We get it and have been in your shoes as a food and beverage brand wary of the yet-to-be-determined state of the market – 2008 triggering anyone?! Though consumer spending appears to be up, consumer confidence in the market is falling and the number of items purchased is slowing. Now brands are starting to see that they need to have a plan in place to weather the storm of the pending economic downturn.
Historically, food inflation averages an increase of 2% each year, but according to the USDA the consumer prices index for food at home rose 11.4% in 2022. That’s HUGE – almost 6x the average! Because of this increase in food prices, shoppers are spending more money per trip, but the number of food items purchased has declined over 17% (according to numerator.com/shopping-behavior-index).
Interestingly, while consumers are purchasing fewer items, the share of private label units continues to rise. As private label and store brands are gaining market share, it’s becoming riskier for independent and even some national brands to increase their prices. Those seen as essential or market leaders in a category can risk adjusting prices because they maintain consumer loyalty and purchase power. However, the smaller brands with less recognition have a harder time competing against their lower-priced private label counterparts.
So how do we adjust for inflation? If we raise prices, we risk losing market share. If we do nothing, inflation and increased COGS eats away at earnings.
Here are steps you can take to evaluate your operations strategy and determine the best ways to reduce costs – it’s not too late.
If you haven’t been keeping a close watch on your spending, now is the time to start. It takes time for those not meticulously monitoring their books to notice large jumps to their COGS. Actively evaluating your spending will show where the increases are happening and uncover opportunities to reduce costs.
Look at your ingredient portfolio to find opportunities to reduce costs. Ask yourself if your current ingredient buying process is sustainable. If you’ve been spot buying, there might be an opportunity to shift to contract buying. Often purchasing larger quantities will help reduce costs and lock in costs throughout the year to avoid unplanned price spikes. However, keep in mind that not all spot buying is unfavorable—maintaining a strong vendor relationship puts some brands in an optimal position to negotiate pricing.
Reformulation is another option to reduce costs by finding lower-cost ingredients. I once worked with a premium pet food brand by helping them reformulate and find a manufacturer that supported their optimization initiatives which significantly reduced their COGS.
I’ve said it before and will say it again, establishing strong relationships with your vendors will not only support your success, it will ultimately have a positive impact on your bottom line. Longstanding, good relationships are rare, but if you put in the effort with thorough planning and proactive communication, you can secure solid relationships with your vendors and retailers.
Maintaining close communication with your retailer will keep you informed and provide key insights into what’s working and preserve your shelf presence. Upholding a regular dialogue with your vendors will ensure you don’t get the short end of the stick – and assure ingredient availability even when there are constraints on supply.
Who better to emulate than one of the world’s most successful businesses. During the pandemic, McDonald’s (like everyone else) encountered supply chain disruption and decreased demand. One solution they implemented was to rationalize 90% of their franchises’ menus. By decreasing their menu offering, they were able to reduce costs and increase the sales of their most profitable items.
Brands can recreate McDonald’s strategy through SKU rationalization. Analyze your sales data to see what makes sense in the market by evaluating product sales and operational costs to determine which ones to cut and which ones to move forward with. By implementing best practices and rationalizing your product line based on the 80/20 rule – scale down to the 20% of your SKUs that make up 80% of your business – you’ll maximize your sales potential while reducing costs.
Getting a 3rd party consultant or advisor to look at your book of business and tell you what you can be doing differently can be a game changer. Often internal teams are too close to the business to be able to assess details objectively. Getting fresh eyes on your books can reveal questions like why you’re making certain decisions, why you’re keeping a SKU that produces .5% of your sales, or why you’re paying a premium price for a widely available ingredient.
Though hiring an outside resource can seem expensive up front, it pays for itself very quickly by allowing you to better position your business, refine your operations, improve vendor relationships, and reduce COGS.
It’s not always easy to identify areas of opportunity, but these steps will help you evaluate areas of your business to find ways to reduce costs and remain competitive in a high-inflation market. For additional resources, reach out to me at JPG and we can provide a fresh look at your business and help you enhance your revenue potential even further.
About the author:
Paul Vilker, CSCP is a dedicated supply chain professional with experience in managing teams and driving project success in manufacturing, operations, planning, and capacity management and control. He's demonstrated leadership capabilities within the food supply chain and is passionate about seeking collaborative and innovative solutions to enhance the goals of clients, their teams or affiliated organizations.