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Food industry growth opportunities - Delivering margin improvement - EY - Global

Food industry growth opportunities

Delivering margin improvement

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“Management teams are rethinking every element of global operating models and operational costs to be as lean and competitive in the market as possible.” Gregg Clark,
Americas Advisory Leader

Adopting a flexible operating model is helping organizations to respond to the demands of today’s changing business landscape.

In emerging markets, supply chain operations need to be geared toward keeping up with the demands of 20%+ growth rates, while in more developed economies, emphasis is increasingly on removing costs and improving customer service.

In optimizing their supply chain networks, companies are increasingly moving toward a mixed model, seeking to strike the right balance between farshore, nearshore and onshore production. Relocating operations can bring benefits in terms of:

  • Cost savings, especially reduction of customs duty costs
  • Proximity to customers
  • Driving sales growth, especially in emerging markets

Whichever market they are considering, food companies are conducting much more cost-to-serve (CTS) analysis to calculate better the profitability of a specific account based on the actual business activities and overhead costs incurred to service that customer.

Translating strategy into operational effectiveness

1. Tracking value leakage through the pricing waterfall - Major food companies invest heavily in selling to their customers. However, poor negotiation, erroneous discounting and lack of clear information results in lost value on a significant scale. The two most common causes of value leakage are:

  • Basic lack of conditionality around discount offers
  • Legacy discounts, which create a lack of clarity on deals

Getting the right conditions and controls in place can help ensure this huge investment works much harder. Food companies help redress the balance of power with retailers by combining increased understanding of both the pricing waterfall and CTS to provide a clear view of efficient and profitable outcomes from negotiations.

2. Making unprofitable agreements less likely - Getting sales execution right requires clear planning and customer segmentation, appropriate incentives and the right information to track performance and improve visibility of returns.

Sales teams need a clear trading strategy that segments customers and provides a plan for each channel. They should clearly understand what they may and may not do within the pricing waterfall. Another challenge is timely availability and effective use of sales data.

Cost management

At present, food businesses have two fights on their hands:

  1. Running the business as a whole in a cost-efficient way, including effectively managing fixed overhead costs
  2. Dealing with rising input costs, resulting from raw material and energy price inflation

Some companies are focusing on leveraging their scale, rationalizing suppliers and using bulk purchasing for everything from raw commodities to office supplies to achieve sustainable cost reduction.

In terms of raw material input costs, commodity price inflation has had a visible impact on food company earnings. This trend appears set to continue for the unforeseeable future as rising commodity costs are expected to continue placing pressure on margins.

How we can help

We have extensive experience helping food companies to improve key aspects of business performance to create competitive advantage and position themselves to grow profitably.

Typical aspects of our work include advising on:

  • Reducing value leakage through the pricing waterfall
  • Sales effectiveness including:
  • Customer segmentation and trading strategy
  • Channel strategy
  • Rightsizing the salesforce to support the customer base
  • Improving salesforce execution
  • Performance measurement and evaluation
  • Review of system-wide strategy to improve brand performance
  • Analyzing Cost to Serve

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