Why are the food and beverage industries being reinvented?

Mega-shifts in the food and beverage industries, driven by consumer and business forces, have the potential to disrupt a company’s DNA and its very purpose. Being aware of these overarching trends can help packaging departments better serve their company’s fluctuating business needs.

Business transformation leader Dan Balan, head of Chicago management consultancy Fastraqq Inc., shares his insights into the reinvention of the food and beverage industries in the first of a three-part “Transforming Industries” article series.

In this series, Balan will investigate the reinvention of three fundamental industries that form the bulwark of the greater economy: (1) food and beverage; (2) retail; and (3) packaging. Collectively, these industries represent more than a trillion dollars in gross domestic product (GDP).

Balan also served as an executive media spokesperson at the Global Food and Beverage Packaging Summit (July 7-8; Chicago) and will have more to share later on key takeaways from the conference.

What changes are sweeping through the food and beverage industries?

Balan: The industries are going through a convergence, similar to the digital convergence that changed the way we live and communicate. Traditionally, these markets have been rather slow-moving. But now, several changes are disrupting the business at large.

There is an increasing chorus for ingredient declaration, removal of harmful additives and preservatives, biodegradable and recyclable packaging materials, and elimination of harmful plastics.

Further, this industry is rattled by the intersection of health, nutrition, taste and lightness. This is creating both opportunities and challenges for manufacturers. Nutraceutical companies will make deeper inroads into the food and beverage business. That disruption is imminent.

Grocery outlets are now proliferating store brands and shadow brands to compete with mainstream brands. Retail relationships are becoming twisted with wholesalers. Technologically, this industry is now beginning to evolve.

How is the supply chain changing this industry?

Balan: The biggest issue in supply chains will be containment of bullwhip effect and the acceleration of payment cycles across the entire ecosystem.

Bullwhip is the term for supply-demand mismatch across the nodes in the supply chain. Next to consumer electronics, the food and beverage industry has the largest bullwhip. Pervasive bullwhip causes economic erosion. It leaves some of the stakeholders suffering from excess or deficient inventory.

A clearer collaboration will be forced from retailers on one end and raw material suppliers on the other. Real-time transparency of demand signals, inventory positions, shipment status, in-transit goods and actual sales will begin to occur—both technologically and operationally. There will be more shared protocols and common metrics to drive collective success.

The next issue is fast payment cycles to the tier suppliers. Extended payment cycles, such as 120-day net, demanded by product manufacturers from their suppliers will adversely affect the industry. It will drive tier suppliers on an unhealthy borrowing spiral, unable to meet working capital requirements. The tier community includes packers, co-packers, contract manufacturers and logistics providers. The delayed payment practice can stymie innovation at a macro level.

Innovation is being challenged in this hyper-competitive market climate. Where do you see product innovation going?

Balan: Innovation is business; innovation is revenue. It is less about product creation than it is about value creation. Companies will be forced to create platforms rather than products per se. Future innovation will be platform based. Corn is a platform, potato is a platform and even chili pepper is a platform. Infinite variations are possible based on segmentation.

But the “Innovation Battle” will be fought at the retail arena. That means companies must go beyond mere product creation to success creation. That translates to agile supply chains, service levels, timely shipments and cost consciousness.

Yes, innovation cycles will get shorter and launch windows will get narrower.  It will behoove companies to reverse engineer innovation from the retail arena. Innovation must be bidirectional, from concept-to-customer and customer-to-concept.

How is branding affected by so many choices for the customer?

Balan: The runaway success of Cheetos is an object lesson in branding. Frito-Lay turned corn puffs into an attitude. The biggest consumers of Cheetos are the Millennials. This product reflected the defiant, different attitude of a generation with new spending power. In essence, Frito-Lay created the product that resonated with the zeitgeist of the times. It took the values, attitudes and lifestyle of a dominant market and answered with a product.

The creation of Jacked Doritos, big corn chips, once again hit the male population with a love of sports. The outsized corn chips bespoke to an audience of male gatherers around big TV games.

Similarly, the popularity of Sriracha Hot Sauce reflects more of an attitude and a sense of the outré. Traditional branding percepts were turned upside down. Enduring brands must be built out of psychographic criteria to compete in a crowded marketplace.

How is technology changing the food and beverage industry?

Balan: With all the hoopla about the Cloud, the food and beverage markets will benefit the most from communalization of critical data among suppliers, manufacturers, packers, wholesalers and retailers. It means doing whatever is necessary to minimize losses, opportunity costs and using information systems as a tool. Such critical data would encompass point-of-sale information, inventory stock, demand signals, constraints and in-transit notifications. Technology also means creation of binding standards and protocol for collective performance.

Companies must transform information technology (IT) into a clear neural-network of data points and decision points, and train people to understand cause and effect along the entire business. Technology alone cannot solve the problem—training people is also required.

Is sustainability now mainstream or is it still faddish?

Balan: Sustainability is starting to mature as a mainstream thought process. However, corporate initiatives must be backed by senior management, otherwise these initiatives tend to scatter and eventually die. From supplier selection to compliance, from product design to packaging materials, from energy and emission standards to environmental responsibility, there are several issues that need to be understood by multiple stakeholders. This is why sustainability should ascend to a strategic entity in corporate planning.

What is the next shift in packaging as the food and beverage industry redefines itself?

Balan: Packaging is a business function and it deserves a seat at the management table. But the first step has to be in the reeducation of packaging engineers and designers. They must expand their operating canvas from technology of packaging to the business of packaging. They must understand supply chains, how costs build up, how customer segmentation occurs, sustainability concepts and how packaging impacts the business bottom line. Senior packaging executives must appreciate how education can add systemically to the success of the business. While technical skills are necessary, analytical skills are critical.

What are some of the shifts occurring in the grocery store?

Balan: The aisle is the new shelf. Retailers are now using the horizontal space for driving impulse purchases. They are employing square vats and stacks, spread throughout the grocery store to impel low-cost, high-volume purchases. An example is Nabisco products, such as Chips Ahoy!, Cheez-It and Vanilla Wafers sold in small containers but from many locations within the store.

Retailers are using vertical space for driving “2-fer” bulk purchases, thereby maximizing sales per square foot of vertical space.

While they are resorting to the strategy of selling to the customer from many location spots in the store, they are aiming at the customer from multiple volume and price points as well. Essentially, retailers are moving to the portfolio model to drive buying behavior. They’re offering linear choices, lateral choices and cross-product choices from the same manufacturer.

The next evolution we will see will be the growth of scanning technologies, predictive algorithms and creating likely-to-buy assortments. The predictive analytics of point-of-sale data will become more sophisticated.

What is the next evolution for human capital and people excellence?

Balan: Given the nature of problems, linear thinking will no longer suffice. Silo mentalities must be eliminated. Functional expertise alone cannot solve the full range of business problems that brew every day. A marketer who does not understand the operational limitations of a new product launch is liable to make spotty decisions. Likewise, a packaging designer who does not grasp the changing dynamics of customers is likely to make myopic missteps.

Companies must create a new paradigm called “Correlational Intelligence.” That means creating a common ground for everyone in the company to understand the business and all its key aspects. Without this cultural shift, corporate productivity will be sacrificed daily, due to opacity, black space and discontinuities. Eventually this leads to loss of moral and vitality.

There has to be a new base line for learning and performance. Mandatory job rotation will go a long way in building Correlational Intelligence.