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More Concerning News for Consumer Packaged Food and Beverage Supply Chains

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One of the front-page articles in today’s published edition of the Wall Street Journal, Big-Name Food Brands Lose Battle of the Grocery Aisle (Paid subscription required) reports that a growing number of food retailers are electing to feature more strategic aisle placement to fresh and prepared products rather than large packaged-food brands. In essence, the report indicates that such building trends are complicating efforts to break out of a multi-year decline in organic sales growth, with more longer-term implications. We quickly add that from our perspective, such trends will place more pressures on existing CPG industry supply chains.

In our 2017 Predictions for Industry Supply Chains (Available for complimentary downloading in our Research Center), we elected to include Consumer Packaged Food (CPG) and Beverage supply chains in our industry-specific predictions. We have included this industry in our industry-specific predictions for the past three years and the industry supply chain stakes continue to become far higher.

Consumers have not wavered in their more health-conscious view of food and beverage consumption and their shopping preferences continue to shun traditional processed foods. This latest WSJ report observes that increasing numbers of food retailers who are always challenged with the need to maximize shelf space and foot traffic are now opting to allocate prime store space to fresh food, prepared meals and local brands that have garnered the new loyalty of health-conscious consumers. As industry participates are all too-aware, without store strategic placement, consumers tend to avoid the center aisles of grocery stores, which adds more fuel to declining sales trends.

The latest WSJ report cites market data from Nielson indicating that volume sales for packaged food products fell 2.4 percent in the first quarter of 2017. Further cited are the latest annual volume numbers indicating that packaged food product volume declined 0.4 percent annually, as compared with growth of 1.7 percent for fresh meat, 1.9 percent for fresh produce and 4 percent for prepared foods. These are not the types of sales trends that branded CPG product managers want to experience, and they continue to magnify the ongoing challenges for large CPG producers and their associated supply chains.

Compounding the challenges are the two largest retailers, Amazon, and Wal-Mart, each demanding more price concessions from the large CPG brands, each threatening volume reductions if their lowest price demands are not met.  That obviously leads to a delicate balancing act to appease both retailers, for different strategic reasons.

This week, three of the largest CPG producers, Mondelez, Kraft Heinz and Kellogg will be reporting financial performance numbers for the latest quarter and many Wall Street eyeballs will to paying close attention. Some are already setting expectations for another tough year for the industry.

Declining profits and meager sales growth continues to spawn activist investors to influence certain CPG, food, and beverage firms to consolidate. The prime disruptor in this industry remains Brazil based 3G Capital and specifically Heinz-Kraft Foods, demonstrating what is often described as a blitzkrieg of cost cutting predicated on zero-based budgeting tenets, with an acquisition model described in the analogy of a swimming shark with tendencies of buy, squeeze and repeat with the next target.

Meanwhile, speculation abounds as to what will be the next target for Kraft-Heinz. Names such as Mondelez International, Campbell Soup, Coca Cola Company, General Mills, Kellogg, and others are being tossed about.

The Supply Chain Implications

In the middle of such forces are CPG focused industry supply chains that continue to be pressured for additional cost reductions and productivity savings. This continues and at a more intense pace.  At the same time, visionaries continue to believe that the future still comes from process and technology enabled innovation and in sourcing, planning and marketing healthier and more organic food products.

This latest WSJ report observes that companies like Hershey and PepsiCo are actively collaborating with retailers to help re-think the center of the store for product placement and for boosting sales growth.

As noted in our industry-specific prediction, many food supply chains have heavy requirements for continuous new product introductions and in developing distribution strategies that accommodate an entirely different customer fulfillment need. Coupled with that is satisfying consumer needs for visibility into all levels of the food supply chain and specifically where food has originated.

All the above remain the primary agenda for CPG, food, and beverage supply chains in the coming year. The winners are supply chain leaders who educate senior management on the differences of supply chain as a cost center vs. a business innovation enabler. They will also be those that can keep a laser focus on the end-goal, meeting and accommodating far different consumer preferences with changed thinking and distribution methods. By our lens, industry supply chains that invest in talent that can bring forward new creativity, collaboration and thinking for a supply chain model that leverages both online and in-store buying needs will likely benefit.

Again- Stating the Obvious

We again re-iterate what was stated in our prediction. The wave of activist investors surrounding the CPG food and beverage industry is destructive to supply chain capability and innovation, and the timing could not come at the worse time.  CPG industry supply chains and their network of food suppliers require the ability to support a business need for healthier and more organic food choices for consumers.  This wave of zero-based budgeting and cost cutting will not likely achieve that objective, and we as consumers, will have limited choices for healthier food.

It is a race to the bottom with notions that the survivors gain the spoils.

One must wonder what the end-state really implies, short-term investor rewards or industry supply chains with very little capability to support required process, technology, and product innovation.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Airbus and Boeing Report Q1-2017 Delivery and Order Booking Performance

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One of our more popular blog postings tends to be our updates on either the quarterly or annual operational performance numbers for the two dominant commercial aerospace manufacturers, Airbus, and Boeing. The interest levels extend not only from supply chain participants in each of these manufacturers but across their global supply chain ecosystems.  Boeing 787 Production Line 300x200 Airbus and Boeing Report Q1 2017 Delivery and Order Booking Performance

Thus, this posting updates on the latest Q1-2017 operational data.

Overall, the operational numbers would indicate that Boeing had a relative excellent Q1 while Airbus experienced an unusual slower than expected start to 2017.

Airbus

We begin with Airbus, which reported a total of 136 commercial aircraft deliveries in the March-ending quarter. That compares with 125 total deliveries in Q1-2016. The Q1-2017 breakout includes:

107 single aisle aircraft (A320ceo, A320neo, A321ceo)

13- A330

13- A350

3- A380

In an operational review conducted in February 2015, Airbus made supply-chain wide plans to target a production rate of 50 A320’s per month by early 2017.  Thus, among the closely-watched numbers are the deliveries of the A320ceo and A320neo (new engine option). At the close of Q1, the single aisle grouping has a rather significant 5547 of backlog orders from airlines with high expectations related to improved and more fuel-efficient performance.  The Q1 report indicates that a total of 36 A320ceo and 26 A320neos were delivered in Q1. Our sense is that Airbus would have preferred these numbers to be reversed.

The new engine option (neo) features an airline choice of two available, new fuel efficient aircraft engines, either the Pratt & Whitney geared turbofan (GTF) engines or the CFM International alliance of General Electric and Safran LEAP engines. The Pratt engine was added to production in Q3-2016 while the CFM International engine has been incorporated in the recently completed quarter.

During 2016, Supply Chain Matters highlighted some significant challenges related to delayed deliveries of the new Pratt GTF engine featured on the neo model, which both significantly impacted Q3-2016 and to a lesser extent, Q4-2016 deliveries to airline customers. The GTF became a rather visible broken-link in the A320 supply chain because of ongoing issues related to operational performance in high heat or humid climatic conditions such as that reflected in certain Asia or Middle East environments. Qatar Airways has been especially vocal regarding the performance of the GTF powered A320neo. Both Bloomberg and Aviation Week have recently reported that while the new Pratt GTF engines are meeting promised 15-20 percent fuel savings, combustion chamber and bearing distress glitches continue with engines operating in certain climates. Bloomberg reported that as of the end of February, as many as 42 GTF engines had to be taken off-wing prematurely, most in environments in India, which currently has the largest fleet of operational A320neo’s.  Pratt has been responsive to operating airlines, but the new engine spares are likely coming from engines destined to support new production.  Modifications to the combustor and additional upgrades are due by the end of the third quarter.  For Airbus, the fallback is concentrating A320neo production on allocated Pratt CFM engines or the new CFM International engine which thus far is showing no signs of glitches.

Turning to new orders, Airbus reported a rather lackluster total of 6 net aircraft orders in Q1, after experiencing several cancellations during the quarter including 8 A320neo’s and 2 A380 jumbo aircraft. Total gross orders were 26 aircraft in the quarter. None the less, the traditional rule of thumb in commercial aerospace is to book more orders than actual deliveries.  As we have noted in this year’s predictions, that period may be ending.

 

Boeing

Boeing reported a total of 169 aircraft delivered in the quarter. Late last year, Boeing announced to its investors that is was going to scale-down deliveries in 2017. Boeing’s Q1-2016 deliveries were a total of 176 aircraft. The breakout for Q1-2017 included:

113-single-aisle 737’s

32-787

21-777

2-767

1-747

 

Boeing’s most critical delivery number also relates to its single-aisle 737. The more fuel efficient 737 MAX is still in the final stages of flight certification and is thus not reflected in Q1 deliveries. There are, from our lens, two positive notes from this latest quarterly report of deliveries. The first is the 32 reported deliveries of the 787 Dreamliner, an indication that prior production glitches and consequent shortfalls are likely resolved.  The 787 is produced by two separate Boeing final assembly production facilities. The other is 777 family- with the newer more fuel-efficient and technically advanced 777X family announced to the market, Boeing has done a good job of filling production slots for the now legacy 777 model.

For new orders, Boeing reported a total of 198 net new orders in Q1, a rather stunning performance considering Airbus’s Q1 order performance. This number was far ahead of the 121 net orders logged in the first quarter of 2016. The breakdown included:

167- 737’s

11- 787’s

15- 767

9-777

As our commercial aerospace readers are aware, net order performance can vary in any given quarter, with announcements tied to specific events such as major air shows or investor conferences. That stated, Airbus has several challenges to address in the coming months, both on the inbound orders flow and in addressing A320neo production glitches. Regarding the latter, we surmise that Airbus’s patience for added glitches or supply shortfalls may be on the edge.

 

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Zara Unveils a Strategy to Embrace and Integrate Physical and Online Presence

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Many analysts and academics in our supply chain world often point to Inditex SA and its fashion and apparel retail brand Zara as the iconic benchmark in retail supply chain agility. It seems that despite the many iteration of retail apparel industry challenges, this fast fashion focused retailer continues to demonstrate a resiliency to changing economic conditions or online buying trends.  Today, Zara is cited as the world’s largest fashion retailer.  Zara London Zara Unveils a Strategy to Embrace and Integrate Physical and Online Presence

It should therefore be no surprise that Zara continues to provide the content basis for many business case studies related to demonstrating a and industry-leading systemic integration of fashion retail business strategy with consistently admired agile supply chain response practices.

Thus, retail supply chain industry focused readers should take note to last week’s unveiling of Zara’s newest flagship store in the retailer’s hometown of La Coruna Spain. The store, sized at 54,000-square-feet and spanning over five stories, will replace five other existing smaller footprint stores, and will reportedly serve as the model for Zara flagships around the globe. The apparel retailer is now transitioning to a new strategy to meet the challenge of the Omni-channel focused online fashion consumer.

In a press conference held last week, Inditex Chairman Pablo Isla declared that Inditex seeks “full integration of the brick-and-mortar stores and online businesses, with store openings that are increasingly more relevant.” According to a published report by The Wall Street Journal, the 2017 strategy calls for the opening of between 450-500 new larger retail stores that will merchandise a full range of apparel, while consolidating 150-200 existing smaller sized stores.

The larger stores are being designed to allow consumers the opportunity to browse broader fashion and apparel offerings while also embracing online capabilities, allowing the ability for shoppers to either buy in-store or order online with the assistance of sales clerks. Online order pickup or return of purchases can be exercised at the retail store as-well.

Despite a rather difficult year in retail, this retailer’s latest report of financial performance established a new record of nearly $25 billion in revenues with a 10 increase in profitability.

As noted in our 2017 industry-specific predictions for the retail industry, we observed that the implications of permanent reductions in physical foot traffic have taken a toll on traditional mall-based retailers and department stores. While well-known broad-line retailers such as Macys are undertaking additional store closings, Zara once again has a different strategy emphasizing larger, more integrated stores to appeal to the Omni-channel consumer, supported by one of the retail industry’s most responsive supply chain response capabilities.  As noted in our prediction, the physical retail store is now the virtual online store, and that brick and mortar stores are the one advantage that differentiates retailers in their ability to offer more timely fashion from that of Amazon and Alibaba.

Obviously, consumers will be the ultimate determinant for the success of Zara’s new strategy.  A successful record of accomplishment up to now provides evidence leaning toward success.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


2017 Industry Specific Prediction- Consumer Packaged Food and Beverage Supply Chains

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In our recently unveiled 2017 Predictions for Industry Supply Chains (Available for complimentary downloading in our Research Center), we elected to include Consumer Packaged Food (CPG) and Beverage supply chains in our industry-specific predictions. We have included this industry in our industry-specific predictions for the past three years and already, industry dynamics of activist investors surrounding the industry are once again underway, and the supply chain stakes are becoming far higher and likely destructive.

Consumers have not wavered in their more health-conscious view of food and beverage consumption and their shopping preferences continue to shun traditional processed foods. They demand healthy food choices containing natural and sustainable ingredients. Throughout 2016, these trends continued to be reflected in the business and financial performance of globally branded food producers who now continue to be challenged in achieving single-digit top-line sales and profitability growth. Global observers such as the Economist question whether the global expansion and presence model has run out of steam because of diminishing financial returns.

As what occurred in 2016, declining profits and meager sales growth continues to spawn activist investors to influence certain CPG, food, and beverage firms to consolidate. The prime disruptor in this industry remains Brazil based 3G Capital and specifically Heinz-Kraft Foods. A report from Fortune describes the 3G Capital playbook as a “meritocracy” that is on track to consume the food industry. The model includes wholesale replacement of an existing senior management team and what is often described as a blitzkrieg of cost cutting predicated on zero-based budgeting tenets. This model is further described in the analogy of a swimming shark with tendencies of buy, squeeze and repeat with the next target.

When 3G acquired Heinz, upwards of 7000 job cuts were initiated while five production facilities were shuttered. Earnings Before Interest and Taxes (EBITA) improved by 8 percentage points over an 18-month period. Heinz then acquired Kraft in 2015, and reports point to upwards of an additional 5000 in headcount reductions. A recent published Fortune report cites research firm AllianceBerstein as indicating that Kraft-Heinz is already 88 percent towards its goal to cut an additional $1.5 billion in annual costs by the end of this year.

Acquisitions govern growth as opposed to just organic sales growth.  The CPG industry is now consumed with the threat of 3G, and as Fortune observes: “The entire food industry is “3G-ing” itself before Kraft-Heinz can do it to the companies.” Fortune writes: “The whole food industry is speculating who’s next.” We concur and we predicted that there will indeed be another major acquisition involving a major branded CPG company in 2017.

Little did we know that it would come so soon and with far broader scope.

Dynamics Already Underway and the Stakes Increase

Last week featured the news of what our prediction included although the target and size was a big surprise. Kraft-Heinz issued a $143 billion acquisition offer for global CPG provider Unilever. While the offer was quickly rejected as insufficient, and subsequently withdrawn, the implications are far larger and once-again reverberating across the industry while all await the next shoe to drop. The Economist headline was: Barbarians at the Plate: 3G Missed Unilever but its methods are spreading.

Within the past few days Campbell Soup and General Mills reported disappointing sales and earnings. Campbell’s cited mistakes in its fresh-foods business unit that included a recent product recall and decision to harvest carrots while they were still small. Late last week, General Mills reported weaker than expected revenues from sales of yogurt and soup along with weakened consumer demand. The firm’s outlook for the remainder of its fiscal year that ends in May is expected to decline by 4 percent.

Today, The Wall Street Journal reported that Unilever is now pivoting from the Kraft-Heinz attempted acquisition with its Board now deliberating on options to deliver greater short-term value for shareholders.  That could include the sale of the firm’s current food division or attempting an acquisition of its own in the personal care area.

Meanwhile, speculation abounds as to what will be the next target for Kraft-Heinz. Names such as Mondelez International, Campbell Soup, Coca Cola Company, General Mills, Kellogg, and others are being tossed about.

With such a backdrop, pressures increase on remaining CPG food and beverage companies along with associated food suppliers.  By our lens, the survivors are those that embrace innovation and find ways to best accommodate today’s consumer choices.

Industry Supply Chains Buffeted from the Impact

In the middle of such forces are CPG focused industry supply chains that continue to be pressured for additional cost reductions and productivity savings. This will unfortunately, continue and at a more intense pace.  At the same time, visionaries continue to believe that the future still comes from process and technology enabled innovation and in sourcing, planning and marketing healthier and more organic food products. Thus, many food supply chains have heavy requirements for continuous new product introductions and in developing distribution strategies that accommodate an entirely different customer fulfillment need. Coupled with that is satisfying consumer needs for visibility into all levels of the food supply chain and specifically where food has originated.

All the above will be the primary agenda for CPG and beverage supply chains in the coming year. The winners are supply chain leaders who educate senior management on the differences of supply chain as a cost center vs. a business innovation enabler. They will also be those that can keep a laser focus on the end-goal, meeting and accommodating far different consumer preferences with changed thinking and distribution methods. Many will need to be equipped to deal with our other 2017 predictions such as responding to the perfect storm in the requirements for skilled supply chain talent across many supply chain, procurement and distribution dimensions along with the needs for advanced technology to support more predictive decision-making.

Bottom-line, the CPG industry remains in a state of defense and apprehension, and by our Supply Chain Matters lens, industry supply chains will pay the inevitable price in needs for further cost and headcount reductions along with blocked efforts to instill added product, process, and resilience to overall business support capabilities.

Stating the Obvious

Sometimes, a blog such as ours needs to be blunt in viewpoint to provoke additional thinking or changed mindset. The wave of activist investors surrounding the CPG food and beverage industry is destructive to supply chain capability and innovation, and the timing could not come at the worse time.  CPG industry supply chains and their network of food suppliers require the ability to support a business need for healthier and more organic food choices for consumers.  This wave of zero-based budgeting and cost cutting will not likely achieve that objective, and we as consumers, will have limited choices for healthier food. It is a race to the bottom with notions that the survivors gain the spoils.

One must wonder what the end-state really implies, short-term investor rewards or industry supply chains with very little capability to support required process, technology, and product innovation.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Bombardier Announces Additional Headcount Reductions

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Last week, transportation equipment provider Bombardier announced plans to shed an additional 7,500 jobs, or just over 10 percent of its global workforce, as it focuses on turnaround efforts amid a soft business-jet market and hiccups with its CSeries commercial aircraft program.  This announcement came in the wake of a prior February announcement to reduce 7000 jobs.

The Canadian-based commercial aircraft and train manufacturer indicated that the headcount reductions will be global in-nature, affecting administrative and non production positions across the company, and are expected to save it about $300 million by the end of 2018.  Swiss CS100 sized 450 Bombardier Announces Additional Headcount Reductions

According to business media reports, about two-thirds of the latest headcount reductions will stem from Bombardier Transportation, the company’s rail manufacturing business. About 2000 of these job cuts are expected to impact employees within Canada.

The cuts are further expected to include a realignment of design, engineering and manufacturing structures and the creation of new “Centers of Excellence” overseeing both rail and commercial aircraft manufacturing.

As Supply Chain Matters and business media continually points out, Bombardier has made a big strategic bet with the development and production in the CSeries single aisle commercial aircraft being a global airline alternative to aircraft producers Airbus and Boeing. This new aircraft finally entered commercial service with Swiss International after a multi-year program delay and flew its first paying passengers in July.

While the new aircraft is garnering positive reviews from airline customers, the financial toll on the broader operations of Bombardier continue and have had a noteworthy financial impact on the company. A year ago, to overcome continued financial funding needs, Bombardier struck an agreement with the government of Quebec to give-up nearly half its stake in the CSeries program in exchange for a $1 billion additional investment. The company further sold an equity stake in its train manufacturing division to a Quebec pension fund for $1.5 billion. That division continues to respond to stiff global competition coming from China’s lower-cost, state-owned rail equipment producers who are in the process of merging.

The latest and perhaps most untimely setback to CSeries program came late this summer with an announcement by aerospace aircraft producer Pratt and Whitney that it would not be able to meet its 2016 production and delivery commitments to certain aircraft manufacturers that included both Bombardier and Airbus.

We previously highlighted that Airbus’s first-half shipping performance related to its new A320 neo aircraft were noticeably impacted by delayed delivery of Pratt’s new geared turbo fan engine. Airbus had delivered just 5 A320neos in Q1 and 3 in Q2 while nearly a dozen of completed aircraft was reported at the time to be lined-up on factory adjacent runways and parking areas awaiting Pratt to deliver completed engines. The July delay was associated with fixing the engine’s cooling design through a combination of software and component modifications.

In early September, Bombardier publicly disclosed a delivery schedule adjustment due to the shortfall in expected completed engines from Pratt. While re-adjusting to a lower revenue expectation, the manufacturer reaffirmed its prior earnings commitment, most likely setting the stage for the current headcount reductions.

Moving forward, the new CSeries is more than ever highly dependent on the consistent and more-timely performance of its sole aircraft engine supplier, Pratt. Industry watchers and academics may well look back and question whether specification and reliance on a single aircraft engine design was a wise one. Then again, Bombardier, from the get-go, may not have had the financial deep pockets to be able to certify and source more than one engine supplier.

 


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