Keith Nunes
Moody’s Investors Service forecasts that in the next 12 to 18 months the EBIT (earnings before interest and taxes) of the U.S. packaged foods sector will grow 4 per cent to 4.5 per cent, and the ratings agency has given the category a rating of stable. That’s the good news. What should be of concern is that Moody’s says cost reduction will be the principal driver of profitability during that period.

Cost reduction is a core element of any business, but when it is the leading driver of profit growth, alarm bells should sound. Several reasons help explain why packaged foods companies are facing this situation, including flat to slow growth in developed markets, dramatic changes unfolding across the retail and food service sectors, and increased competition from smaller, more agile and on-trend packaged foods companies.

While Moody’s sees cost reduction programs throughout the U.S. packaged foods industry continuing through 2018 and into 2019, the ratings agency forecasts the benefits will be less significant than in 2017 as programs implemented by some of the largest companies wind down. A critical issue for industry executives will be how the savings will be reinvested to generate future sales and profit growth.

One area in need of attention at some companies is information technology. A new study by the Grocery Manufacturers Association in conjunction with the Boston Consulting Group titled Accelerating Digital Innovation in C.P.G. assesses the state of information technology departments of consumer-packaged goods companies. This report represents the third iteration of the project. It began in 2013 and has been conducted every other year since.

The study shows that while information technology departments are making progress in reducing operating costs when compared to earlier survey results, few companies stand out as innovators.

“I.T. innovation in C.P.G. companies is best measured by the breadth and level of digital investments, the extent of direct-to-consumer activities, the application of advanced analytics and the use of innovation accelerators,” the study said. “Many C.P.G. companies have made investments in these areas, but few have done so in a comprehensive way that has allowed them to break from the pack.”

The study shows that four years ago, 32 per cent of all C.P.G. companies participating in the study were characterized as “frugal spenders,” meaning information technology operating expenditures accounted for 1.4 per cent of revenue or less. Today, 51 per cent of the companies participating in the survey fall into the frugal category.

A decline in the costs of some digital technologies is one reason companies are spending less on information technology. Another reason may be that management is not keeping pace with the future needs of their companies. Whether it is related to consumer engagement; data collection; management and mining; front-end applications for the merchandising and selling of products; or back-end functions required for the efficient management of production, transportation, logistics and inventory, digital technologies are becoming critical components to the growth and profitability of any business.

The business of selling consumer-packaged goods is evolving at a breakneck pace. Future success in this dynamic market requires investment in the technologies needed to generate the consumer insights that lead to more robust innovation, and the systems necessary for the operation of an optimized supply chain.