Finance leaders working in the food and drinks industry have always faced a complex series of challenges. The very nature of the products created by the sector, require an extensive analysis of ever-changing landscape, both economic and physical, in order to consistently deliver high-quality goods.
Additional difficulties faced by those in the sector include the seasonal availability of certain key commodities, as well as the need to cost-effectively secure suppliers and carriers with the right experience and equipment. In this context, 4C Associates brought together a number of leading CPOs working in the food and drink sector, to dis cuss the latest challenges and insights surrounding their industry.
The subsequent discussion touched on a range of issues affecting modern procurement leaders within the food and drinks industry, including price pressure from retailers, unbundling certain low value tasks and talent retention.
Mounting pressure from retailers
Members of the Food & Drink Procurement Industry Forum were near unanimous in labelling cost pressure from retailers as a key concern for the industry.
According to one attendee, this trend is unlikely to change as hard-pressed consumers will not return to pre-crisis level spending in the foreseeable future. Discount supermarkets, he argued, are beginning to gain a foothold in the UK and shoppers are going to get used to their low pricing.
“Consumers are more price savvy now, and they aren’t going to lose their bargain hunting habits.”
There was some contention over just how new this trend was, with another forum member explaining that discount food and drink retailers were not new to Europe. Germany, for example, was highlighted as a country which had a long history of low-cost supermarkets.
The techniques employed by these retailers have created fresh challenges for the industry. The refusal of some companies to offer temporary promotions and instead focus on consistently low prices has put a real strain on supplier relationships.
“Some retailers just aren’t interested in building workable relationships with suppliers. They say ‘it’s this price or nothing’.”
Compliance challenges and the importance of relationships
A number of attendees drew a parallel between the bad press surrounding the horse meat scandal and the ever more complicated Terms and Conditions imposed by many major retailers. In one attendees’ opinion, the horse meat scandal was principally the result of cost pressure from supermarkets.
“Horse-gate has been the most impactful scare in our industry for a long time.”
In his opinion, a huge rise in beef prices was the principal culprit behind beef being substituted with unidentified meats. The problem was further escalated by the increasingly distant relationship between supermarkets and suppliers. Retailers continued to put the same cost pressure on suppliers, forcing certain companies within the supply chain to adapt illegal practices to be able to fulfil their orders. One of the positive sides of the scandal, it was argued, is that supermarkets have been forced to recognise that they cannot simply impose prices on suppliers without there being serious consequences.
On the other hand, an attendee explained that the increased level of scrutiny on the food industry and the resulting Terms and Conditions (T&Cs) imposed by certain supermarkets, had made it difficult to do business. For example, buying certain types of fruit in South Africa had become near impossible as growers are given no financial incentive to comply to T&Cs. Many are simply choosing to sell to Chinese or Russian companies which often demand less-stringent checks.
“As the situation spreads, retailers will have to pay more or have empty shelves.”
Corporate Social Responsibility (CSR) was also raised as an issue, although one which affects procurement departments across a wide range of sectors. A number of fashion brands were named with regards to the challenges in this area, particularly due to the complexity of their supply chains.
“There are many companies which have done a lot of work in CSR, but there’s no story in compliance.”
The importance of cultivating relationships
It was unanimously acknowledged that many retailers are increasingly price driven and short-term focussed. This often acts to the detriment of suppliers and, as illustrated by the horse-meat scandal, can lead to problems down the line for both parties.
In this context, the forum discussed retailer strategies which include moving buyers frequently to ensure they don’t build relationships with suppliers. One attendee criticised supermarkets for their short-term planning and not taking into consideration long-term issues facing suppliers, such as land management. He explained that supermarkets cannot simply demand “apples one day and bananas the next”.
“It’s true that some supermarkets are awful in terms of how they work with suppliers.”
Speaking on the issue, Philip Joss, Practice Lead at 4C Associates, explained that suppliers often approached negotiations with retailers without the necessary level of information. Identifying cost-drivers for each party is essential, he said, in order to come to an agreement which suits both parties.
“Suppliers need to be very well-informed to deal with retailers on the same level. They need to present a logical argument to increase the likelihood of even having a price conversation.”
However, the benefits of effective Supplier Relationship Management (SRM) extend beyond ensuring suppliers do not find themselves under too much cost pressure. Strong bonds and business relationships built on trust, lead to better quality products as well as improved levels of staff satisfaction and retention.
The issue of supermarkets bypassing suppliers and going straight to growers was also discussed. According to a number of Forum members, this approach was increasingly disrupting relationships within the food and drink industry. A number of large retailers were criticised for their cavalier attitude to the food supply chain and it was suggested that the approach would not bear fruit in the long run. Particularly as many growers had no experience of dealing directly with retailers.
“You can’t forget that the vast majority of fresh produce is now sold through supermarket chains.”
Asked how certain suppliers could shield themselves from seemingly all-powerful supermarkets going straight to buyers, one attendee proposed a novel solution. His company had taken to developing different varieties of their fresh produce which they owned the intellectual rights for. This tactic is effective in ensuring retailers do not try to cut out certain suppliers.
Other tactics discussed included buying up stock to ensure it does not end up being sold as a white label by a lower cost competitor. In this case the conundrum facing many buyers is whether they should buy and then sell the excess stock as white label themselves, or risk the stock being bought by a white label competitor. In both cases it can be argued that the buyer is acting as the architect of its demise.
The above point was made specifically in reference to the German market, where consumers are less attached to brands and packaging. As a result white label products at lower prices are able to compete with more established brands. Although British consumers still associate products with brands and specific item presentation, the emergence of low cost supermarkets in the UK may well change this.
Unbundling spend to deliver better value
In many industries, buyers have often allowed preferred suppliers to bundle sets of related services. The reasons for this vary enormously and may stem from attempts to integrate multiple services or simply through habit and convenience. However, in the words of several attendees, unbundling spend can be an effective means of cutting costs and avoiding complacency.
“If the market moves, we make sure we’re moving with it.”
Unbundling spend and re-sourcing low value tasks can lead to significant improvements not just in terms of cost but also performance. New suppliers may have access to better technology, a more experienced talent pool and specific skill sets a supplier specialised in certain services simply cannot compete with. These attributes can lead to lower costs, better quality and faster turn-around times. It was also suggested that assigning individual tasks to specialised suppliers results in higher staff engagement and general satisfaction.
One related example is the success of procurement departments in unbundling advertising spend. In the past, advertising agencies would control marketing strategy, creative content and actively run campaigns. Nowadays, many advertising operations have been optimised as a result of unbundling elements such as media buying and logistics. The same approach can also be applied to the food and drinks industry.
One attendee explained that effectively unbundling certain areas of spend, enabled the company to benefit from lower costs when the price of a certain commodity diminishes. In these circumstances, the buyer can approach suppliers with the knowledge that a certain commodity is cheaper and expect a reduction. The key, he explained, is picking the best time to hold auctions, correctly applying the process and building the appropriate relationships.
Another participant shared his experience of multiple suppliers simultaneously deciding prices for a certain product would increase. “You need to have tactics to counter this sort of situation,” he said, adding that relentless tenders and auctions should not be seen as the “bad side of procurement.”