Food & Beverage (F&B) Industry Research Note

Market Forces and Trends driving the F&B Industry

Key drivers impacting manufacturing and business strategy include:

Consolidation (M&A) Changing consumer preferences and global shifts in consumer expenditure rise of BRIC economies Government and FDA regulations Health and nutrition o The carbonated soft drinks market continues to exhibit a downward trend in sales and consumption. The markets long-term profitability appears to be threatened by a combination of factors such as the health consciousness of the consumers (obesity issues), consumers growing skepticism about the artificial sweeteners in soda, etc. Sustainability and the green movement Convenience

Costs
According to a study by the Panorama Consulting Group Players in the F&B industry experience an average total cost of ownership of $8.2 million, or 8.6% of annual revenue. Companies spend almost 23% of their total implementation budget on business implementation costs, including third-party consulting fees.

Business Challenges
Top three key business issues in any F&B company: Financial performance: In todays global marketplace, where growth via acquisition is prominent, the key to sustained positive financial performance is the ability to understand and respond to consumer demands and competitive pressures while reducing cost of production. Sustainability: Manufacturers want to have a positive impact on society and the environment. In addition, they want to turn sustainability challenges into business advantages. At the heart of a well-planned sustainability program is the belief that corporate investment in environmental and social responsibility must strengthen business performance to be successful. It must reduce environmental impact, achieve genuine economy in the use of resources, deliver a return on investment, and enhance the equity of your company. Brand equity: Customer loyalty is the key to success, and maintaining customer loyalty is achieved through consistently manufacturing high-quality products, batch after batch. In doing so one adds value to their brand. Therefore, protecting brand equity is the core to financial strength. Operational challenges and need for Automation and IT: Competition: The level of competitiveness is elevated by low volume growth and reduced margins, brought about by market saturation and the rising cost of raw

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materials. Producing quality goods at the lowest possible cost is a major concern. Manufacturers are responding by identifying opportunities to improve production efficiency by using information systems that monitor operations and provide the capability to analyze results and determine the root cause of problems. The performance of assets is being improved as maintenance regimes are stepped up with improved support and better management of spare parts. And, businesses are reducing utility costs by installing information systems to monitor utility usage and identify opportunities to reduce costs. Multiple and varied products: Increasing consumer demands and quality and cost expectations have created significant pressure on F&B manufacturers who have the difficult task of meeting the ongoing evolution of consumer demand. This increased volume and diversity of products is causing plants to design their lines based on shorter production runs with more changeovers. Meeting these demands requires operational flexibility. Businesses must be able to easily add new products to the mix, change recipes on the fly and quickly implement new operational procedures. In addition, they must execute these changeovers while meeting high sanitation and environmental requirements. All of this has to be done smoothly to reduce time-tomarket and limit the impact on operations. Innovation: Increasing quest for innovation, forcing businesses to rethink the way they do business, formulate strategy and deliver on consumer expectations. Customer satisfaction: While speed and flexibility are crucial, plants must also take the steps needed to ensure the highest quality possible. The key to maintaining brand equity, which is paramount in this industry, is product consistency not only batch-to-batch, but facility-to-facility. To meet these consistency requirements, companies need advanced automation and information technology. This technology will help ensure that each batch and each operation is performed the same as the previous one, while simultaneously allowing operators to compensate for process changes and raw material variability that can impact the finished product. Product safety and security: As concerns over food safety and transparency continue to grow in the minds of consumers, businesses are required to improve the processes that monitor quality and track material through the facility. At each critical control point of the production process, systems are being installed to monitor operations in order to verify that operations have been properly executed. Systems are being implemented to track all raw and in-process material through the entire facility to meet regulations and provide information if a product recall is required. They may be looking at the vulnerability of the networks, automation and information systems and implementing changes to protect your systems from intruders. Supply-chain integration: Many plants have evolved from make-to-stock operations to a demand driven model where the completed product is shipped directly to retail outlets. Products no longer sit in a distribution center after production. Each order passing through the plant is for a specific customer, and has a defined delivery date. Hence the company must manage operations to ensure that production orders are scheduled and executed on time, and delivery requirements are consistently met. Some of the other challenges include: Economies of scale versus specialization Low margins Free flow of information Necessity to handle electronic data exchange

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Opportunities
In response to the challenges, global brands are investing heavily in becoming better innovators, focusing more closely on using data and insight to technology driven strategies. The power of digital platforms is creating new opportunities to build brand awareness and converse with consumers well away from the point of sale, but very much part of an integrated communications strategy.

F&B Industrys IT Spend and Budget (dated but useful; figures may change
due to the current economic conditions but does provide some insight) Inside companies Average portion of revenue spent on IT - 2% Portion of IT organizations that sell services or IT products to other companies - 24% Portion of companies that say wireless E-commerce will contribute to Ebusiness revenue stream - 59% Senior IT executive is a member of executive management committee - 59% Average portion of customers included in electronic supply chain - 50% How companies divide their IT budgets New product and technology purchases - 20% IT consulting and outsourcing - 11% Research and development - 4% Salaries and benefits - 33% Applications - 20% Everything else - 12% How often companies re-examine their IT spending plans Daily - Weekly - Monthly - 47% Quarterly - 18% Twice a year - 12% Annually - 23% Source: InformationWeek Research

References
Gartner report on IT Key Metrics Data 2009: Key Industry Measures: Food and Beverage Processing Analysis: Current Year http://www.gartner.com/DisplayDocument? ref=g_search&id=833751&subref=simplesearch http://www.gartner.com/DisplayDocument? ref=g_search&id=833749&subref=simplesearch Top global F&B companies: Strategies for success; $3,850 http://www.packagedfacts.com/Global-Brands-re-1780987/ Archived report on F&B companies in a Nutshell

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http://www.informationweek.com/news/showArticle.jhtml?articleID=6503411

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