The Corner: March, 2014

As food industry experts, Blueberry Business Group offers our observations, opinions and recommendations in this periodic feature of Big Thoughts to help food industry chief executives factor what lies ahead into organizational strategy and resource-allocation plans.

Profit2Recent industry events are interrelated and difficult to isolate from each other; outcomes are conditional. In summary, there are two important considerations:

  • Foodservice manufacturers must get realistic about potential losses associated with new industry behaviors and changing market dynamics.
  • Suppliers awarded category management volume can expect a hit to margins from price requirements and a surge in associated costs if not taking pre-emptive action.

The current state-of-things to support these statements:

The operator is the keeper of the margin in foodservice. To manage cash flow and product assortment, they will continue sourcing from distributors but will expand their options to include more wholesale outlets and e-commerce.

  • One national cash-and-carry banner alone does over $6B in annual volume; this and others is revenue taken from the distributor community. (It is unknown whether one or some of these will be acquired by a regional broadliner. Blueberry believes Yes.)
  • E-commerce (supplier-direct or Amazon) will serve operators seeking price deals as well as those unable or unwilling to meet distributor order minimums.

In turn, distributors are fighting for market share and feeling the pinch from these new product streams:

  • Category management will evolve as standard business practice for national and most regionals.
  • More acquisitions will eventually fill the vacuum created by the recent mega-merger announcement.
  • As competition increases and intensifies, supplier pricing and programs throughout the supply chain will be scrutinized as all players seek a position of advantage.

For suppliers on the award side of current initiatives, the price, cost and resource requirements can be staggering for those unprepared. This is overlooked in the revenue and market share equation and requires your attention now.

  • In various simulations, Blueberry estimates an increase in losses to supplier foodservice earnings of up to a 6 point decline in margin.

Every supplier is different; every catman program is different. Outcomes will vary and admittedly, this commentary is a bit ahead of its time. However, market dynamics are moving in this direction and forward-looking CEOs should be factoring these elements into organizational strategy. We have seen many caught in a reactive “boiling frog” situation, forced to increase the magnitude of adjustments by acting too late.

We recommend CEOs prepare their organizations as follows:

  • For suppliers likely to land on the outside of category management or consolidation decisions:
    • Get realistic and flag current related volume as high risk.  Use this time to act immediately to recover potential losses with new strategic alliances. Look to M&A as an attractive strategy.
  • For suppliers likely on the winning side:
    • Simulate the various financial impacts of price demands and estimated costs required for category management and to secure your business during other supply chain and competitive consolidation activity.
  • In either case:
    • Initiate cost reduction, resource re-allocation and other pre-emptive plans to recover margin or revenue losses, fund innovation and growth, avoid a defensive posture and improve your competitive advantage. (It is important not to reduce resources for those in customer or market-facing positions.)
    • Spread risk. Strategically align with the right distributors not solely as logistics providers but as partners with shared market share goals.
    • Widen access to your products in order to be found where operator sourcing is expanding/migrating.
    • Gain a clearer understanding of how to win faster in alternative channels and segments, including chains. This, as well as the sales cycle, takes time so act now to acquire and imbed new knowledge and new competencies into your organization.

Be prepared for what’s ahead, and feel free to contact Blueberry Business Group if we can provide assistance.

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