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Food Manufacturing: Growth Requires Moving Past Tradition

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In the boardroom, the pressure is on. At the Kellogg Company, CEO John Bryant is stepping down after seven years at the helm of the cereal and snack maker with declining volumes. He is passing the torch to Steven Cahillane, prior president and CEO of The Nature’s Bounty Co., a vitamin and nutritional supplement manufacturer. Dirk Van de Put, previously CEO of Canadian frozen foods manufacturer McCain Foods, is replacing Irene Rosenfeld in November 2017. Both companies seek growth in a declining packaged foods market.

As the food manufacturing market struggles under the battling forces of the "Amazon Effect" and the "3G Effect", there is a need for strong leadership. Neither company has the scale to deliver on a B2C model, and they do not have the leverage with the shopper that they used to. As the men pull up the chair in their new offices, they will be surrounded by frenetic marketing teams. Deep in functional silos they will find fear. The problem? Traditional marketing programs don't work so well in today's market; and unfortunately, traditional supply chain programs do not work as well either. It is time to rethink processes from the channel back. In the food industry, as shown in Figure 1, there is a steady decline in operating margin. This is despite the benefit of declining oil prices.

Figure 1. Orbit Chart of Operating Margin and Inventory Turns for the Food Industry for the Period of 2006-2016

Their companies relative positions in the food industry based on balance sheet performance for 2010-2016 are shown in Table 1. notice the underperformance in growth.

Table 1. Overall Industry Performance

Both companies lack supply chain resiliency with larger swings at the intersection of inventory turns and operating margin than their competitors. This is largely driven largely by functional silos and the lack of a balanced scorecard to drive overall corporate performance. As growth slowed, performance at the intersection of costs and inventory weakened.

Figure 2. Orbit Chart Showing Year-over-Year Performance for General Mills and Kellogg at the Intersection of Operating Margin and Inventory Turns

Figure 3. Orbit Chart for Mondelez and Nestle at the Intersection of Operating Margin and Inventory Turns

My advice to the new leaders?

Match Physical to Digital. At each of your companies there is a gap between the physical world and the digital online experience. This cannot be fixed in the silos. This requires a heavy hand from an inspirational leader. eCommerce today is 4%, but is expected to be 8% of sales in 2021. Consumers want the package on the online screen to match what is delivered. For you, this is a major issue requiring rethinking the item master, brand extensions, slottting allowance procedures and product delivery.

Be Aggressive on Smart Label. Aggressively work on smart labeling for shelf visibility for the consumer. This will require reworking many elements of the supply chain, but it is going to be a requirement to drive growth. Step-up and be a leader.

Reset Base Prices and Cease Trade Promotion Spending. Start with the first category and make the transition category by category. Overhaul price/pack architectures and take the 20% of revenue spent on traditional trade promotions, and invest it in the omnichannel consumer experience. Drive digital transformation. Recognize that trade promotion spending shifts demand, versus shaping and driving baseline lift. As companies drive trade promotion spending they increase the cost of the product in marketing spending and the cost to deliver in the supply chain. Help get the company off of the bad drug called traditional trade promotion management spending.

Reduce Complexity. Each of your companies have excelled at line extensions. Simplify. Simplify. Simplify. Most line extensions added complexity not value to the market and they are a fundamental driver of higher costs. While the launches allowed marketing to check the box on bringing a new product to market, most were not successful. Streamline the customer experience and rationalize the line extensions.

Invest in Fresh and Wellness. Cookies and snacks are declining in a market seeking fewer pre-packaged foods and seeking wellness. Redesign the supply chain to deliver localized assortments of fresh products to deliver on the wellness goals. Rethink the categories and deliver on new value propositions like Plated at Albertsons.

Build Outside-In Processes. Get good at the use of channel data, and sense demand. In this area, both companies lag competition.  Recognize that there is a big difference in syndicated and point of sale data. Test and learn cross-channel, and mine unstructured text to listen to consumer sentiment. Do this cross-channel. Form cross-functional teams--marketing, sales operations, quality, R&D-- to test, learn and listen. The winner will not be the company that "YELLS" the marketing message the loudest. Instead, it will be about sensing and listening through outside-in processes. Break the functional silos.

As you roll out your new plans, stabilize your investments in traditional applications like Enterprise Resource Planning (ERP) and analytics. Recognize them as legacy applications. And, in the process, remember that an investment in end-to-end process flows does not enable outside-in or digital thinking. Instead, start with the channel and invest in new forms of analytics. Drive changes in digital manufacturing and define digital path to purchase around the moments of truth. Good luck in your new positions both of your companies need your leadership.

What would be your advice to these leaders?

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