As more and more consumers eat at home rather than eat outside during this recession, they are shopping for inexpensive and healthy meals. People are coming home to cook meals and as a result food categories such as pasta sauces are doing well in this economy. This is consistent with what I wrote last month – Consumers are going B2B: Back to Basics! Consumers go B2B: Back to Basics!
Heinz, a leading food manufacturer announced today that net income has risen by 11% despite the weak economy. I think consumers shall continue to look for savings and they shall cut down on luxury products and discretionary products, while they might increase spending on staples. Although some households have turned to their pantries and basements to consume what was already purchased, they cannot rely on that for long, as they do need to go out and replenish their stocks. The same logic holds for some retailers who are relying on their inventory for the short-term, however after a while these retailers need to replenish stocks as well.
Another reason why some food categories may be doing well is due to the increases in commodity costs that have led to higher prices to the consumer. While commodity prices are highly volatile and there are many ups and downs, the price of food is not reduced each time commodity costs fall.
The raw materials for Consumer Products companies that are commodities such as sugar, cocoa, fats, oils etc. often constitute a significant part of the cost of goods. Commodity prices fluctuate due to economic forces as well as due to changes in climate as well as due to political influences in supplying countries that are geographically widespread. When commodity prices fluctuate, this causes a tremendous challenge to maintain the health and profitability of the Consumer Products company. It cannot pass on the price hikes immediately, and it needs to manage its positions carefully and mitigate the risks before the losses become unbearable. Besides there is a compliance requirement that mandates that all financial assets and liabilities are recognized on the balance sheet. When there are fluctuations in the valuations, these need to be reflected quickly and accurately.
A lot of the financial trading as well as a lot of the physical delivery of goods as a result of the trades, is currently managed in a manual and disparate way. This requires many FTEs and the process is slow and error-prone. The reconciliation of transactions takes very long when things are done in silos. Many companies are at risk due to lack of speed and transparency in the whole process, and they don’t even know this until it is quite late to react.
Leading companies are streamlining their Commodity Management processes by streamlining and integrating the trading and logistics business processes. By having one robust platform companies can manage their procurement centrally, manage the logistics of the trades centrally as well as manage the risks centrally, taking advantage of economies of scale. They can cut the cycle times for the reconciliations; improve visibility across the organization, mitigate the risks and manage the compliance requirements in an effective and efficient way.