The food industry is undergoing a major change in the way it thinks about commodities and commodity supply chains. From restaurants to food companies to farms, the food industry is working hard to replace the undifferentiated commodities in its commodity supply chains with ingredients that are more compelling to consumers.
Here are a few examples:
- Restaurant menus are proudly stating the name and location of the farms that supply prominent ingredients in their dishes.
- Startup food companies are taking share from giant CPG companies by pushing brand strategies that emphasize authenticity and tell a story about the product’s origins. For example RX Bar, Krave Jerky, Chobani, Sir Kensington’s (ketchup)
- Beyond Meat, a plant-based “meat” company, IPO’d at the beginning of May, earning an $8 billion market cap on less than $100 million of revenues in 2018. Beyond Meat asks, “Why do you need an animal to create meat? Why can’t you build meat directly from plants?”
- General Mills entered into a strategic sourcing agreement with a farming company to convert 34,000 acres of conventional farmland to organic, expanding its organic supply chain. This farmland will supply wheat for General Mills’ organic brands, including Annie’s.
- Anheuser Busch announced a partnership with Indigo Agriculture to source 2.2 million bushels of trademarked “Indigo Rice.” The farmers supplying this rice are required to reduce water use, nitrogen use, and greenhouse gas emissions by 10% relative to benchmarks.
Consumers Need to Know
The common thread among these anecdotes is that every company that sells or produces food must now build a strategy to address consumers’ (especially Millennial consumers) need to know where their food comes from.
For food manufacturing companies, raw material cost tends to be the biggest expense on the income statement. Food companies have worked tirelessly for years to wring costs out of this line item by squeezing commodity suppliers.
The anecdotes discussed above reflect a major paradigm shift that is turning the traditional notion of minimizing commodity input costs on its head. Food companies are realizing that managing a commodity supply chain isn’t as simple as just minimizing costs anymore.
Supply Chain as An Investment
Food company management teams now need to think about their commodity supply chain as an investment in an asset. And like other assets, a supply chain asset can create exposure to dangerous losses if it is neglected.
The accounting definition of an asset is a resource from which a company can derive future benefits. A supply chain is less tangible than a traditional asset like a piece of equipment, but that doesn’t mean that you can’t derive future benefits from investment in a supply chain.
Today’s most successful food companies invest in appealing supply chains and tell the story in an engaging way, like the companies listed above. And they stand to earn tremendous future benefits in the form of growing market share, revenues, customer loyalty, and brand equity.
On the other hand, if a supply chain is poorly managed or neglected, it exposes a company to potential losses. This should be thought of in the same way as deferring maintenance on equipment until it threatens productivity or safety. Supply chains thought of one-dimensionally, as a cost minimization exercise, will struggle in today’s market.
If a food company layers on lack of transparency with consumers, or even worse, disingenuous communication with consumers, a supply chain crisis can ensue. There is no room for this in our age of immediate distribution of information.
What about Wisconsin?
Many Wisconsin food companies are lucky to have supply chains and farmer relationships very close to home. Everyone knows that Wisconsin is famous for cheese and bratwurst (made from milk produced on Wisconsin dairy farms and pork produced on hog farms in neighboring states, respectively). But Wisconsin farmers also grow beef, eggs, potatoes, vegetables, among many other things.
This proximity creates an opportunity for Wisconsin food companies to know and understand the farmers who supply their raw materials. Consumers want to hear the story of where their cheese, brats, burgers, eggs, potatoes, and veggies came from.
Opportunity abounds for food companies that understand this and can tell their supply chain story to consumers. How can you create differentiation for your brand by partnering with farmers on production processes tailored to consumer tastes? Animal welfare? Carbon emissions? Water conservation? Waterway and wetland management? Soil management? Nitrogen use?
Bay Point Foods works on projects like these every day. How can we be a resource for your company?