By Talia Soffer, an engagement lead at Clareo
Building resilience amidst market uncertainty
The food industry is no stranger to cost volatility even in more stable economic situations with the average gross profit margins ranging between 20-35%, much lower than the overall market average of around 50%. For restaurants, this number is even lower with a range of 0-15%.
Companies have addressed inflation in a variety of ways, from passing their business costs onto the consumer, to widespread layoffs, to practicing “shrinkflation” – a method of hiding increased costs from consumers by keeping the price tag the same while slightly downsizing product size. These quick cost-cutting measures, while functional for keeping businesses afloat until external circumstances stabilize, are band-aid solutions at best that limit the overall growth potential of the industry while hurting consumers. This recent bout of inflation may be the impetus the industry needs to start building a more resilient market.
How can businesses change their approach when there are unavoidable operational costs related to ingredient sourcing, transportation, and labor? The answer lies in looking at innovative operational methods that have the potential to transform the value chain.
Reduce waste by using it
Upcycling in the food industry is a process that uses the surplus from food production to create new products, providing a highly sustainable solution to food waste. Regrained is one company that offers upcycled ingredients, using the excess nutritious grain created in the beer brewing process to make a variety of food products for both consumers and businesses.
Given the nascency of this sector, some experts question if incorporating upcycled ingredients into their products would bring down costs at this time. While there is certainly a need to scale upcycling operations to further lower costs, launches of food and beverages with upcycled ingredients saw a 122% compound annual growth rate in the five years ending the third quarter of 2021, according to an Innova Market Insights report. The report also noted this figure was higher than for companies using recycled plastic and companies carrying carbon emissions claims – potentially an indicator that companies making shifts in ingredients could see the benefits pay off sooner than expected.
Limit procurement complexities
Sourcing ingredients and supplies for a food business is a time-intensive process, often with a lack of transparency surrounding costs. New technology solutions make it easier to manage these complex processes from a centralized location including communication with distributors and suppliers, cost transparency, and scheduling deliveries. Companies like Food Circle offer a centralized management platform and enable food companies to discover new suppliers. BlueCart offers an end-to-end platform for wholesale distributors specifically, making it easier for their customers to make purchases directly through distributors.
The alternative protein market demonstrates the value in efficient production capabilities. One reason companies have not been able to bring down their costs to be remotely competitive with real meat despite using much less expensive ingredients and resources is because they have not been able to scale production efforts, making it more difficult to be precise in meeting production where demand is located.
Micro-factories, or high-tech solutions that enable flexible manufacturing commitments based on localized demand, may be a solution for budding businesses that have yet to build up the ability to scale operations – or companies that want to reach demand pockets that are too small to justify building large-scale production facilities. For instance, Relocalize uses a combination of automation technology and scaled-down factories to enable production closer to consumer demand and/or distribution centers, giving businesses the opportunity to expand their reach. This solution reduces costs typically associated with transporting goods from production facilities far away from the point of distribution.
Use transportation services only when needed
Freight waste is a major contributor to larger costs, with approximately 20% of freight miles empty. Traditionally, this has been a difficult problem to avoid as many freight services require booking far in advance, leaving no room for disruptions to supply or demand. Companies like Hwy Haul offer on-demand truckload shipping for businesses in order to minimize half-empty trucks transporting goods. The company is also building solutions to optimize temperature and humidity within trucks to minimize food waste, and route optimization to minimize fuel waste.
While adopting new solutions and technologies attempting to address operational efficiencies may not solve the food industry’s cost problem overnight, it’s time for the industry to start shifting its reactive approach to a proactive one that can withstand the market, environmental, and societal fluctuations of the future.
Talia Soffer is an engagement lead at Clareo, a growth strategy and innovation firm based in Chicago.