GMA report examines industry responses to price pressures
rises through risk management, product reformulation and
innovation, according to a report by the Grocery Manufacturers
Conducted by PricewaterhouseCoopers and released last month, the 11th annual GMA/FPA Financial Performance Report examines the challenges industry has faced, and the way it is responding to these. "Global economic forces, changes in demand patterns, and new forms of legislation and regulation are creating new pressures for CPG manufacturers. Commodity price volatility is higher than ever and higher than financial volatility. Current USDA projections are that the price of many key raw materials will stabilize over time-but at higher levels than traditionally seen," writes the report. "To confront these challenges successfully, manufacturers are moving beyond traditional techniques of scale and hedged buying and have begun employing such strategies as product reformulation and substitution, portfolio realignment, and supply chain realignment." According to the report, "forward-looking companies" are taking a "robust and integrated" risk management approach that allows them to realize value across the value chain, thereby becoming more able to manage and respond to this new risk environment. Leading companies analyze data around both short- and long-term structural changes in the marketplace to assess the organization's overall exposure to risk, it says. For example, Tyson Foods has been working to manage commodity risks through this kind of data analysis. To more effectively monitor grain, energy, and freight markets, Tyson uses software made by a risk management solutions provider that normally serves energy companies. Tyson's commodity trading and risk management group-which includes many members who have background working at energy companies-is applying practices from the energy industry to actively monitor the commodities markets and manage price volatility. According to GMA, this kind of data is leveraged most effectively when there is collaboration throughout the organization. "A high level of transparency will ensure that employees are pushing in the same direction-understanding risks together across the entire company and implementing integrated risk management strategies." "For example, sales and marketing professionals can appreciate how the cost of a beverage containing high-fructose corn syrup is affected by the rising prices of corn and energy. They can then relay important information to other departments about how much extra money the customer might be willing to spend for that beverage. Groups responsible for other functions, like innovation and procurement, can then collaborate on responding to this challenge. And finally, the reporting function can evaluate how price risk management contributed to achieving overall business objectives. Such an approach integrates strategic, operational, and financial strategies with overall company goals." Manufacturers are also responding to rises commodity prices through product reformulation and mix. Although this can be hard for companies because of consumer sensitivities around taste and appearance, it can be a longer-term solution to input cost changes, says the report. It provides the example of an increase in sugarcane prices, which threatened the profit margins of soda makers. Coca-Cola and PepsiCo responded by switching to high-fructose corn syrup as a lower-cost alternative to sugar. Amid concerns of increases in corn prices, analysts are now speculating that some soft drink manufacturers may make the switch back to sugar. Additionally, says the report, companies can mitigate the impact of commodity input price changes and of increased volatility from more rapidly changing commodity prices by promoting consumption of specific stock keeping units (SKUs) or sizes that are less impacted by commodity price swings. Essentially, this alters the product mix, shifts consumer demand, and creates a new, more appropriate portfolio. "Working across procurement, sales, and marketing, and understanding retailer needs along the value chain, can lead to a more agile organization that can quickly respond in a way that re-aligns the portfolio with minimal impact." In addition to manufacturers' responses to commodity price pressures, the report also examines ways in which firms align their people and processes, both globally and locally, in a way that allows them to collaborate and respond quickly and continuously to consumers' changing and diverse needs. Reactions to a rapidly changing consumer and media environment are also examined. Other sections of the report deal with financial performance benchmarking throughout industry sectors. To access the full report Insights into the Food, Beverage, and Consumer Products Industry: GMA/FPA Overview of Industry Financial Performance and Trends, click here.