Executive Briefings

There Are Seven Market Trends to Watch for in This Vertical in 2009

If history is our guide, sales of food and beverage products will rise in the economic downturn. Food staples (cereal, bread, milk) along with convenience meals will gain volume as more families eat at home. It appears that 2009 is a time for food and beverage manufacturers to create big brands in big economies.

Analysis of the food and beverage sector show there are seven primary market trends that companies active in this area should be aware of this year:

• Private-label purchases are rising. In 2008, Q2 consumption of private-label goods hit a record high unit share in the United States. Switching behavior was seen by consumers from all income levels. There has never been more pressure on food and beverage companies to drive platform innovation.

• Global competition is increasing. With the rise of global multinationals, supply chains become more complex with a focus on regional market execution. Expect greater brand evolution from emerging economies. As a result, 30 percent of food and beverage companies have formed supply chain centers of excellence to focus on regional execution based on global planning.

• Working capital is an opportunity. Despite investments in enterprise resource planning and the advanced planning systems, industry working capital and inventory levels have not improved. Levels over the past four years are static. This is a large opportunity for most companies. Companies that do this best include inventory and working capital analysis in systemic, cross-functional processes like sales and operations planning making working capital a cross-functional measurement and goal.

• Demand variability will increase. Over 52 percent of companies report a rise in demand variability. The three drivers are new-product launch forecasting, special marketing programs with retail, and the growing complexity of product portfolio due to item proliferation. With the changes in consumption - changing demand patterns due to the recession increase in private label, and a move to more in-home eating--2009 demand patterns will have even higher error rates. Companies can do three things: focus on improving demand sensing through vendor-managed inventory programs, use of downstream data to drive replenishment, and daily recalculation of forecasts and safety stock at the distribution center.

• Need for safe and secure supply chains. The power of the brand is closely tied to safe and secure supply chains. The numbers of recalls are rising; however, due to product velocity, only 40 percent of products can be reclaimed in a recall. The average recall costs $20m, and after a major recall, the equity of the stock loses 7 percent on average. To improve brand protection, research indicates that companies need to do three things: unit level tracking, hourly quality monitoring, and multi-tier ingredient lot control/visibility systems with contract manufacturers and ingredient suppliers.

• Increased need for demand orchestration. Companies need to learn from the past year-with the turbulence in commodity markets in 2008, there was a need for increased skill in price management and commodity buying strategies--to become a demand orchestrator. Companies that are demand orchestrators use commodity prices as an input to manage supply and go-to-market programs. For example, for demand orchestrators, as commodity prices increase, alternative formulas are used to reduce the impact of expensive commodities and go-to-market strategies change-trade promotions, sales deals, trade deals and marketing-to drive sales of products with lower volatility commodity ingredient lines.

• Sustainability becomes mainstream. While the ink is drying on many companies' social responsibility programs, 2009 is the year where green becomes a driver in the design of supply chains. Sustainability will be a major thrust in defining supplier development programs and green packaging will become more than lip service.

The Outlook

Food and beverage technology spending will be in the areas of demand sensing, demand insight management, price management and investment in factory automation (tighter connection of manufacturing material management to specification requirements and a focus on quality to improve product safety). For those that do it right, 2009 can be a pivotal year for creating big brands in big countries.

Analysis of the food and beverage sector show there are seven primary market trends that companies active in this area should be aware of this year:

• Private-label purchases are rising. In 2008, Q2 consumption of private-label goods hit a record high unit share in the United States. Switching behavior was seen by consumers from all income levels. There has never been more pressure on food and beverage companies to drive platform innovation.

• Global competition is increasing. With the rise of global multinationals, supply chains become more complex with a focus on regional market execution. Expect greater brand evolution from emerging economies. As a result, 30 percent of food and beverage companies have formed supply chain centers of excellence to focus on regional execution based on global planning.

• Working capital is an opportunity. Despite investments in enterprise resource planning and the advanced planning systems, industry working capital and inventory levels have not improved. Levels over the past four years are static. This is a large opportunity for most companies. Companies that do this best include inventory and working capital analysis in systemic, cross-functional processes like sales and operations planning making working capital a cross-functional measurement and goal.

• Demand variability will increase. Over 52 percent of companies report a rise in demand variability. The three drivers are new-product launch forecasting, special marketing programs with retail, and the growing complexity of product portfolio due to item proliferation. With the changes in consumption - changing demand patterns due to the recession increase in private label, and a move to more in-home eating--2009 demand patterns will have even higher error rates. Companies can do three things: focus on improving demand sensing through vendor-managed inventory programs, use of downstream data to drive replenishment, and daily recalculation of forecasts and safety stock at the distribution center.

• Need for safe and secure supply chains. The power of the brand is closely tied to safe and secure supply chains. The numbers of recalls are rising; however, due to product velocity, only 40 percent of products can be reclaimed in a recall. The average recall costs $20m, and after a major recall, the equity of the stock loses 7 percent on average. To improve brand protection, research indicates that companies need to do three things: unit level tracking, hourly quality monitoring, and multi-tier ingredient lot control/visibility systems with contract manufacturers and ingredient suppliers.

• Increased need for demand orchestration. Companies need to learn from the past year-with the turbulence in commodity markets in 2008, there was a need for increased skill in price management and commodity buying strategies--to become a demand orchestrator. Companies that are demand orchestrators use commodity prices as an input to manage supply and go-to-market programs. For example, for demand orchestrators, as commodity prices increase, alternative formulas are used to reduce the impact of expensive commodities and go-to-market strategies change-trade promotions, sales deals, trade deals and marketing-to drive sales of products with lower volatility commodity ingredient lines.

• Sustainability becomes mainstream. While the ink is drying on many companies' social responsibility programs, 2009 is the year where green becomes a driver in the design of supply chains. Sustainability will be a major thrust in defining supplier development programs and green packaging will become more than lip service.

The Outlook

Food and beverage technology spending will be in the areas of demand sensing, demand insight management, price management and investment in factory automation (tighter connection of manufacturing material management to specification requirements and a focus on quality to improve product safety). For those that do it right, 2009 can be a pivotal year for creating big brands in big countries.