As we approach the annual peak period of global transportation over the next three months, there are additional troubling signs related to global transportation trends, trends that indicate more excess capacity remaining in ocean and air cargo, but continued restricted capacity within U.S. trucking.
Ocean Container Segment
Drewry Maritime Research recently reported that a the half-way point of 2015, east-west container trade was flat, and that the firm will likely be downgrading its global container traffic forecast for 2015 from 4.3 percent to roughly 2 percent in growth. Drewry pointed to some optimism related to Middle East traffic as a result of the possible lifting of economic sanctions related to Iran, causing the need for increased goods volumes. Keep in mind that many global ocean container carriers were previously forecasting global container volume increases averaging three to four percent, while adding more mega container ships to the global fleet. In August, ocean container carriers were motivated to significantly cut back on scheduling. The Wall Street Journal reported that freight rates at the time between Shanghai and Rotterdam barely covered carrier operating costs, hence the announced cutbacks. The WSJ noted that carriers were significantly reducing capacity to insure higher freight rates, in spite of dramatically reduced fuel costs. During that same period, industry leader Maersk Line revised its estimates of global container volume down to a range of 2-4 percent from the previous 3-5 percent growth estimate and vowed that it would defend and even expand its industry market share position.
The Drewry forecast downgrade comes in midst of the National Retail Federation’s (NRF) Monthly Import Tracker report indication that import cargo volume at the nation’s major retail container ports is expected to increase 1.2 percent this month over the same time last year as retailers head toward the holiday season. The Tracker reported that import volume was up 2.9 percent from June and 8.1 percent from July 2014. The Tracker indicated that inbound container volume for the first-half of 2015 totaled 8.9 million TEU’s, up 6.5 percent over the same period last year. That may be an indicator that retailers elected to position holiday inventories much earlier, given last year’s port disruption. The NRF further reports increased inbound U.S. volumes for September through November, but that number may be skewed by last season’s U.S. West Coast port slowdown. The NRF additionally notes that U.S. retailer inventories are “plentiful’ and that “Shoppers should have no worries about finding what they’re looking for as they begin their holiday shopping.” By our lens, reports noted above are an indication that ocean container volume will indeed level off for the remainder of this year.
Air Cargo Segment
On the air cargo front, the International Air Transport Association (IATA) indicated a decline in air cargo demand in July. IATA reported that disappointing July air freight performance was symptomatic of a broader slowdown in economic growth, most likely caused by a slowdown of activity in China and other Asia based countries. The news comes as passenger airlines continue to add more air freight, as IATA indicates that in July, available air cargo space expanded by 6.7 percent.
IATA’s CEO noted to The Wall Street Journal:
“The combination of China’s continued shift towards domestic markets, wider weakness in emerging markets, and slowing global trade indicates that it will continue to be a rough ride for air cargo in the months to come.”
On the U.S. surface trucking front, the American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index decreased 0.5% in June, following a revised gain of 0.8% during May. The soft June volume number was attributed to flat factory output and falling retail sales. However, the June, the index equaled 131.1 (2000=100) somewhat below the all-time high of 135.8 that was reached in January of this year. During the second quarter, the index fell 1.7% from the first quarter but increased 2% from the same quarter in 2014.
The ATA recently extended its U.S. Freight Transportation Forecast to the year 2026. The report forecasts a 28.6 percent increase in freight tonnage and an increase in freight revenues of 74.5 percent by 2026. However, the not so good news for industry shippers is a forecast indicating that the number of Class 8 trucks in use will grow from 3.56 million in 2015 to mere 3.98 million by 2026. That current demand-supply imbalance does not bode well for trucking cost projections. Factor the current building wave of acquisition activity among non-asset and asset based transportation and logistics providers and the picture becomes far more troublesome for industry supply chains that do not plan accordingly.
How different can the clock speed of industry business change occur- consider the current plight of the U.S. railroad industry. Last year, the industry was booming, and was strategically placed to take advantage of the explosion of new oil exploration methods occurring throughout North America. Crude transport by rail was the new phenomenon that restored profits and expansion for U.S. railroads.
The continued plunging global based cost of crude oil and sudden glut affecting global commodity needs has changed that dynamic dramatically.
Union Pacific, a major U.S. railroad recently disclosed that 2300 workers are currently on temporary layoff or alternative work status as that railroad initiated efforts to adjust its current cost structure toward lower transport demand needs. UP’s shipping volumes are down 4 percent year-to-date with reported declines in chemical, agricultural and industrial goods segments. Industry rival, Burlington Northern Santa Fe (BNSF) is now part of Berkshire Hathaway, and it may be some time before similar news leaks out regarding the effects of the declines in crude-by-rail shipments.
Reports concerning other U.S. railroads indicate similar trends with hundreds of idle tank cars now parked and idle after recently being utilized to transport dedicated crude-by-rail trains. Railroads are now reportedly pushing-back on end-of-year regulatory mandates regarding positive-train control and tank car safety upgrade initiatives. The U.S. rail industry now has a capacity imbalance related to commodity transport, the bread and butter of volume and profits.
Thus, as we approach that last three months of 2015, different capacity dynamics across global transportation lead to a similar impact and concern that being far more turbulence in global transportation circles in the months to come. Rest assured, these different imbalance situations will be included in our 2016 predictions for industry and global supply chains.
We want to hear from our readers on these trends. Is your organization currently concerned and is your organization actively planning contingency scenario? You can email your comments and feedback to: feedback <at> supply-chain-matters <dot> com.
The following Supply Chain Matters commentary is our annual reflection on the Annual State of U.S. Logistics Report. Normally, our postings typically average 350-400 words of blog content for reader benefit. Rather, this is a longer length advisory report to educate our readers that will be also be made available for separate complimentary downloading in our Research Center within the next few days.
The 26th Annual State of Logistics Report prepared for the Council of Supply Chain Management Professionals was released last week (free for CSCMP members and can be purchased for $295, both options available on the CSCMP web site). This report, the latest which reflects on 2014, has consistently tracked U.S. logistics metrics since 1988 and is often of high interest to logistics, transportation and procurement professionals. Since our inception, Supply Chain Matters has provided specific commentary and our view of the key takeaways from the report. With the latest report, we believe that industry supply chain teams to move beyond industry media spin. Pay close attention to the concerning industry trends and their implications, and act proactively to continuing logistics challenges that could prove costly.
Our editorial commentaries for both the 2012 and 2013 State of Logistics reports expressed concern towards a continued trend for increased logistics, transportation and inventory costs. The latest report depicting 2014 activity is no exception.
The report summary begins: “Total logistics costs increased only 3.15 percent in 2014.” The underline and emphasis of the word “only’ is ours since we were astounded by such use depicting normalcy. Considering the low rate of inflation, interest rates and the dramatic reduction in the costs of crude oil in 2014, from our lens, an overall 3.1 percent in the cost of logistics in the United States should remain a concern for industry supply chains. These total costs have now climbed beyond the peak level reached in 2007, prior to the global recession. In theory, U.S. logistics efficiency and productivity should be trending positive.
We first call attention to the report’s references to U.S. GDP values as a point of reference comparison. The report authors have utilized nominal GDP as a consistent baseline as compared to real GDP. Nominal GDP includes all the changes in market prices that have incurred during any year including inflation or deflation, while real GDP is reported as a percentage increase from a specific base year. To provide our readers a sense of the difference for 2014, nominal GDP growth for the U.S. was reported as 3.9 percent while real GDP averaged between 2.6-2.9, percent, depending of which cited source, over the past six quarters. For the 2010-2014 recovery period from the severe economic recession, The World Bank reported annual real GDP growth as averaging 2.2 percent annually. This difference is significant when reporting and charting logistics costs as a percentage of GDP.
Lesson in economics aside, we advise readers to pay close attention to specific logistics and transportation cost increases. As an example, total U.S. logistics costs rose by nearly $43 billion in 2014, compared to a $31 billion increase reported for 2013. For the period 2010-2014, U.S. logistics costs have risen 18.2 percent or $223 billion, almost 7 percentage points higher that real GDP growth in that same period. Factor whatever GDP growth number you want but the takeaway message should be one of concern and diligence to the trends of why such increases are occurring.
Other highlights and some observations of the latest 2014 report are noted below.
- Inventory carrying costs in 2014 rose another 2.1 percent, compared to the 2.8 percent increase reported in 2013 and the 4.0 percent increase reported for 2012. Overall business inventories were reported as rising by $52 billion or 2.1 percent in 2014. The second and third quarters were noted as high water marks for 2014 and that obviously reflects the impact of the U.S. west coast port disruption, as industry supply chain teams increased safety stock levels in anticipation of contract labor talks. Manufacturing inventories were reported as down slightly. Interest costs remained well below 1 percent and thus increased costs for taxes, insurance, warehousing, depreciation and obsolescence occurred. The cost of warehousing rose 4.4 percent, reflecting near capacity utilization rates.
- Overall transportation costs were reported as rising 3.6 percent, with the largest component, trucking, up nearly 3.0 percent. The current fragile state of the U.S. trucking industry was again highlighted. The report cites anecdotal evidence indicating that loads are heavier and more trucks are moving near full capacity. Cited are estimates from the American Trucking Association (ATA) estimating the current truck driver shortage as being between 35,000 and 40,000 drivers, which should remain of concern.
- U.S. rail costs were reported as increasing 6.5 percent on top of a similar percentage increase reported for 2013. Total carloads were up 3.9 percent, the highest since 2006 and overall rail traffic was reported as increasing 4.5 percent. The U.S. railroad industry operating remains operating at near capacity, despite the addition of 1300 new or rebuilt locomotives and nearly 4500 new rail cars put into service.
- Costs for water based transportation rose 8.9 percent in 2014, the second highest reported growth sector. U.S. East Coast ports were noted as experiencing the biggest percentage gains in traffic pick-up because of the West Coast port disruption. Another challenge that manifested itself in 2014 was the impact of the larger, mega container ships calling on U.S. ports, and resultant disruptions related to the availability of container truck chassis, along with the time required for unloading and re-loading. One rather important trend noted was that the monthly average number of containers imported from China was more than 10 percent higher than average monthly shipments for the last four years. From our lens, that seems to be a reflection of even more freight being routed by ocean container vs. air. Air freight revenues were reported as declining 1.2 percent with international air freight down 3.6 percent.
- The revenue growth trajectory of U.S. non-asset based services and Third Party Logistics (3PL) providers continued in 2014. Revenues pegged for the third-party logistics (3PL) sector were reported as $157.2 billion, an increase of $10.8 billion or 7.4 percent over 2013. The most lucrative segment of 3PL services remains Domestic Transportation Management which grew an additional 20.5 percent in 2014, on top of the 7.2 percent growth reported for 2013. According to the authors, shippers continue to engage 3PL’s to ensure that they have capacity when required. However, the U.S. 3PL industry is shrinking in numbers as larger players acquire smaller ones. We continue to believe that these trends are troubling and imply additional consolidation and structural change in the months to come. Carriers who own the assets are being economically squeezed and dis-intermediated from shippers, and without assets, transportation as a whole will encounter additional shocks.
The Looking Ahead portion of the 2014 report provides another important takeaway for our readers, one that we have already reinforced in our predictions for this year. The report specifically states:
“The capacity problems that emerged in 2014 will continue to worsen for at least the next two years before they begin to improve.”
The report later summarizes:
“To summarize, most of the problems that the freight logistics industry will face in the next three years will boil down to capacity issues.”
Thus, our 2015 Supply Chain Matters Prediction for a turbulent year in global transportation more likely will take on a multi-year context.
Supply Chain Matters submits that the overall takeaways from the 2014 State of Logistics are once again dependent on the reader frame-of-reference.
If you reside anywhere in the transportation and 3PL logistics sector, your reaction is likely positive. Business is very good indeed. However, that would be in inability to sense a longer-term disturbing trend of pending challenges regarding added investments in capacity and delivery of services. Distribution center operators and real estate interests are included, especially in light of the pending shift of more ocean container traffic in favor of U.S. East Coast ports, as well as the dramatic changes in distribution flow-through and drop-ship footprints required by more online customer fulfillment needs.
If your frame of reference involves a constant diligence for controlling overall transportation procurement, 3PL and supply chain related operating costs, we again submit there are troubling areas that should motivate concern, constant analysis and attention.
Once again we offer the following insights:
- Procurement, supply chain planning, B2B business network and fulfillment teams can no longer assume fixed transport times and logistics costs in fulfillment planning, nor should they assume that contracting all logistics with a third party provider is the singular solution to reducing overall costs. By our view, the “new normal” is reflected in strategies directed at assuring consistency of service, deeper levels of business process collaboration delivered at a competitive cost. The renewed message in the light of 2014 data is to insure that the cost, service and inventory benefits derived by contracting services with respective 3PL’s outweighs the continuing pattern of increasing 3PL services costs. As supply chain processes and risk profiles continue to become more complex, especially in light of the demands of online and Omni-channel fulfillment, 3PL’s will have to invest more in technology and services, adding more motivation to increase fees.
- Approaching transportation spend as the singular dimension of cost reduction remains an unwise move, given the structural and dynamic industry changes that are occurring. There needs to be obvious deeper partnering that includes healthy exchange of expectations and desired outcomes. The data for 2014 indicates that more and more supply chain teams are exercising strategies to assure consistent and reliable transportation capacity and logistics services.
- Similarly, we again encourage S&OP teams to re-double efforts to further analyze and manage overall inventories with a keener eye on the overall stocking point and fulfillment center trade-offs and costs of carrying inventory. Today’s global logistics environment remains dynamic and complex. Decision-making data must reflect this state, along with the assumption that overall logistics costs are trending higher.
- In order to reduce overall cost and asset investments, senior supply chain leaders in certain industries have contracted more and more services to 3PL’s and other service providers. Insure that your teams are continually analyzing cost and benefit tradeoffs. Maintain periodic reviews of costs and benefits on a more frequent basis.
- Both FedEx and UPS initiated dimensional-based pricing on ground shipments effective in 2015, and initial financial results from both of these carriers indicates positive impacts in revenues. This area continue to have an impact on online B2B and B2C fulfillment trends, in particular whether free shipping as a practice remains a viable strategy for certain classifications of products. Be watchful of this area.
- Last year’s Supply Chain Matters commentary reflecting on the State of U.S. Logistics observed that the U.S. economy showed more promising signs of manufacturing growth. The latest report of 2014 activity paints a more cautionary picture regarding manufacturing and logistics growth. The logistics industry must tackle troubling capacity and productivity constraint trends along with their impact on customer costs. There has also been too much of a tendency to maintain fuel surcharges and fees to boost revenue and profitability levels even higher.
We again encourage our readers to share their observations regarding the current state of both U.S. and global logistics, its implication on supply chain objectives and needs.
©2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
Of late, Supply Chain Matters has highlighted new industry supply chain challenges related the current high value of the U.S. dollar in relation to other foreign currencies. That challenge now extends to the flow of recycled materials emanating from the United States to other geographic regions.
The Wall Street Journal reports that for sellers of scrap metal, used paperboard and other recycled waste, headwinds are more described as a hurricane resulting in a current glut of scrap materials. (paid subscription required). The WSJ cites data from a unit of McGraw Financial indicating that prices of shredded scrap steel have plunged 18 percent thus far this year, and our down an overall 41 percent since 2012. Likewise, the price of used corrugated cardboard has fallen 27 percent this year. Noted is that Turkey, whose steel mills had been a able buyer of U.S. based scrap, have been buying more from Russia and other sources. China’s demand is also reported as having slowed dramatically. One beneficiary of the current slump is reported to be U.S. based Nucor, which makes most of its steel from melted scrap. Tht could provide Nucor the opportunity to move up the supply chain into scrap processing.
Recycled materials shipped from the U.S. to other regions were able to take advantage of available surplus capacity on container ships. With the current economics fueled by the higher value of the dollar, scrap materials inventories are building across U.S. distributors. Further, the cost of municipal waste collection contracts are often offset by the value of the scrap and recycled materials that are sold. The economics of that waste stream are now subject to disruption and potentially added costs for U.S. cities and towns.
Included in our Supply Chain Matters Predictions for Industry and Global Supply Chains (available for no-cost complimentary downloading in our Research Center) are what we predicted would be certain extraordinary industry-specific challenges. The packaged consumer product goods and food industry, specifically large, global branded firms and their supply chains, has been included in our list for the past three years. As we approach the mid-way point of 2015, the crisis of “Big Food” has now reached its most disruptive and dynamic point, with consumers sending a very clear message regarding healthier food choices and more natural ingredients in their buying preferences.
The crisis has had acute market, channel, investor and operational implications which continue to cascade among cross-functional CPG supply chain and product management teams. Rather than reminding our readers residing in the industry of the constant pain points they already know and deal with each week, we would rather provide help in providing perspectives on helpful ways to manage in such an environment.
Our previous commentaries have noted that setting continuous improvement goals predicated on months of key performance indicator history, or industry benchmarks is not going to cut it. Managing from the rear-view mirror perspective is not going to cut it. The crisis of big food is moving at unprecedented transformational light speed, which we will touch upon later.
As large CPG firms continue to serve up grim or disappointing financial results as a result of these forces, as well as others, Supply Chain Matters offered three important strategies for our CPG industry readers. They included a critical need for increased product innovation and quicker introduction of new products in spite of continued pressures to reduce costs. Volatile and rapidly changing global markets require that Sales and Operations Planning (S&OP) teams anticipate such market changes with the ability to sense and respond on a more timely basis. The focus clearly turns toward an outside-in perspective, allowing the supply chain to respond as quickly as possible to market opportunities or threats. Today, natural and organic foods have a high online presence including online outlets such as Amazon Fresh. Finally, supply chain segmentation strategies, those that orient supply chain resources to the most influential customers, most profitable market segments or highest customer growth opportunities are now ever more essential.
As more global food companies turn their attention to acquiring more organic, sustainable and/or ethical food supply chains, we offered pointers for more effective supplier management, specifically an emphasis toward longer-term buying agreement that assist smaller suppliers in the required investments needed to produce healthier food. We noted how industry observes pointed to Hain Celestial, Pacific Foods and Chipotle Foods as good examples for these strategies.
In this commentary, we call reader attention to two industry focused articles published this month that are now drawing very wide interest and attention among traditional print and social media channels. They offer similar industry observations but slightly different tactics, because their prime industry audience is different.
The AdvertisingAge’s arictle Big Food’s Big Problem: Consumers Don’t Trust Brands, addresses the current crisis from a branding lens concluding that:
“Quite simply, big brands are losing one of their most valuable assets: consumer trust. And the fight to regain it will shape the industry for years to come.”
The article cites Boston Consulting Group and IRI data indicating that some $18 billion in sales have shifted from large to smaller CPG firms from 2009 to 2014. Major retailers, convenience foods and restaurants are responding to consumer desires are now shifting supply chain sourcing, retail assortment and merchandising strategies away from processed to feature more natural and organic food products on shelves or on menus. On the subject of acquisition of other more desirable brands as a strategy, the message is avoiding some major mistakes incurred by the likes of Kellogg with its acquisition of Kashi. It further advocates for a hands-off strategy in terms of blended marketing strategies.
What we believe is an even more profound article, one that we highly recommend, was one published by Fortune, The War on Big Food. We view this article as one with a perceptive product operations and supply chain perspective, in addition to branding.
Need more facts related to industry change- the article cites a Credit Suisse equity analyst as declaring that the top 25 U.S. food and beverage companies have lost an equivalent of $18 billion in market share since 2009. A former Con Agra executive who know runs a natural foods company is quoted: “I’ve been doing this for 37 years and this is the most dynamic disruptive and transformational time that I’ve seen in my career.”
Fortune observes that almost all big CPG companies are radically re-thinking their own product recipes while some are attempting to buy their way into the natural space through acquisition. Brought forward on a positive acquisitions theme are the positively perceived strategies of Campbell’s in its strategies with Boathouse Farms, General Foods in its acquisition of Annie’s Foods. The most important takeaway here was a perspective of acquiring more agile talent and resources and allowing the new entrant to continue to be independent in marketing and distribution strategy needs. The CEO of yogurt producer Stonyfield Farms notes that major food companies can bring their acumen, deeper pockets and global supply chain scale “but they should stay the heck out of their brand.” Rather than homogenize acquisitions into the huge supply chain, the acquired company determines best competitive strategy in its market segment.
Positive examples of rethinking existing recipes are Nestle and Hershey with their new ingredient approaches to current iconic brands. In the case of Hershey, it was helping longstanding suppliers understand that the company was committed to GMO-free or growth hormone free milk products. An important takeaway- for now, Hershey is reportedly willing to adsorb the added costs for the ingredient changes while it looks for savings elsewhere.
A final important takeaway of the Fortune article came from Hain Celestial’s CEO who admitted to the magazine that he is often grilled on a regular basis on margin growth. His reply to Fortune: “ If your products are non-GMO, organic and have no artificial ingredients you’re always going to give up 10% to 15% on margin.” He questioned whether other big CPG companies are really willing to leave such margin on the table. That perspective is ever more echoed by the post Heinz-Kraft merger and the notion of 3G Capital’s current assault on the industry.
For this author, the most important and powerful analogy describing current global CPG and food industry supply chains is indeed winning short-term battles to satisfy activists while losing the longer-term war of the brand and of the supply chain’s efficacy in fulfilling consumer needs. The supply chain’s goal is in the end, delivering satisfaction and service for product consumers.
In times of crisis, one has to invest in accelerated transformation, more agile business processes and better technology to accomplish such objectives. Many years of investment made up processed food supply capabilities and distribution channels and similar longer-term investments will be required to augment and sustain fresher, organic and artificial ingredient free supply chains. Work with and continue to educate your senior management teams in the balancing both short and long-term needs.
© 2015 The Ferrari consulting and Research Group LLC and the Supply Chain Matters© blog. All rights reserved.
Supply Chain Matters has on multiple occasions, in our blog commentaries and in our annual industry predictions, provided our readers perspectives on activist investors’ efforts in driving manufacturers, retailers and technology providers toward more short-term results. We have done so because of our belief that such growing activities influencing firms toward investing more in stock buybacks, shorter-term shareholder dividends and accelerated cost control efforts have a negative effect on longer-term global competitiveness and supply chain capabilities. The effects literally cascade horizontally and vertically among industry supply chains and the effects are showing.
Review some of our past commentaries reflecting on consumer product goods supply chains and you will hopefully sense such long-term impacts. Once more, activist investors have now spread their influence across many different industry sectors as well as among multiple supply tiers of industry supply chains. It seems as though senior management’s sole concern of late has been either fending-off such efforts or positioning their firms to avoid an activist thrust.
The growing concerns related to this topic were brought forward today by The Wall Street Journal in two separate articles, a front page article, As Activism Rises, U.S. Firms Spend More on Buybacks Than Factories and a Business & Tech section article, Tech Firms Seek Ways to Fend Off Activist Investors. (both require either paid subscription or free metered view)
The WSJ describes the ongoing trend as a fundamental shift in the way firms are deploying capital and raises similar concerns to the effect of longer-term competitiveness. Billions of dollars that were once invested in product R&D, innovation or new plant & equipment are instead channeled into strategies directed at shorter-term shareholder value. Boosting a firm’s stock price trumps needed investments in longer-term innovation, talent and capability. Once more, even Silicon Valley companies, known as the hotbed of technology innovation, are increasingly under attack. Moody’s Investors Services is cited by the WSJ as indicating that tech companies accounted for 20 percent of firms that activists targeted, while retailers accounted for 13 percent. There is literally no industry not consumed by this trend.
Once more, there is quantification of the scope of such change. The WSJ commissioned an analysis conducted by S&P Capital IQ indicating:
“that companies in the S&P 500 index sharply increased their spending on dividends and buybacks to a median 36% of operating cash flow in 2013, from 18% in 2003. Over that same decade, those companies cut spending on plants and equipment to 29% of operating cash flow, from 33% in 2003.”
“At S&P 500 companies targeted by activists, the spending cuts were more dramatic. Targeted companies reduced capital expenditures in the five years after activist bought their shares to 29% of operating cash flow, from 42% the year before, the Capital IQ analysis shows. Those companies boosted spending on dividends and buybacks to 37% of operating cash flow in the first year after being approached, from 22% in the year before.”
The WSJ provides other profound statistics pointing to the broad extent of the current trend.
Of course, statistics and trends are subject to debate and interpretation, and such debate rages on. The continued availability of cheap money adds to the debate since in the past, a dramatically lower cost of capital would have motivated longer-term investments in products, processes and productivity needs. We are sure our global Supply Chain Matters audience will have mixed views as well.
The bottom line for product development, procurement, cross-functional supply chain and their associated supplier teams is the added pressures for accomplishing more with less, while demonstrating abilities to respond or take advantage of constant market change. Product innovation has become the key ingredient to sustained competitiveness yet suppliers more often experience continued demands from their customers for reduced costs as well as leading-edge innovation. We believe both goals are becoming more difficult to jointly attain.
The activist investor trend is multi-faceted and industry supply chain teams continue to be caught in the middle or held hostage to events that they cannot influence. Operations, supply chain and S&OP leaders must now, more than ever, provide the leadership to navigate these troubled waters while providing existing teams the motivations and incentives to continue to make a difference in delivering expected business outcomes.
Now let’s hear from our community of readers- do you believe that the activist investor trend is helping or hurting your supply chain organization’s efforts in supporting expected business outcomes? Share your perspectives in the Comments section associated with this posting.
Supply Chain Matters has featured numerous prior commentaries regarding the difficult challenges and structural business challenges facing large consumer packaged goods producers and their associated supply chain ecosystems. Yet while the industry continues to respond with severe cost cutting and a sense of crisis, the industry may well be overlooking the more important strategic need for meaningful investments in organic and sustainable food supply chain capability and supplier development.
Currency headwinds and activist investors focused on short-term shareholder value and increased earnings add more cost cutting pressure to the crisis. Signs of increased merger and acquisition activity, most recently the announced HJ Heinz and Kraft Foods mega merger, add more turmoil and stark actions surrounding CPG supply chains.
Today’s consumers demand healthier food choices and more natural ingredients, shunning high volume, well-known iconic food brands. Consumers are more interested in knowing where their food originated, the ingredients within food and how food is produced with sustainable methods. Well known producers, food service providers and suppliers such as Hershey, Nestle, MacDonalds, Tyson Foods, Costco, Yum Brands and others have all embarked on initiatives directed at curbing the use of antibiotics in animals, artificial food coloring within food, and higher quality standards for suppliers.
In a previous commentary, we advocated the need for CPG producers to focus on increased product innovation and quicker introduction of new and healthier products. These capabilities need to be obviously enhanced, in spite of continued pressures to reduce costs. However, we have wondered how the ever increasing consumer needs for more organic and sustainable food products can be fulfilled among current food supply chains. Is there a discernable capacity shortage?
A recent report published by The Wall Street Journal, Hunger for Organic Foods Stretches the Supply Chain (paid subscription or complimentary metered views) brought forward such a perspective. According to the report, the increasing need among consumers for more organic foods is literally: “hampering the growth of one of the hottest categories of the U.S. food industry.” Farmers, dairies and ranchers face significant costs and risks in attempting to convert from conventional to organic farming or animal production techniques. “While organic produce or livestock can command prices as high as three to four times that of conventional food, farmers generally have to sell their food at conventional prices during the transition.”
Mentioned specifically are organic and natural foods producer Hain Celestial Group, soup maker Pacific Foods and fast casual restaurant chain Chipotle Mexican Grill recruiting, financing and training more farmers willing to utilize and adhere to organic methods. Some producers such as Hain Celestial have had to initiate long-term buying agreements, as much as three to five years, to insure the transition to more organic supplies. Two years ago, Chipotle began providing financing incentives to help black bean farmer’s transition from conventional to organic production. This fast-growing restaurant chain that prides itself on higher quality, ethically based food ingredients recently took the bold step of suspending sales of its pork product in nearly a third of its restaurants after discovering a supplier was not complying with animal welfare standards.
With increasing reports of supplier bullying and cost squeeze tactics occurring among the larger traditional packaged foods producers, we wonder if that approach actually lends itself to required investments in organic and sustainable food supply. If the ultimate strategy among activist investors is ultimately to squeeze existing costs across the entire conventional processed food supply chain to free-up cash to fund acquisitions of smaller, more organic and healthier food producers, will such innovative and dedicated producers wither amidst an environment of draconian cost-cutting?
By our lens, it may be an argument for supply chain and individual brand segmentation anchored on market differentiation and segments.
For us, one tenet appears obvious, the industry needs to respond to growing consumer tastes by actively investing in boosting capacity and capability in organic, sustainable and healthier food products. To do otherwise is opportunity lost.
© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters ® blog. All rights reserved.