Economic downturn will make food industry stronger

by Keith Nunes
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At this point in the global economic downturn it may be cold comfort to hope that the changes many food processors are undertaking to their product portfolios and manufacturing operations will make them stronger when the global economy recovers. The volatility of commodity costs combined with unpredictable consumer purchasing patterns have forced companies to reassess their priorities and to focus on aspects that define their strengths.

This subject was clearly on managements’ minds at the Consumer Analyst Group of New York’s (CAGNY) annual conference in mid-February. Missing from this year’s event was the constant stream of new value-added product introductions and wide ranging discussions about new opportunities available in emerging markets like China, India, Russia and Brazil that have highlighted past conferences.

At this year’s event, the focus centered on performance. Tolerance for underperforming brands and stock-keeping units (s.k.u.s) is nonexistent and many are being disposed of or discontinued. Emphasis at this year’s CAGNY was on the need for processors to have a No. 1 or No. 2 brand in a market category in order to achieve long-term profitability.

That emphasis highlights the power private label is exerting over brands as the value trend gains momentum. It will not be surprising to see manufacturers with a toe-hold in a category through the ownership of a No. 3, No. 4 or No. 5 brand dispose of these assets to focus on core strengths.

Companies also are stressing operational performance with the intent of maximizing facility efficiency and production. The savings from these efforts will be used to strengthen each company’s balance sheet.

During her presentation, Brenda Barnes, chairman and chief executive officer of Sara Lee Corp., said the company’s Project Accelerate will yield benefits in the range of $200 million to $250 million during the next two years. The effort will involve such actions as outsourcing, supply chain improvements and rationalizing s.k.u.s.

Project Accelerate also is designed to reduce Sara Lee’s spending against indirect goods and services, which runs about $2.9 billion each year.

"We are setting up a global transactional procurement process and expanding our strategic sourcing capabilities, which will improve our visibility into how and where we spend and create standardized processes to leverage our scale," Ms. Barnes said.

Sara Lee’s focus on supply chain improvements also is having an impact on facility operations, specifically capacity utilization. In her presentation, Ms. Barnes cited the company’s Claryville, Ky., meat plant as an example. With no additional capital outlay, the facility has been able to improve its production capacity by 25%.

"We plan to implement this at other production facilities and believe we can generate 10% to 30% greater capacity per plant, again, with no capital outlays," Ms. Barnes said.

The Kellogg Co., Battle Creek, Mich., also is focusing on improving its performance with its K-LEAN program. By 2011, the company hopes to achieve $1 billion in annual cost savings through its K-LEAN manufacturing optimization efforts. Initially started in two U.S. plants, the program is being introduced throughout the company.

"We had always seen our manufacturing facilities as being world-class," said David Mackay, president and chief executive officer of Kellogg. "We didn’t think there were real savings opportunities there. We brought in some external consultants to really challenge whether that was actually true or not, and I’d have to say that we’ve been quite surprised at some of the opportunities that they’ve identified."

Beyond this economic downturn, these efforts will make Sara Lee Corp., the Kellogg Co. and other food manufacturers that have undertaken similar endeavors stronger. Each underscores the fact that even in this economic environment food manufacturers may take advantage of opportunities to improve the profitability of their businesses.

This article can also be found in the digital edition of Food Business News, March 3, 2009, starting on Page 9. Click here to search that archive.

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