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Most of us will have taken pleasure and delight in consuming about as much chocolate as one grown individual could muster over this gloriously sunny Easter holiday, but how much is chocolate worth to you? What are you willing to pay for this pleasure and for some daily necessity?
I don’t know what you found, but my clutch of Easter Eggs cost exactly the same at the check out as they did last year. Surprising I thought as I happily handed over the cash, as the news has been full of chocolate or more precisely its derivative cocoa.
Cocoa crops have been hit by bad weather, beetles and increasing world consumption over the last few years and this year, serious political unrest in the Ivory Coast and a ban of cocoa export resulted in a further cocoa price hike. Cocoa producing regions plus other raw commodity generating areas are often in socio and politically unstable areas and this year problems in Africa and the Middle East acts as siren that raw material prices are exceptionally vulnerable long term.
Expensive cocoa eats into manufacturers margins as does commodity increases in sugar, milk, nuts, packaging and oil all common ingredients in our every day delight, so a natural conclusion would be that we the consumer will foot the bill.
In this climate though retailers are generally pushing price increases back so you find some manufacturers are changing how they use cocoa in recipes using less cocoa butter and more cocoa compound as it is cheaper, some will absorb the price into the supply chain, but how long can this be sustainable before the product is no longer recognisable or the manufacturer collapses?
What else can we do to offset the climate of commodity increases? What core skill sets can the Interim community offer our manufacturers to: hedge price fluctuations, preserve margin or gain price increases with retailers.
Is now the time to draw a line in the sand with the retailers and secure price increases that are a fair reflection of what is now the true cost of producing our beloved chocolate?
Let me know your thoughts.
Jo Sands Head of Food & Drink, Interim Partners
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May 6th, 2011 at 3:05 pm
Jo
This is an eggscellent debate point. Commodities rising is not going to stop.
Great blog and very relevant.
Ian
May 6th, 2011 at 4:38 pm
Jo
This a humorous but serious example of an issue that has been prevalent within the food industry for some considerable time.
I have recently worked in both Dairy & Bakery categories (in an interim and perm. capacity) ,which were both very vulnerable to raw material and heat/light/fuel cost rises and saw both ‘best practice’ and ’suicidal tendencies’ in play.
There are no quick fixes but it is most important to confront ,rather than ignore, these issues when composing suatainable business plans with major retailers and having an agreed mechanism in place to reflect any true cost increase, outside of the manufacturers direct control.
This is not a license to be complacent though, when sourcing viable alternative solutions (or providers)
Rodger
May 6th, 2011 at 5:18 pm
Jo,
The best answer to the question “what else can we do to offset the climate of commodity increases”, especially when talking about cocoa – we should be doing more to help the producers. Treat the issue at source – this is something that the Interim community can do. How many of us have the courage or opportunity to go where we can really make a difference ?
Ian
May 6th, 2011 at 5:21 pm
Great point. Inflation is with us – fact. The industry can’t absorb it ongoing as it simply isn’t sustainable or viable. We should however never use inflation recovery as an excuse for not relentlessly pursuing efficiency improvement or cost reduction.
May 6th, 2011 at 5:31 pm
Hi Jo I am eggstatic reading your new blog!!!
Having worked in fair trade with Cafe Direct and also in FMCG with multinationals and SMEs the power of the retailers can be awesome in these circumstances. However the ultimate power lies with the consumer and it is through generation of consumer understanding that the constraint on the supplier can be alleviated as it is they, the consumer, who are able to put pressure on the retailers.
Whilst the consumer must be protected in these times of hardship, so too must suppliers. There is a joint role to be played by suppliers, consumer associations and trade associations who all have a role to play to protect the supply chain.
Otherwise the Humpty Dumpty suppliers of commodities will fall off the wall and there will be no kings army and no kings men to put the commodities on the shelves again.
May 6th, 2011 at 5:46 pm
May 6th 2011 at 18.05
Having worked for 10 years as a senior buyer for a top three retailer, and 19 years as a supplier to all major retailers, I have seen both sides of the fence.
As a cocky young kid of a buyer, I purchased a Yorkshire retailers first ever pack of own label cherry bakewells in 1986. It was a 5 pack,repaet a 5 pack, and we paid 43.5p, retailing at the competitive price of 64p.I have a good memory. The brand, exceedingly good cakes, sold at 74p. The seller was none other than Brett Warburton.
In the late 90s, ANO retailer had an infamous internet auction for a 6PACK of cherry bakewells, and we were the incumbent supplier at invoice 59p ish, retail 74p. Within seconds of the screen going live, a bid came in of 45p, and to save us spending any more money on electricity, we turned the screen off. Only recently, with all the severe commodity increases, have invoice prices recovered past that late 90s point, but the brand merrily sails on at retails of £1.40 plus. Well done the brand, but even it is now hooked on a permanent high low strategy, with about 70% of volume being deal driven.
The bidder who won the auction no longer exists. My old company, the then incumbent, is still in business.
Within this period, own label bakery has declined in profitability, there have been numerous casualties, venture capitalists abound and maybe regret it, and its hard work. Although Every Little Helps, relationship between supplier and customer is very important, with that one internet auction destroying about 10 years of inflation and a few thousand jobs.
I am all for product value engineering, reduced packaging, improved supply chain, 2 fer deals, 3 fer deals (see Cadbury Creme eggs and M&S retail eggs as prime examples), up front volume commitment, wider terms deals, improved manufacturing efficiencies, NPD as a tool to recover cost increases by avoiding direct comparisons etc etc, but there does come a point where passing on cost increases that are commodity driven is essential.If retailers choose to sell pound notes for 50p that must be their perogative,but long term subsidisation of such activity will end in tears.
Recent commodity price increases have been severe, with sugar contracts being ripped up, dairy at all time highs, dried fruit doubling in two years, cardboard prices jumping etc, all at a time of moderate recession.
Have active workstraems on all the above initiatives, buy as hard as you can for your business, rationalise supply base where possible,but lose sight of selling margins at your peril.
A few years ago I remember a buyer insisting that a valentines treat product, aimed at females, must retail at £1.99. I offered him four pound coints and told him to treat himself as well. He understood the irony, we are still good friends, we struck a deal, he is still in a job, and they still make about £900m a year.
There is always next Easter.
Take care
May 6th, 2011 at 5:49 pm
Well, my expertise is in Supply Chain, but I know from the time I’ve spent working with an FMCG sales force that it’s a happy day when you get price increases out of the customer without seriously affecting volume – I don’t think it makes a difference whether we’re talking chocolate, cereals or beer. The interim who pulls this off is certainly worth her daily rate.
In terms of input costs, hedging has its benefits and I think will always be part of a sophisticated procurement policy, but this really only reduces fluctuations – it’s not going to suppress costs permanently – though, again, an interim who could achieve that for a client would be forever in demand, but I suspect if they’re that good, they’ve already joined Glencore.
So, increasing input prices, capped selling prices, it doesn’t make for a comfortable story. What’s left?
It has to be about innovation and change – either opening up new premium priced offerings or changing how things are done to keep the quality, but lower the costs. And this is where I think a good interim manager who knows how things work, can really add value: the effective implementation of this NPD project or that brand re-launch; the seamless integration of this acquisition or the clean disposal of that divestment; the rigorous evaluation of the business case – accelerating value-added investment and stopping bad investment; rationalisation and tail management; driving Product Value Engineering; or going for that outsourcing project; or even (and there’s certainly hidden value in this) making sure you properly retender the contract that’s up for renewal rather than letting it roll on way beyond the contract date … and this is just for starters…
In fact, on the pretext of any of the above (and plenty of others not mentioned) there’s also the fact that an interim is embedded in the organisation and has an opportunity to really get under the skin of what’s happening – to bring a fresh pair of eyes and challenge the status quo.
Great topic, Jo. Look forward to seeing other views.
Jonathan
May 7th, 2011 at 6:48 am
Joe
A good example of a problem that has been around for some time.
How can an Interim Manger help?
Ensure that there are no cosy relationships between the Purchasing Manager and the existing supply base by using an Open Tender approach.
Review recipes and Engineer Products to ensure the most cost effective recipes are used and that the product matches the market requirement
Finally most products have a life cycle and after a period of time become commoditised, a supplier needs a library of new products, ideally were price points have not become established, to enhance margin.
Interims can have a role to play in all the above.
Peter
May 7th, 2011 at 11:23 am
Jo,
It is an interesting and complex debate that is not just confined to the cocoa industry. However, the way forward is to create and promote brands which focus on quality not quantity. Whilst there will always be a demand for smartprice chocolate at 29p, the industry needs to up its game, promote the joy and benefits of eating good quality product and therefore encourage an appropriate retail.
And interim managers with good brand building and category management skills can help with this process.
Karen
May 8th, 2011 at 2:54 pm
Jo
Good question
In a rising Market , you will find out how good your relationships really are!
Or how fair you were when the Market was the other way
What comes around comes around!
Larry
May 9th, 2011 at 7:01 am
Jo,
We have seen a number of manufacturers responding to pressures on cost by reducing the size of the product. As such, the price to the retailer and consumer remains the same but there is less value for money. Faced with the choice of increaing the price or decreasing the size of the product for the same money, many manufacturers have opted for the latter, working on the (probably correct) assumtion that many people won’t look at the price per g/kg and compare it to what they paid before.
So, your Easter eggs may have cost you the same, but were the eggs as big as before? Of course, if you’ve eaten them already, it’s too late to tell….!!
Great blog,
Andrew
May 9th, 2011 at 8:32 am
Hi Jo,
This issue is a constant challenge for the Food companies I am currently working with. For the those that manufacture Branded goods it is essential that quality is not compromised when being challenged by ‘value’ alternatives. Communication with the consumer is key as well as a need to resist short term changes to product formulation as an alternative to protecting margins.
May 9th, 2011 at 9:35 am
Jo,
Nice angle on a common problem.
A few steps to take, some of which have been touched upon.
1. Rigorous cost reduction/efficiency throughout the supply chain – share the pain.
2. Re-engineer products but without compromising product quality – no knee-jerk reactions here.
3. Rapid product development to introduce new product or reposition existing products to add value/margin. Reducing weight whilst maintaining price is a good example.
4. Develop strategic buying partnerships for particular commodities.
Mike
May 9th, 2011 at 11:23 am
Hi Jo
Very salient and timely. I was recently listening a radio 4 programme focusing on the Fair trade element of this and the apparent move by the primary supermarkets to move towards this mutually beneficial arrangement. This I believe to be the key in a sustainable and balanced market place. During the same programme one of the premium traders had a minor gripe about the potential for cocoa to become a monoculture as more and more retailers are specifying the same 2/3 varieties (can’t remember the name).The trader concerned was advocating the move towards luxury brands i.e. 10 times the cost of market standard making for a potentially interesting market segmentisation and a possible way out for those farmers being squeezed. In conclusion the current soft commodity inflation reminds me a great deal of the volatility that existed in 2007/8. If the western consumer world moves into a double dip this would have a major rebalancing effect on these markets. I would hold a wait & see position.
Sean
May 10th, 2011 at 8:12 am
Interesting topic Jo and an issue that has been the bane of many raw material buyers over the last 12 months – an unexpected explosion in commodity prices against a backdrop of economic stagflation with Sales Marketing extremely reluctant to push for price increases to dominant retail buyers or other sectors such as automotive. Back-to-back contracts and indexation are some of the tools an Interim manager can use to protect his client’s position, but these of course work both ways. Running the commodity category as a true portfolio is the best way to manage over the cycle, using a range of appropriate measures to smooth the peaks and troughs and give the client more control over its destiny.
You’re timing could not be better – within a few days the market has taken a dive, although I suspect this has more to do with the imminent Glencore flotation that this blog!By the way, cocoa bucked the trend last year – whilst the bets on most others was on rising prices as measured by the call/put ratio, cocoa was the reverse, but this was only temporary. Martin
May 10th, 2011 at 8:26 am
Jo
Innovation is one of the ways to margin enhancement, in any sector.
A couple of years ago I was waiting for a ferry in Holyhead and went into a local fish and chip shop. On the menu board directly beneath “Deep Fat Fried Mars Bar”, was a NEW sticker with, “Deep Fat Fried Snicker Bar” at 20p increase. According to the owner he was doing a roaring Trade!!
May 10th, 2011 at 2:01 pm
Jo
Very thought provoking. As usual, no easy answer, however, these challenges have been around since year “dot”. And through finding a better way, collaboration and hard work, the these challenges do often turn themselves into opportunities
Graham
May 13th, 2011 at 7:16 am
Jo.
An interesting point which will have an effect, when is the question?
There is also the World shortage of grain and some other base commodities.
The issues for Interims is helping prepare our cleints for what could be a return to holding mass amounts of stock, forward buying and as someone above points out how can we help at the ‘Source’, where the problems are actually happening, so technical support and maybe risk managment.
Tony.
May 16th, 2011 at 11:19 am
Jo,
Congratulations again on the new blog – I’m sure it will be brimming with comments soon ! As discussed before, commodity prices are at the mercy of the market. Within Engineeering/Operations, we can look at receipes but ultimatley you can only go so far with ingredient changes -if you DO go too far, the product changes could have potentially significant effects on sales etc. i.e. the product is no longer what it was ! Finally, in Ops we can also focus on keeping waste levels very low to achieve maximum raw material productivity. It is really down to our Procurement colleagues to come up with innovative ways to save on/or stabilise commodity costs within a fluid market -not easy I fully accept !!!. As you say, inevitably price increases will be passed onto the consumer or the consumer will get smaller amounts of products but pay prices for original larger ones. It is certainly a dilemma and not going to go away…..
May 17th, 2011 at 11:00 am
Jo,
Very topical and a nice way of framing the problem. Easter Eggs are an emotional thing – with a value to the consumer well beyond the cost of the chocolate itself. Innovation and brand building are key here – putting that engaging ‘mystery’ back in where value has been engineered out before – and so rebuilding margins to absorb much of the near term cost volatility. Same species of problem as faced by Thorntons today. Change of focus needed – ideal roles for interims!
Thanks
Chris
May 17th, 2011 at 7:28 pm
Hi Jo,
Better late than never I thought….
Agree about Innovation (Peter / 16), although I doubt Deep Fried Creme Eggs this side of the border will catch on? NPD is always an opportunity to maintain cash margin.
The Mars Bar has definitely got smaller since our childhood (Ronan / 19) – think this approach alienates the consumer ‘though.
I have used strategic buying partnerships, leveraging scale, previously with much success (Mike / 13, point 4).
With Thorntons having profit warnings recently, and The Chocolate Society and Browne’s Chocolates both in sever financial difficulty, is a combination of the weather and the economy affecting our tastebuds, because sales are down across the board in chocolate.
As an interim that has done work with confectionery suppliers, there are always ways to add value and profit-improve, be it improving labour utilisation, reducing waste, or good old fashioned communication to ensure everyone is facing the same way…
Great blog Jo,
Mark