September 8, 2014
By Tom Wrobleski | VP, Industry Supply Chains
You know big changes are afoot when a grocery manufacturer’s conference keynote address is given by the President of Google Enterprise.
In 2014, it is estimated that the global food and agricultural industry will $7.6 trillion of the market, or about 10% of global GDP. In the United States alone, food and beverage sales are estimated to reach over $600 billion this year. It is a difficult number to wrap your head around. Beyond the staggering numbers, what’s even more significant about this business is it literally touches every single consumer on a regular basis.
I was extremely interested to tap into the latest buzz surrounding the future of the food and beverage industry. I recently attended the Grocery Manufacturers Association’s Leadership Forum, with over 400 executives from some of the leading consumer packaged goods (CPG) manufacturers and grocery retailers.
Grocery E-Commerce is Approaching
This was a hot topic during the Leadership forum. The Food and Beverage market is the largest retail category in the U.S. by a wide margin. Yet unlike most other retailers, e-commerce currently only represents 0.9% of all sales in the U.S.
Grocery e-commerce will reach nearly $18 billion by 2018, according to recent reports. That’s a 21.1% compounded annual growth rate (CAGR). In comparison, offline grocery sales will grow only 3.1% during the same period. Even more astonishing, projections beyond 2018 expect online grocery sales to reach 7.5% of total revenue by 2023.
How Will The Grocery E-Commerce Channel Operate?
That’s the big question on everyone’s mind. That answer depends on many variables including delivery infrastructure, the ability to meet customer delivery windows, last mile service levels, etc.
Modeling logistics for this direct channel is going to consume CPG manufacturers and retailers over the next several years, but one thing is clear: Capitalizing fully on grocery e-commerce will require full expertise in grocery, logistics, and the internet. No single entity currently has proficiency in all three components vital to success, so future market leadership is very much anybody’s game depending on what company can master each competency.
At least one major CPG manufacturer revealed that it is rethinking its packaging strategy and dropping “channel” from its “4 Cs”. As the grocery business becomes truly omnichannel, it no longer makes sense to optimize packaging for a single channel. Whereas creating packaging that grabs consumer attention from store shelves used to be a sound strategy, the rise of additional channels, like e-commerce, reduces that importance and puts a premium on factors like ease and cost of transport. The best way this manufacturer sees to handle coming increases in channel complexity is to focus on factors like cost and messaging.
Collaboration for Joint Business Planning
The supply chain conversation is moving quickly to the c-suite. In fact, it has largely already gone there. Sharing lessons learned and collaborating across product categories and companies has been discussed for many years, but this idea is finally breaking through and becoming a reality.
In one session, three major CPG manufacturers and a national grocer described plans to balance different CPG categories in planning sales and promotional events. The lower level details in planning the capacity of distribution centers, backrooms, and shelf space will be shared among stakeholders to optimize results for all. Stressing collaboration benefits each party and the breakout session that discussed this new paradigm was standing room only. Smart manufacturers and grocers are ending the race to the bottom and collaborating to enhance each other’s businesses. To this end, Sales and Operations Planning (S&OP) is making its long overdue transition from an exclusively internal process to being performed by and among trading partners.
2% GDP Growth is the New Norm
In the current business environment, growth is slow and margins are flat. That isn’t expected to change anytime soon. The COO of a large CPG manufacturer stressed the need to “develop a quantitative approach with retailers to drive category growth differentiation and cost takeout.” This is indicative of a new spirit of cooperation that the most successful companies are adopting to thrive in a slowing marketplace.
Manufacturers are also seeking more clarity into operating models to aid in planning continued cost takeouts year over year. They are striving to develop trust and give authority where the information is; that means more decision making power for category team members like buyers and merchandisers to improve the operating model between manufacturer and retailer.
As the world continues to change, businesses like grocery are changing with it. That was exemplified by paradigm shifting statistics such as the 50 billion devices forecasted to be connected to the internet by 2020 and the fact that consumers are already spending more time with digital devices than television for the first time in history. Marketing and selling to this new generation of consumers requires a massive shift in business planning and execution that the industry is latching onto and preparing for.
Are you ready for major changes in the food and beverage industry? Chainalytics can help get you there. Contact one of our experts to better prepare for a changing marketplace.
Tom Wrobleski is Vice President of Industry Supply Chains at Chainalytics. Tom more than a decade of experience working with international CPG companies on large-scale transformation projects.