demanding new Value, health consumer ♦ Lots of consumer short (fads) changing purchasing patterns ♦ Rapidly changing demographics and new geographies (small bodegas) ♦ Increasing number of SKUs and new product introductions ♦ Increasing percentage of sales from promotions ♦ Increasing importance of packaging ♦ Limited resources ♦ Available capital ♦ L b pool and skill sets Labor l d kill t ♦ Water, energy, ingredients, packaging materials 7 © ARC Advisory Group
  • 8. More Sustainable Manufacturing♦ Driven by retailer initiatives • “The challenge of creating a low-carbon society will require a revolution in thought and action – a revolution in green consumption.” - Terry Leahy – CEO Tesco♦ Driven by business and regulatory y g y requirements • As a part of their effort to eliminate waste and improve efficiency, Pepsico has been applying eco- friendly 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 parts of the world♦ Driven by the “green” consumer/shareholder • A recent survey over 50% of consumers consider “ f id “green” i their purchasing ” in h i h i decisions and 20% are ardent “green” even concerned over how a company treats its employees 8 © ARC Advisory Group
  • 9. Sustainable Manufacturing ♦ To the consumer • Product availability Environment • Environmental & Resource responsibility Friendly Products ♦ To the employee and his/her family / y ♦ To the local community Environment & Resource Environment & Resource Friendly Friendly ♦ To many segments of Supply Chain Plants manufacturing ♦ To Wall Street 9 © ARC Advisory Group
  • 10. Response to Changing Business Environment♦ Initial Strategy i i l “Margins rise while returns are flat” • Mergers, acquisitions, divestitures, outsourcing • Product portfolio rationalization/optimization • Productivity initiatives • OEE, TPM, continuous improvement • Supply chain optimization programs 10 © ARC Advisory Group
  • 11. Now Food, Beverage, and CPG Manufacturers AreAsking ♦ 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 come up with new ideas or equipment that is multi- tasking and that can reduce change over time? ♦ Wh t are th b t metrics to support future manufacturing What the best t i t tf t f t i requirements? ♦ How do I support my ever expanding manufacturing and business automation systems and networks? 11 © ARC Advisory Group
  • 12. Response to Changing Business Environment “An agile, innovative enterprise to sustain growth and improve♦ Strategy Going Forward – margins” • Global “super branding” • Expansion of distribution channels • Process automation and integration of manufacturing & business processes enterprise-wide • More sustainable & flexible manufacturing & supply chains h i • Develop a more innovative and extended organization and culture (people) 12 © ARC Advisory Group
  • 13. Operational excellence is no longer enough.Its power to differentiate has eroded. Rory A. M. Delaney Senior Vice President Strategic Technology General Mills 13 © ARC Advisory Group
  • 14. A Discipline of Innovation Emerging Innovation is generally recognized as the principle driver of growth and shareholder value g • An increased rate of change has made an ability to change more valuable • Methods and tools are emerging to vastly improve innovation success rates • Companies need new insights to achieve p g growth • Companies are “globalizing” their innovation p processes. A “follow the sun” p process is emerging • Companies are also utilizing more external resources to drive innovation 14 © ARC Advisory Group
  • 15. A Discipline of Innovation Emerging Innovation is generally recognized as the principle driver of growth and shareholder value g • Companies involving suppliers earlier in design phase of new products and processes • Some OEMs are driving innovation faster than their clients – even in non-traditional areas of their business • Patented p oduc pac ag g a e ed product packaging • More functions on a single unit or machine • More continuous on-line quality verification • New environmentally friendly technology • Packaging end line provider • Sustainable manufacturing and limited resources in emerging markets will drive innovation even faster 15 © ARC Advisory Group
  • 16. Where Are We Today? ♦ Few food, beverage, CPG manufacturing sites have their processing, packaging, warehousing, logistics, and business systems networked together with bi- bi directional electronic exchange of information ♦ Over 67% of packaging lines do not measure performance ♦ 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 16 © ARC Advisory Group
  • 17. Increased Need for On-line Quality Verification 17 © ARC Advisory Group
  • 18. 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 quality ARC Insights & Manufacturing Performance Surveys 2007♦ Some factors inhibiting adoption of technology • Lack of ease of use for operators • Cost and complexity of maintaining technology • Lack of resources to evaluate new technologies • Long standing purchasing & amortization policies 18 © ARC Advisory Group
  • 19. What Do We Need To Do? ♦ A More Comprehensive Plan to Meet Business and 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 requirements • Affocus on people – your most valuable resource l l bl 19 © ARC Advisory Group
  • 20. It’s Not Just About Technology “To sustain the productivity surge, todays 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 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 todays today s IT advances. ……. “Productivitys Technology Iceberg” March, 2004 by Erik Brynjolfsson, Professor of Management MIT Sloan School of Management 20 © ARC Advisory Group
  • 21. 21© ARC Advisory Group