This is the first installment in a two-part series on major changes taking place in the US foodservice industry. In this installment we look at some of the key challenges, stemming from current industry practices, that impede optimal performance by manufacturers, distributors and operators in the sector. The second installment will examine converging technologies that are poised to challenge the industry status quo, and present an opportunity to benefit through improved sales and marketing analytics for those who are prepared.
The foodservice industry, comprised of the food prepared away from home (FAFH) sector of the food & beverage market, accounts for about 46% of all consumer dollars spent on food and beverage products in the US. Over the past twenty years this business has changed considerably as American lifestyle habits, choices and spending propensities have evolved with regard to food and beverage consumption. Yet manufacturers, distributors and operators in the foodservice industry have in many ways been slow to adapt their sales and marketing practices to better serve the evolving preferences of the end consumer. As a result there are considerable inefficiencies up and down the value chain resulting in suboptimal performance for all parties. Trade spend management, campaign marketing and other critical activities suffer from an absence of data-driven input for decision-making, as well as the inability to effectively monitor and evaluate performance. Relations between trade partners are often characterized by mistrust and a lack of willingness to work together for win-win outcomes.
There are ways for companies throughout the foodservice value chain to dramatically improve existing practices and enjoy enhanced market share and profitability performance. However, it is first necessary to pinpoint where existing practices are falling short, and why.
The Trade Spend Albatross
Any discussion about sales & marketing challenges in foodservice usually does not take long to get to the subject of trade spend. According to the MarketIntelligence 2010 Foodservice Trade Survey, over 75% of foodservice manufacturers are dissatisfied with their trade spend programs and regard them as inefficient. Moreover, fully 85% of the respondents said that they do not employ business intelligence or analytical tools to improve the effectiveness of their trade spend initiatives. Foodservice manufacturers spend an estimated 18% of every sales dollar generated on trade spend, and it is typically the second-largest line item on their income statements, after COGS (cost of goods sold). Yet for all the financial resources they consume, trade spend programs clearly are not delivering the results that manufacturers need or expect. Trade spend is seen as more of an institutional necessity – an “ante” or cost to be in the game for manufacturers and an essential component of net margin for distributors – rather than a variable to be optimized for improved financial performance.
An Absence of Data-driven Insights
A big part of the problem with trade spend is the way in which it is often allocated – primarily through zero-sum negotiations with adversarial distributors rather than through data-driven collaboration for mutual benefit with trade partners. Additionally, large amounts of effort are spent “analyzing” mountains of program claims from trade partners – claims that usually come in multiple data formats and accounting conventions, are riddled with errors and consume enormous amounts of manual resources in resolving. Void/compliance and duplicate claims issues are persistent headaches for trade program managers – and all the time spent resolving these types of problems is time that could be better spent identifying opportunities to grow sales through targeted offers of specific products to specific customers.
The need for effective campaign marketing
Because trade spend programs have become so entrenched with little effort employed to identify and improve their efficiency, the data that could help managers identify and execute more precise marketing campaigns currently lie unutilized. Campaign marketing is an area of vital importance for foodservice manufacturers. Over the past twenty years the industry has seen a vast proliferation of products, concepts and venues related to the experience of dining out. In fact, “dining out” itself is an outdated term – as long ago as 1996 McKinsey & Company pegged changes taking place in the foodservice environment by noting that where the food is consumed is less of an issue than where and how it is prepared. These changes have had a direct impact on the demand for specific products and categories in specific venues at specific times – an impact that has flowed upstream from the end consumers themselves to foodservice operators, distributors and manufacturers.
To execute effective campaigns, manufacturers need better insight into the many variables that affect the sales of each of their products – and, moreover, the nuances that affect the same products differently for different customers. The good news is that those insights are available. The data do exist and can give manufacturers a deeper understanding of how to improve the sales of targeted products across precisely-targeted accounts. However, in order to develop this capability and prosper in the new foodservice environment, industry players will need to adapt to the changing paradigm.
Growth prospects for foodservice in the decade ahead are likely to be muted. This new environment will require trade partners to adopt practices that improve their visibility to downstream demand, and when possible find ways to collaborate with each other for win-win outcomes. The common theme among these practices will be the improved use, management and analysis of data for informed decision making.