FIT TO WINSECURING THE SUCCESS OF STRATEGIC FOOD INITIATIVES TODAY AND TOMORROWFood industry companies: navigating troubled waters1Your progression is our obsessionEFESO Consulting is a global management consultancy firm helping its clients progress faster and better. Over 400 consultants, operating from 26 offices, working in over 75 countries and representing more than 40 different nationalities currently support more than 900 progression programmes working in Tandem with our clients.Our progression motto “Improving results today, securing results for tomorrow” means achieving tangible business results faster and, at the same time, developing the capabilities, leadership and culture to continue to improve faster than competition in the future. We engineer the combination of continuous improvement, transformation and disruption approaches to yield the most effective and durable progression results. We look at and connect progression across the End to End Value Chain and from micro (the individual contributor) to macro (eco-system).Our progression approach combines strategic (orientation and prioritization), systemic (changing the DNA of the functioning of a company in a sustainable way) and specific (tangible specific results) interventions.To improve the results of today and secure the results for tomorrow we address at the same time 4 Dynamics: Our people bring together hands-on experience and expertise spanning a wide range of sectors and functional capabilities. The success of the EFESO approach is reflected by our 90% client retention. “Coming together is a beginning, keeping together is progress, working together is success” - Henry Ford For more information check our website: www.efeso.comValue Dynamics - Exploiting the fast changing patterns of value creation to focus on what will really make the difference in terms of quality, functionality, experience, time to marketFlow Dynamics - Understanding how to streamline activities to deliver the target valueAsset Dynamics - Ensure the optimization of the lifecycle and value/cost ratio of key assets such as machines, data, brands, intellectual propertyHuman Dynamics - Enhance the competence, commitment and culture of your people exploiting adoption, anchoring and leadership expertise1234Fit to winFood industry companies: navigating troubled watersFit to winIs it possible to create lasting value in today’s food industry? Is this something that food companies can still achieve? Most of the world’s leading listed companies still manage to do so, but the added value created by the food industry in mature markets like Europe as a whole is mostly stagnant, if not actually decreasing. These are companies operating in an increasingly competitive world where a form of economic Darwinism selects participants on the basis of their ability to adapt to an unstable and fast-changing environment.The food industry is living through turbulent times, forcing it to navigate a path littered with multiple constraints. Not all of this is due to the economic downturn. It has simply exacerbated some companies’ endemic weaknesses and cannot, therefore, be used as an excuse. Some perform far better when faced with identical constraints. This is due to their ability to innovate and take risks, their strategic and operational flexibility, their willingness to question the business model, their effective approach to rolling out strategies on the ground, and their adoption of a management culture that promotes staff empowerment and commitment.Based on its extensive experience of the food industry, EFESO has developed a vision of the sector and of the winning strategies. By in-depth studies of financial data from leading food industry companies and monitoring of the strategies used by businesses of all sizes, we have identified the key factors for success that make it possible to combine growth with profitability. Yes, it can be done…5 CONTEXT: the new rules of the game8 STUDY: outperforming companies from around the world10 ANALYSIS: the 7 keys to success13 SUCCESS: there’s nothing small about these SMEs16 MODEL(S): from strategy to execution3Challenges to value creation in the food industryVolatility: Absorbing raw material price increases has become a major issue for food industry companies. They also have to limit their exposure to structural volatility with increasing amplitude; paradoxically, this involves shoring up their financial bases so that they are better equipped to deal with price cycles.Defence: It is strategically important to defend existing positions before setting out to conquer new markets. In mature markets, increased competition comes not just from other brands, but also, and more especially, from the omnipresence of private-label brands and the increasingly blurred boundaries between product categories and types of household expenditure.Innovation: Only innovation and re-segmentation have sufficient impact to generate growth or new growth drivers in fast-changing markets reeling from the economic downturn; renovation alone is not enough.Conquest: Emerging markets generate double-digit growth. But conquering them demands strategies adapted to local food cultures and lengthy and complex routes to market. Agile operational models and an anthropologist’s mind-set are needed to roll out glocal approaches.Productivity: Only step changes in competitiveness can reduce costs and restore some financial leeway. These changes go far beyond conventional ad-hoc cost-cutting plans and include reconfiguring footprints and adopting approaches such as Lean Manufacturing and Should Cost. The goal is to make a clean break with past practises to achieve far greater gains.Risks: The food industry is awash with health, media, currency and other operational threats and restrictions, all amplified by regulations. Anticipating and managing these risks is a critical strategic capability.Complexity: Producing growth in mature economies requires renewed differentiation, a process that involves meeting the needs of each respective consumer segment. This inherent limit on production volumes creates complexities that should not be avoided but simply managed profitably.Skills: Attracting, nurturing and retaining the right talents is a precondition to any effective strategy roll-out. Managing in an inter-cultural context and integrating members of generation Y demands more high level people management skills.4CONTEXT: The new rules of the gameThe food industry is living through turbulent times, its environment is marked by volatility, uncertainty, complexity and ambiguity. New rules of the game are emerging in an ecosystem where everything is moving simultaneously. The impacts of these changes are felt in all aspects of the business environment, affecting everything from raw material prices and consumer behaviour to retail’s positioning, the competitive landscape and the media and legal environments.The first variable, and by no means a small matter for the food industry: raw materials. Volatility – the price fluctuation range – has risen from 9% to 21% in the space of a decade. These broad variations, against a backdrop of rising prices, have a direct impact on the bottom line, since companies are generally unable to pass the full price higher up the value chain, as we will discuss later. A number of companies, including some big names, have recently seen profits cut in half because of this. Take the biscuit sector as an example: faced with a 10% rise in the cost of ingredients, and despite ceaseless efforts to enhance productivity, companies have to be able to increase their prices by 1.5% if, at constant volumes, they are to avoid operating losses.Current economic conditions, which reflect well established and sustainable phenomena, call for profound changes.“If we do not take change by the hand, it will surely take us by the throat.” Winston Churchill5The second variable, equally crucial to the food industry: retailersAs a rule, there is growing pressure on prices from retailers, much of it originating in the fierce competition between rival operators: in France, the independent chains set the tone, forcing Carrefour to alter its strategy and placing Casino in a tricky situation. Never has there been a smaller price difference between chains. This situation has an increasing impact on manufacturers, especially those involved in manufacturing private-label products. The size and power of a brand is the only way to resist this process: the leading companies, whose growth lies in the 5 to 7% range, manage to pass on price rises accounting for almost half of their increase in turnover.Furthermore, it now takes longer to pass on raw material price rises, assuming that retailers agree to factor them into their sales prices at least partially. It often takes 6 months or more before this happens, so suppliers need sufficient cash flow to cover their working capital needs. However, it is pointless to wait for the pressure from retailers to ease, simply because they too are suffering from the general economic gloom. The results posted by the leading stock-listed groups attest to this, with the vast majority going through difficult times. Even the recognised leaders of the industry, like Tesco in United Kingdom and Mercadona in Spain, are seeing profits fall.Never has there been a smaller price difference between chains. 6Hyper-segmentation is revolutionising the rules of the mass market.The third variable and the one that has the final say: the consumerIn mature regions, consumer spending is declining at a moment when consumer savings have never been higher (i.e. in France: 16.8%). This is a phenomenon that encourages behaviour that is emotional; there is not always a clear correlation between buying power and actual spending. In times of anxiety, consumers spend prudently: with increasingly inelastic fixed-cost (housing, energy, loans, etc.) amounting to 38% of disposable income, they are forced to make trade-offs, with food often being used as an adjustable variable. Food has to compete with other expenses, such as telecom, leisure and clothing, and the aim becomes to find affordable products priced low enough to free up some income. This rationalisation of food expenditures, which did not exist a few years ago, has fundamentally altered the market structure: no-frills and bottom-of-the-range products prosper at the expense of discount brands and private labels, despite the considerable promotional efforts made by national brands to support their star products. At the other end of the scale, premium products are thriving while the mid-market shrinks. This has produced a hyper-segmentation of the food market that is revolutionising the traditional rules of the mass market. The future is all about understanding how to meet highly specific needs. This is the era of customisation, which means satisfying specific need-units as a function of narrowly-defined targets — seniors / 65 years and older (150 million in Europe by 2050, more than 20% of world’s population), ˝adulescent˝, DINKs, etc. — or new trends such as nomadism, 100 mile-diet, naturalness, fast casual and so on. Even Coca-Cola has got in on the act, releasing 800 million personalised bottles in 32 countries across Europe.The trend of personalisation also impacts communication strategies, as demonstrated by the increase of use of digital media. As an example, over one third of Procter & Gamble’s marketing budget currently goes to digital media.Food industry companies also have to deal with the polarisation of food consumption patterns among city dwellers. Three primary meal times have emerged, during which time constraints and pleasure are in competition with each other. Each meal time demands a tailored response in terms of products and/or services: dMidday meals: influenced by work/mobility/working from home dEvening meals: as a family or alone dWeekend meals: for pleasureThe fourth variable, an unavoidable feature of mature western economies: competition. For food industry companies selling under their own brands, this is competition we can put a name to: private labels sold by the retailers. This is the real competition that food brands face, as can be seen by Nestlé Waters’ falling market share in the USA. These days, they cover every product category and unit of need, at the entry level of the market as well as in niche markets (local, sustainable, children’s, etc.). The supermarkets manage their products as brands and they can supplant national brands in the eyes of the consumer, becoming the benchmark brand (sales of the Tesco Finest brand exceed €1.5 billion). Retailers are either investing in R&D and marketing as if they were manufacturers, or else they rely on dedicated services provided by their suppliers. The result: private-label products often have average annual growth rates higher than those of national brands, once promotions are stripped out. The paradox is that this is actually an opportunity for manufacturers whose business model is based on manufacturing private-label products (see next page).7The fifth, and final, variable is the media and legal environment. The unwavering vigilance of NGOs and public authorities places a heavy burden on manufacturers and the way they bring their products to market. This might take the form of a fight against obesity, an ever-increasing tax burden, a backlash against waste (an emerging trend in mature economies where 30% of food goes uneaten, a figure that could be reduced by a quarter) or many other manifestations, all heralding an impending drop in sales. Whatever the precise mechanism, manufacturers are always highly exposed. This is especially true in Europe, where there will inevitably be a further tightening of controls over the entire food chain as a result of the “horsegate”. Similarly, tighter restrictions on health claims threaten the business model of companies whose growth has been built around them.Although every company in the food industry has to face the same variables, which in combination can create great uncertainty, there are other long-term factors that are considerably more reassuring. First of these is the demographic trend: globally, the number of middle class people able to afford processed food products will rise from 1.8 billion today to 5 billion by 2030. China’s per capita GDP in 2050 will probably be equivalent to Sweden’s today, with India reaching the same level as Taiwan. This is a real cause for optimism in an industry under pressure.STUDY: Outperforming companies from around the world6% average annual growth — and some food companies do even better! To help achieve a better understanding of how listed companies perform, EFESO has drawn up a ranking of the world’s Top 50 listed food companies, classified by turnover.We analysed results over a 7-year period, from 2006 to 2012, looking only at pure players.A panel of businesses with contrasting performance moyenhighaverageaverageHigh330100-140-16%16%6%lowValue creation index (2006 - 2012)Grouth rate (Turnover: CAGR 2006 - 2012)TOP 108We compared their average annual growth rates to a composite index that looks at returns on capital employed, combining dividend payments and rise in stock values. The companies in our panel exhibit extremely divergent performance profiles, from Japan’s Asahi, Mexican’s Bimbo which lead the way in terms of sales growth, to SAB Miller, the incontestable number one in terms of value created.After analysis, the identity of the Top 10 performing companies emerged. With the exception of the brewers (SAB Miller, Asahin ABInbev and Heineken), the success of this group of champions is not linked to a particular market sector or geographic region. It is worth pointing out that if we had carried out the same study a few years ago the results would have been different. Mexico’s Grupo Bimbo, one of the most eye-catching successes, does not come from a mature country and does not have a long-established history in the sector.A number of diagnoses can be made after detailed analysis of these companies’ performances. In some cases it is the result of following a specific strategy, in other cases it is due to a combination of diverse factors. Despite these disparities, our analysis has identified seven keys to success, which we will examine in greater detail on the following pages.The Top 10 of performing businesses USAUSAUSASwitzerlandUSAUKUKUKGermanyMexico9Next >