The Changing Landscape of the Foodservice Industry – Part 1

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.

It's a new world for FAFH, but the industry remains stuck in unproductive practices

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. Read the rest of this entry »

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Avoiding the “Irrelevant Elegance” Trap: Modeling for Practical Business Outcomes

Quantitative modeling is a creative process. There is as much art to modeling as there is science – choices about what relationships you want to express and how to express them. And just as with anything creative, the authors of quantitative models can take pride in the beauty of their creations. In the words of my colleague Ali Mahani, Sentrana’s senior quantitative modeler, models can be truly elegant – they can be things of beauty. But he adds that they can also be irrelevant – irrelevant to the particular business goals they are intended to serve. That presents a problem for enterprises seeking to elevate the role of quantitative insights in their decision making processes. Data and analytical methods are important tools in the arsenal of a modern enterprise. But decision makers would be wise to heed my colleague Ali’s advice: in using these tools, make sure to avoid the trap of “irrelevant elegance”.

Elegance does not always lead to the best outcomes

Elegance in modeling is expressed in the appearance of simplicity – rendering sprawlingly complex interrelationships in the real word into the clarity of precise mathematical formulae. Simplicity and elegance are all well and good, unless in the quest for this holy grail you wind up dramatically misrepresenting how things actually work in the environment you are trying to model. This can result in not only failing to solve the business problem at hand, but actually making matters worse than status quo ante by facilitating decisions based on incorrect assumptions. We have a real world example of just how much worse this can be in the financial markets debacle of 2008, when the elegant models crafted by the best and brightest quantitative experts Wall Street had to offer proved to be fatally flawed in the assumptions and heuristics they used to express the variables affecting housing prices, interest rates and mortgage payment trends. Perhaps modelers need to live by something like the Hippocratic oath taken by medical doctors: first of all, do no harm. Read the rest of this entry »

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4-Cs Series: Connecting to your Demand Signals in Real Time

In introductory college microeconomics classes students are exposed to the concept of price elasticity – that is, the predicted response of a buyer in terms of quantity demanded when a seller raises or lowers the price of a certain good or service.  In the real world, companies in competitive industries are continually trying to extend insights about elasticity and other behavior-response metrics across thousands of customers and products.  The problem with this is that real-world business problems bear very little resemblance to the theoretical examples contained in Microeconomics 101 textbooks.  First of all, customer behavior is very hard to pin down.  Numerous variables affect every translation.  How can we say with a high degree of confidence that a price change was the main cause of a change in demand?  Why not something else – perhaps an especially strong and persuasive effort by the salesperson to make the sale? Or something completely outside our control, like the weather that day?

a unique processing system

Modern business intelligence systems are rising to meet this challenge by encompassing more explanatory variables into their algorithms.  But even so there is still a problem.  These models are still confined to looking backwards, to past events, to formulate guidance about what to do in the present and future.  Sales & marketing decision makers need to complement their insights from historical data with an approach that can work in the constantly changing environment of their markets in real time.  That approach has to draw on the processing capabilities of a system uniquely suited to the ambiguities and constant flux of dynamic markets: the human brain. Read the rest of this entry »

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4-Cs Series: Customizing Sales & Marketing Guidance with Micromarket Precision

What marketing decisions are most critical for your organization?  Are these priorities predictable or do they fluctuate with day-to-day changes in your market?  Do you have the right data, tools and support systems at hand to make the best decisions on an ongoing basis?  Is your organization wired to optimally deploy these tools to enable different organizational silos with access to  a common view of your demand environment?

Unique challenges require customized solutions

Increasingly, sales & marketing decision makers find themselves in need of highly customized solutions to the problems that are specific to their organizations and their place in the value chain.  Manufacturers of food and beverage products may primarily be concerned with making more productive trade spend decisions, while CPG producers might focus on shoring up brand equity for premium products facing competition from substitute offerings.  Wholesalers may prioritize increasing the value of each transaction basket by inducing customers to purchase products from them that they currently purchase from competitors.  And retailers might want to better understand how their promotional campaigns resonate with target customers and what they can do to earn a better return for each campaign dollar. Read the rest of this entry »

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4-Cs Series: Pricing and the Coordination Challenge

In large organizations pricing is everybody’s problem, but everybody looks at the problem in a different way.  Salespeople earn a livelihood by offering their customers prices that result in completed sales.  Account managers have to keep track of tens of thousands of price rules governing products, brands and customers.  Bean counters in the finance department are concerned about the relationship between prices and costs.  C-suite executives are motivated by how price contributes to the market share, revenue growth and profitability numbers they have to report to their shareholders every quarter.  And somewhere in the organization somebody is clamoring for a “just this once!” exception to some pricing policy in order to achieve an immediately pressing milestone.

These are all valid concerns.  The problem is that the decision makers are sitting in different parts of the organization, their objectives are often in  conflict with each other (or at the very least require trade-offs and compromises), and they are not armed with sufficient information to understand the broader impact of each price decision on firmwide performance. Read the rest of this entry »

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4-Cs Series: Complexity and Campaign Marketing (it’s harder than a Rubik’s Cube)

Veteran marketing managers can tell war stories of battles fought to secure marketing budgets – the pitches and cajoling to focus C-suite attention on the strategic and the tactical importance of effective marketing campaigns.  Getting something close to the budget you want may be just cause for heaving a big sigh of relief, but these days few marketing managers will be found clinking glasses of Veuve Clicquot in celebration.  Once the budget is in hand the real work begins.  The economic downturn has put constraints on the total number of dollars you have to spread among competing projects, but it has done nothing to constrain the nearly limitless ways those dollars can be allocated.   “Do more with less” is the mantra of the day.  To make those scarcer dollars go further means relying on more than traditional finger-in-the-wind gut instincts to tell you what campaigns will work and what campaigns won’t work.  Campaign marketing – the art of pulling together targeted messages for specific geographic markets, consumer segments and product types – is in need of a healthy dose of scientific rigor. Read the rest of this entry »

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Density, Sparsity and the 4-Cs

Solving the micromarketing challenges of the Information Age

We live in the Age of Information, so we are told.  Never before has so much raw data existed bearing testament to every  pulsebeat of human commerce, every touchpoint between a customer and a good or service.  The problem for decision-makers, according to the conventional wisdom, is Information Overload – volumes more data to analyze than the human brain can easily digest.  But it is not that simple – there are deeper challenges below the surface.

Information is not always where you need it

While the conventional wisdom is right in the aggregate, the lush and dense information rainforest starts to turn remarkably arid and sparse as you drill down into the nuanced segments of your demand environment.  At the micromarket level, infrequent transactional activity in the long tail of customers and SKUs yields little insight to inform decision making.  Managers thus face challenges that go well beyond the simplistic construct of TMI (too much information).  They need tools for managing the real information problems in their micromarkets.  These tools need to address head-on the challenges posed by what we call the 4-Cs: Read the rest of this entry »

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Crunch the Numbers that Really Matter (hint:they’re the ones that relate to downstream demand)

A New Approach to Trade Spend for Foodservice Manufacturers

There is no shortage of quantitative analysis in the trade spend practices of foodservice manufacturers.  Unfortunately, very little of this analysis helps give decision-makers insights about the effectiveness of their trade spend programs.  The numbers being crunched do not relate to signals about actual downstream demand, but rather to the formidable mountain of claims from their distributors.  These claims come in all manner of data formats and accounting entries and it typically takes armies of brokers, salespeople and financial staff to figure them out.  After all the cumbersome and error-prone line-by-line calculations to validate claims are said and done, you are no more informed about the profitability or the potential risks associated with any given program.  No wonder there is widespread dissatisfaction with the effectiveness of these programs.  Over 75% of manufacturers in this sector consider their trade spend initiatives to be inefficient, according to the 2010 MarketIntelligence Foodservice Trade Survey. Read the rest of this entry »

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Brand Loyalty: The Uphill (but Winnable) Battle for Heartshare

The other day I conducted a little thought exercise, and it brought me back to a question that often comes up in my line of work: the fleetingness of brand loyalty in the age of marketing message saturation and the daunting challenge for brand managers and other decision-makers whose livelihoods depend on the existence of such loyalty among their customers.  Happily for those who walk the brand beat, there is a ray of hope in this otherwise cautionary tale.

Olay, Nivea, Neutrogena and L’Oreal are all established beauty products brands with a broad array of medium-priced product lines and multiple product offerings in each.  More to the point, for purposes of this thought exercise of mine, is that each of them offers a range of good quality facial cleansers, a product I buy on average about once every two months.  The exercise was to determine what, if any, brand loyalty existed in my facial cleanser purchases over the last 2 years.  The answer appeared to be: none.  Nada.  At some point over those past 24 months and (give or take) 12 purchases, my domestic shelf space has been occupied by at least one representative facial cleanser SKU from each of those brands.  I wondered why this was the case.  And then I remembered that it was not always thus.  Long ago (more years than I care to disclose) there was a rather splendid product by Neutrogena called the Facial Cleansing Bar. Read the rest of this entry »

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Physics Envy: Pervasive, But Not Incurable

Everywhere you look, it seems, people are talking about “physics envy”.  This derisive term mocks the attempt of economists and other social sciences practitioners to imbue their disciplines with the equations and mathematical rigor of physics – a rigor that many believe fails when applied to the messy environments of disciplines like sociology or economics.  It’s not a new term – economist Philip Mirowski contributed to the Finnish Economic Papers series way back in 1992 with a piece entitled “Do Economists Suffer from Physics Envy?”

kinetic energy, not supply & demand

Eighteen years later the answer from many observation posts along the byways of public discourse appears to be: yes, they most certainly do, and so do their fellow travelers, business and financial markets experts.  After all, we just barely survived the most devastating economic event of our times, deeper and more far-reaching than any downturn since the Great Depression, and all the high priests of the field can do is shake their heads and say “wow, I sure didn’t see that coming.”  Distrust of fancy math is rampant in all walks of business life.  That presents a real problem for enterprise decision-makers at a time when they need smart quantitative tools – yes, fancy math and all – more than ever.  Markets are more complex than at any time in human history.  Giant waves of transactional data inundate marketing managers with new information every day.  Managers need science to help them gain valuable insights into the markets for their products and services – but how do they know that the growing number and variety of scientific marketing tools out there aren’t infected with the nasty symptoms of physics envy? Read the rest of this entry »

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