Rise of contract manufacturing in food and beverage – summary
- Major CPGs increasingly use contract manufacturing beyond cost-reduction strategies
- Rising capital costs and workforce pressures accelerate outsourcing adoption industrywide
- Pandemic disruptions highlighted limitations of wholly owned production models globally
- Brands retain proprietary recipes, quality standards and consumer data internally
- Contract manufacturing boosts agility scalability and speed to market growth
Contract manufacturing has been used in food and beverage production for decades, enabling brands to scale efficiently, access specialised expertise and manufacturing capabilities, and bring products to market without significant capital investment in production facilities.
But it was never the primary route to market for major CPGs, who instead chose to retain direct control over production. Until now.
Some of the industry’s biggest names, including Nestlé, The Kraft Heinz Company, PepsiCo, Mars, Inc., Mondelēz International and Ferrero Group, are embracing contract manufacturing as a strategic business tool.
So what’s behind the shift and what does it mean for the industry?
The rise of contract manufacturing
The move away from in-house to contract manufacturing is being driven by “capital economics, workforce pressure, supply-chain architecture, and the imperative for speed,” says Ramendu Kumar, project lead at industry analysts Mordor Intelligence.
Capital economics
Building and commissioning a food-grade manufacturing facility requires significant capital investment, often running into tens of millions of dollars, says Kumar. For many brand owners, tying up capital in property and equipment is becoming increasingly difficult to justify, particularly when those resources could be invested in innovation, brand building and growth initiatives.
Outsourcing offers a clear alternative, allowing companies to access production capacity and expertise without the financial burden of owning and operating manufacturing assets.
Workforce pressure
Operational pressures also play a role. As manufacturers contend with workforce challenges and increasingly complex supply chains, external production has emerged as a way to alleviate resource constraints while maintaining growth ambitions.
Supply-chain architecture
The COVID-19 pandemic, says Kumar, also rewired thinking about supply chain concentration.
When demand surged for staple packaged foods in 2020, several big CPGs announced plans to expand external manufacturing – some like General Mills by as much as 20% – recognising that single-site or wholly owned production models could not absorb demand volatility at speed.
Speed-to-market
Finally, there’s speed-to-market. “Research estimates that brands can move from product concept to shelf in three to six months through an established co-manufacturer, compared with twelve to thirty-six months for an internally built facility,” says Kumar. “In categories where trend responsiveness and first-mover advantage define commercial outcomes, that differential is not marginal, it’s strategic.”
For many manufacturers, that faster route to market is one of contract manufacturing’s biggest advantages. And it’s not the only one. Beyond helping companies avoid the costs and constraints of in-house production, the model is increasingly valued for the strategic benefits it can deliver.
What are the benefits?
Increasingly, contract manufacturing is being viewed as more than just a way to cut costs.
As product portfolios expand and innovation cycles accelerate, it’s becoming a tool to improve agility, reduce risk and bring new products to market more quickly. Dedicated production lines are often difficult to justify for limited-edition launches or niche product ranges, making external manufacturing partners an attractive alternative.
The ability to test concepts before committing significant capital is another key advantage, explains Kumar. Rather than investing in new facilities or equipment, brands can use co-manufacturers to validate demand, gather consumer feedback and refine products before scaling production.
At the same time, contract manufacturers have expanded their capabilities, offering increasingly sophisticated technical, operational and regulatory expertise. Consequently, selecting the right manufacturing partner is becoming an important source of competitive advantage in its own right.
Though the model is not without its downsides.
What are the risks?
Outsourced production can carry lower margins than manufacturing in-house, reflecting the costs and mark-ups associated with third-party partners.
Brands must also relinquish a degree of direct control when outsourcing, creating potential challenges around quality assurance, food safety and consistency.
There are broader strategic considerations, too. Relying heavily on external partners can expose companies to supply chain disruptions and capacity constraints, while sharing proprietary recipes, processes and technical know-how raises concerns around intellectual property protection.
Despite this, many manufacturers appear willing to accept the risks in return for greater flexibility, scalability and speed to market.
Having said that, manufacturers aren’t outsourcing everything.
What stays in-house?
As contract manufacturing becomes more widespread, food and beverage companies are becoming increasingly selective about what they contract out and what they keep in-house.
At the heart of these decisions is a simple principle, says Kumar. Protect what creates competitive advantage and outsource the rest.
- Proprietary formulations and recipes: Companies typically retain control of the intellectual property that differentiates their products in the market
- Production know-how and specialist processes: Unique manufacturing techniques that contribute to product quality, texture, flavour or functionality are often kept internal
- Brand strategy and commercial decision-making: Portfolio direction, innovation pipelines, market positioning and investment decisions generally remain firmly in-house
- Quality standards and final approvals: Even when production is outsourced, responsibility for product quality and sign-off usually stays with the brand owner
- Customer and retailer relationships: Manufacturers tend to maintain direct control over key commercial partnerships and route-to-market strategies
- Consumer data and insights: Shopper and consumer intelligence is increasingly viewed as a strategic asset that companies prefer to manage themselves
This, says Kumar, reflects a broader shift in thinking. Rather than viewing manufacturing as an all-or-nothing proposition, many CPGs are adopting a hybrid approach, retaining control of the capabilities that define their brands while outsourcing activities that can be delivered more efficiently or flexibly by specialist partners.
A new manufacturing model
If the past decade saw contract manufacturing gain popularity among the world’s largest food companies, the next is set to cement its position as a core pillar of Big Food’s manufacturing strategy, says Kumar.
With the forces driving contract manufacturing showing no signs of slowing, many CPGs are moving beyond the question of whether to use it and are focusing instead on where it can create the greatest competitive advantage.
That doesn’t mean the shift will be universal. Categories built around proprietary processes, unique formulations or highly differentiated manufacturing techniques are likely to remain closely guarded.
But for much of the industry, contract manufacturing is becoming a cornerstone of modern manufacturing strategies, helping brands balance efficiency, agility and growth in an increasingly competitive and complex market.
