Supply issues top CPG company leaders’ concerns, study finds

Dive Brief:

  • Supply chain disruptions have become the top concern for most food, beverage and dietary supplement leaders, with 58% ranking it as their biggest challenge, according to a survey done in June by TraceGains. More than six out of 10 business leaders said they have changed at least six product recipes or formulations in the last two years, with 37% having to modify 20 or more.
  • Nine out of 10 leaders said they’ve paid more for ingredients and materials in the last two years, and 65% have increased their prices. But 49% have halted production of specific items, with nearly as many saying they are unable to meet consumer demand.
  • Product shortages and price increases have dominated business outlooks and earnings calls for the last six months as CPGs look to balance sales and profits during an uncertain economic period.

Dive Insight:

No studies are needed to show that many CPG leaders are worried about supply chain issues, but this new report from TraceGains shows just how deep these issues are cutting into corporate operations.

According to the study — conducted last month through a survey of more than 300 business professionals at U.S.-based companies with annual sales of more than $500 million — the perpetual concern of quickly changing consumer preferences is now at the bottom of the list of things that leaders worry about. After supply chain issues, the survey found, leaders said their top concerns are labor costs, uncertainty and difficulty planning and forecasting and materials costs — and then consumer preferences.

Almost 70% of CPG business leaders surveyed said they plan to increase their supplier diversity in the next two years as a long-term way to deal with uncertainty. Leaders in other manufacturing sectors have been feeling the same way. According to the 2021 BDO Manufacturing CFO Outlook Survey, half of middle-market manufacturers planned to identify alternative or backup suppliers last year. 

But adding different suppliers to a manufacturer’s mix could force slight reformulations on products — though this survey shows taking that action has become a commonly used tool to blunt the impact of inflation. While reformulating products to make them more nutritious or more sustainable gets the bulk of the attention in the food business, these types of reformulations go under the radar. 

Changing only slight features of the product — different varieties of grains, shifting the amount of ingredients used, or completely doing away with certain ingredients — does not always require dramatic changes to product labels. It also may not significantly alter the taste, texture and appearance of the finished product.

This kind of supply uncertainty also creates opportunities tailor-made for today’s big ingredients companies. Earlier this year, Ingredion CEO Jim Zallie said in an interview that the current situation leads manufacturers to enter into supply agreements more quickly. 

The larger players in the ingredients space — including Ingredion, Kerry and International Flavors & Fragrances — have been active in M&A during the last few years. The added scale increases the likelihood that they can be a “one-stop shop” for a manufacturer. Food and beverage makers also are more willing to partner with the formulation teams at ingredients companies for quick innovation, creating a tighter relationship between the companies. Zallie described this as “a win for them, a win for us.”

These kinds of arrangements are especially important because the TraceGains survey showed innovation is not necessarily slowing down right now.

While 35% of respondents said their innovation had slowed during the pandemic, 36% said their efforts had accelerated. This could be a smart business move right now. As consumers are being more careful with their money, they’re showing they are less loyal to specific brands and products. But a new twist on a beloved brand could reinvigorate interest and make a consumer feel like it’s worth paying for, even if the name-brand option is more expensive.