In order to boost relatively flat revenue growth among its U.S. physical retail outlets, Wal-Mart recently raised salary levels for its respective U.S. retail associates to improve customer service and responsiveness. The retailer further continues to invest heavily in its online fulfillment channel. All of these actions provide adding pressure on margins.
In April, Supply Chain Matters echoed business media reports indicating that this global retailer was ratcheting up pressures on its suppliers to squeeze costs. Earlier this month, Reuters reported and somewhat validated a significant effort to offset increasing costs, namely imposing added charges among most all of Wal-Mart suppliers. Supply Chain Matters is of the belief that this effort will have added implications for both parties.
According to the report, added fees will relate to warehousing inventory along with amended payment terms, affecting upwards of 10,000 U.S. suppliers. In one cited example, Reuters indicates that a food supplier would supposedly be charged 10 percent of the value of inventory shipped to new stores or warehouses, along with one percent to hold inventory in existing Wal-Mart warehouses. It reportedly was not clear if the one-time charges apply only to the initial shipment or would cover a specific period of time. A Wal-Mart spokesperson indicated to Reuters that these fees were a means for sharing costs of growth and keeping consumer prices low.
In our April commentary, we observed that these appear to be signs of yet another wave of supplier squeeze tactics in order to improve a retailer or manufacturer’s overall margins. While these actions are not new for Wal-Mart, their application to a far broader population of suppliers is noteworthy. Such efforts that add to the cost burden of doing business with a retailer are bound to provide setbacks in efforts towards deeper collaboration and supplier product innovation. Consider that Wal-Mart continues with the construction and opening of new online fulfillment centers to support is WalMart.com fulfillment needs. The addition of supplier inventory fees to stock these new centers may cause some suppliers to consider alternative inventory stocking strategies of their own, that balance the needs of Wal-Mart with other retailers such as Amazon, Target or Costco. Indeed, unilateral efforts directed at transferring the cost burden among suppliers can often lead to counter-productive consequences, particularly during seasonal buying surge periods such as the holiday season.
Suppliers can take advantage of the same fulfillment decision-support technology as retailers, namely to determine the profitability potential for each major customer, and providing preferential service for customers that financially support needs for added responsiveness and fulfillment collaboration.
Too often, it seems that these mandates are handed down by the most senior management responding to investor pressures for more short-term profitability and margin growth. These efforts cascade from retailers and manufacturers, to first tier suppliers, and throughout other tiers of the supply chain. It’s unfortunate that there supply chain teams are rewarded more for enforcement of such actions as opposed to efforts directed at joint supplier process and product innovation.
This week’s announcement of the planned merger of European based retail supermarket market chains Royal Ahold and Delhaize Group has implications for consumer product goods supply chains.
This proposed combination would amount to €29 billion in total revenues and in excess of 6000 retail stores with what are described as strong local identities. It further brings together Netherlands based Ahold’s existing European retail and online shopping brands, along with Giant and Stop & Shop in the U.S., together with Belgium based Delhaize’s European retail outlets along with Food Lion and Hannaford retail brands in the U.S.
Business media reports that this combination of equals would create the fourth largest U.S. retail supermarket chain with an especially high concentration in the northeastern portion of the United States. According to the announcement, the combined businesses will have the name of Ahold Delhaize. The announcement further states:
“From providing a broader selection in own brand products to having a wider range of store formats, customers will have more and easier ways to shop, whether they are visiting stores, or shopping online with pick-up points and home delivery, both in food and non-food.”
Ahold alone boasts that it provides an omni-channel presence offering its customers their channel of choice for shopping options including retail supermarkets, convenience stores, gasoline stations, specialty stores and online food and merchandise delivery options. It further positions its brands as offering responsible and more healthy products with a commitment for environmental responsibility. Since the current CEO of Royal Ahold will assume leadership of the new combined company, these tenets are likely to continue Delhaize has its own innovations to add.
As Supply Chain Matters has noted in prior commentaries, the retail supermarket industry has undergone significant change during the post-recession years and margins remain slim. Consumers demanding both more healthy and convenient food choices have impacted both supermarket chains as well as packaged consumer goods providers. A merger of this size provides opportunities for additional buying scale and the ability to influence a greater selection of natural and specialty convenience based foods among existing or new producers. Due to minimal geographic redundancy, this combination provides added opportunities to take advantage of added efficiencies in logistics, distribution and transportation costs.
From our lens, the most significant implication is the additional buying influence that can be brought to bear on consumer product goods producers. The notion that this combined entity spans both European and U.S. retail markets adds additional impetus to breakdown the different pricing, merchandising and promotional strategies that CPG producers maintain as separate and distinct in both markets. More importantly, as major supermarket chains continue to merge into larger entities, the balance of buying and merchandise selection power will continue to swing back to chains themselves.
This combination is expected to be completed by mid-2016, subject to regulatory clearances and shareholder approval.
As thought leaders in supply chain management, we often point out the critical importance for firms to more quickly sense geographic or regional changes in product demand and respond to such changes with integrated supply and fulfillment capabilities. This week, The Wall Street Journal highlights (paid subscription) how certain high-profile consumer product goods companies were hampered in China by not having such capabilities.
The report notes that a sudden change among China’s consumer buying trends suddenly occurred as millions of consumers elected to shift their buying practices away from larger retail outlets in favor of online marketplaces. The WSJ indicates that an estimated 461 million Chinese consumers, nearly a third of the population, are now shopping online. Further cited is Nielsen data indicating that nearly half of Chinese consumers are buying groceries online, compared to a quarter of consumers on a worldwide basis. Global CPG firms such as Beiersdorf, Colgate-Palmolive, Nestle and Unilever were reportedly laggard in the sensing of this channel buying shift.
For Unilever alone, the shift toward online buying accounted for a 2.7 percent drop in global revenues. The CFO of Unilever is quoted as indicating that CPG firms in China were “too slow to react to the changes in the marketplace.” Another Unilever executive is quoted as indicating: “It’s very, very difficult for us to be absolutely sure (of inventory levels) because the visibility across the extended supply chain in China is not that great.”
Many CPG firms distributing products in China had targeted their merchandising and inventory strategies towards large retailers and thus were not able to sense the changed buying patterns until inventories grew.
Many of these firms are likely to have acquired important learning and are re-focusing supply chain strategies more towards online fulfillment channels including more direct presence. There will obviously be further learnings in the months to come.
Suffice to state that in today’s complex supply chain universe, generalized market support and distribution strategies will not suffice. Each major market requires its own set of product demand planning, sensing and supply chain response strategies.
This Supply Chain Matters posting serves as a backdrop to our ongoing commentaries focused on the consumer packaged goods industry, specifically the dramatic business challenges being posed by consumers demanding fresher and more natural sources of ingredients. We have noted how specific CPG firms are scrambling to either re-formulate existing products or acquire smaller firms with higher growth prospects within the natural and sustainable foods segment.
Today, Campbell Soup Company, which has experienced declining sales of the company’s packaged soups decline, announced that it has entered into an agreement to acquire Garden Fresh Gourmet, the producer of the number one branded refrigerated salsa in the United States, along with hummus, dips and tortilla chips. The fresh salsa producer, headquartered in Ferndale, Michigan has approximately 500 employees with operations in Grand Rapids, Inster and Detroit Michigan. The announced cost is $231 million, roughly double Garden Fresh Gourmet’s $100 million in 2014 revenues. The transaction expected to close in the fourth quarter of fiscal 2015 subject to regulatory approvals and customary closing conditions.
Original founders Jack and Annette Aronson started making fresh salsa in the back of their small restaurant in Ferndale, Michigan. The recipe involved small batches using only the highest-quality ingredients. Before long, people began to flock to his restaurant just for the outrageously good salsa, and that morphed to providing the fresh salsa to local supermarkets. On its web site, Garden Fresh Gourmet states its commitment to sustainability, from how ingredients are sourced, to the manufacturing methods and to the packaging materials employed in its processes.
Today’s acquisition is Campbell’s fourth acquisition directed at higher growth, more natural foods segments. Prior acquisitions included fresh products producer Bolthouse Farms in 2012, organic baby-food producer Plum and biscuit maker Kelsen in 2013.
According to today’s announcement, Garden Fresh Gourmet will become part of the Campbell Fresh division which will now oversee upwards of $1 billion in revenues while leveraging the Bolthouse Farms refrigerated fresh platform business model. Plans call for the new addition to retain its corporate presence in Ferndale Michigan, led by Todd Putman, General Manager. Founder Jack Aronson will stay on as a business advisor and in a letter to customers, pledges that the same values of quality and caring will continue with the Campbell relationship.
In a matter of four years, Campbell continues its transformation into packaged fresh and organic foods segment which now includes four prominent brands. The next chapter is growing these businesses to scale broader geographic market segments while retaining the tenets of brands that stand for fresh and sustainable supply chain practices.
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.
This week brought significant and perhaps troubling news to food and consumer product goods producers and their respective suppliers distributing products throughout the U.S.. Business headlines noted that a ConAgra Foods business unit agreed to plead guilty to a federal misdemeanor charge and pay an $11.2 million fine in conjunction with 2006-2007 salmonella outbreak involving the firm’s Peter Pan and Great Value branded peanut butter products.
At the time, the salmonella outbreak occurred across 47 states and sickened a reported 700 people. The outbreak was eventually traced to a manufacturing facility in the state of Georgia. As part of this week’s plea agreement, ConAgra admitted it had been aware of some risk of contamination prior to its voluntary recall. After this outbreak, ConAgra subsequently made was is reported to be significant upgrades to its manufacturing facility along with instituting advanced safety protocols.
This news is significant for this industry in a couple of rather important dimensions. This week’s fine, although meager by today’s liability standards, is noted as the largest fine levied to-date in a food safety case. Once more, over these past months, federal authorities are now demonstrating intent to hold both companies and their individual executives accountable for food safety. According to The Wall Street Journal, since 2013 the Justice Department has won convictions or guilty pleas involving four criminal cases against food companies or the executives that run them. The WSJ notes that in most of the recent cases, successful prosecution occurred even without proof that officials acted with criminal intent, which was a difficult hurdle for investigators to previously overcome. The significant nuance of holding executives accountable without proofing criminal intent has reportedly jolted the food industry, given its broad implications. That implies that executives are now legally accountable for food safety, and that might be interpreted to include senior supply chain executives. Certainly, we are not lawyers, and industry supply chain leaders are advised to seek out specific opinion from in-house legal counsel.
Food companies are now stepping-up efforts to improve food safety including investments in new technologies to monitor any signs of contamination or erosion in quality and to speed-up data analysis. That, in reality, may be good. However, it opens the doors to added sensitivities as to when manufacturers should recall food products, and the types or levels of internal documentation required as proof of proactive response to suspected contamination and/or disease. The industry may well experience an increased rate of recall actions out of abundance of caution, as these new nuances are more fully understood.
The takeaway for consumers is hopefully safer food products in the coming months. For supply chain management teams, the implication is added cautions and increased scrutiny of individual production, storage and distribution practices related to food production. Any notion that assuring proactive food safety practices is not my job is now null and void. Food safety is every executive’s and every employee’s concern.