Food and beverage industry 5 top business concerns and solutions January 2019
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Food and beverage industry5 top business concerns and solutions
January 2019
Authors
Katie EngleAssistant Vice President
Account Executive617.880.1524
Charlie GoraSenior Vice President
Food & Beverage Practice Leader312.669.6934
The food and beverage marketplace is quickly changing to meet consumer demands and comply with government regulations. The main objective for most food and beverage companies is to grow, but with that growth comes a complex framework of supply chain, product line, acquisition integration and global compliance issues to navigate. In a highly competitive space, how should food and beverage companies prioritize their efforts to reduce risk and capture market share?
To provide insight, the Lockton National Food and Beverage Practice Group conducted a survey of our clients in the industry. The questions focused on ranking emerging risks, categorizing corporate goals and identifying obstacles that would adversely impact those goals, assessing contingency plans and identifying top business concerns.
70% of survey respondents noted that demand
for healthier foods is the most impactful
emerging risk to their businesses.
2
Food & Beverage Industry: 5 top business concerns and solutions The food and beverage marketplace is quickly changing to meet consumer demands and comply with government regulations. The top business initiative for food and beverage companies is to grow, but with that growth comes a complex framework of supply chain, product line, acquisition integration, and global compliance issues to navigate. In a highly competitive space, where should food and beverage companies prioritize their efforts to reduce risk and capture market share? To provide insight, the Lockton National Food & Beverage Practice Group conducted a survey of our clients in the industry. The questions focused on ranking emerging risks, categorizing corporate goals, and identifying obstacles that would adversely impact those goals, assessing contingency plans, and identifying top business concerns. Emerging risks (This first sentence is a callout) 70% of survey respondents noted that demand for healthier foods is the most impactful emerging risk to their business. To meet consumer demand, food companies are addressing issues such as providing healthier products, transparency in labeling, secure verification of supply chain tracking from farm to table, and corporate, social, and environmental responsibility. Macro-economic factors such as trade policy and tariffs are influencing supply and demand equilibriums and impacting commodity pricing. Climate trends are leading to an increased number of severe weather events and unusual weather cycles which pose additional difficulties. Social media proves that reputation and brand image are intangible assets that can be destroyed overnight. Cyber incidents are a daily occurrence ranging from the loss of protected information to ransomware and operational infrastructure hacks which impact operations. In addition, regulatory issues abound for food companies, at the global, federal, and state levels.
0%
10%
20%
30%
40%
50%
60%
70%
80%
Demand forhealthier foods
Evolvingconsumer
expectations(technology:retail and riskdistribution)
Food SafetyModernization
Act (FSMA)
Network security- cyber attack,
businessinterruption
Minimum wageincreases
Franchiserelationships
GMO awareness Autonomousvehicles
(delivery)
Sugar law andtaxes (UK,California)
Multiplejobholder
employees/thegig economy
Truth inadvertising
Most Impactful Emerging Risks
Emerging risks
To meet consumer demand, food companies are addressing issues such as providing healthier products, transparency in labeling, secure verification of supply chain tracking from farm to table, and corporate, social, and environmental responsibility.
� Macro-economic factors such as trade policy and tariffs are influencing supply and demand equilibriums and impacting commodity pricing.
� Climate trends are leading to an increased number of severe weather events and unusual weather cycles which pose additional difficulties.
� Social media proves that reputation and brand image are intangible assets that can be destroyed overnight.
� Cyber incidents are daily occurrences ranging from the loss of protected information to ransomware and operational infrastructure hacks which impact operations.
� Regulatory issues abound for food companies at the global, federal and state levels.
MOST IMPACTFUL EMERGING RISKS
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Corporate initiatives 60% of survey respondents noted “growth” as their top corporate initiative. The second most pressing corporate initiative was “cost reduction” (40% of respondents). Resources and time were noted as the top two greatest obstacles to achieving corporate goals, surpassing capital constraints, lack of cross-company collaboration and specific expertise.
Business concerns
0%
20%
40%
60%
80%
Top Initiative Second Initiative
Top Corporate InitiativesGrowth (new products, new geographies, mergers &acquisitions, etc.)Cost reduction
Effective deployment of capital (CapEx, increasedividends, etc.)Protection of the balance sheet (increase liquidity,reduce leverage, etc.)Management of human capital (succession planning,improving recruitment/retention, etc.)
0%
10%
20%
30%
40%
50%
Greatest Obstacle Second Obstacle
Greatest Obstacles to Achieving Corporate Initiatives
Capital constraints
Lack of cross-company collaboration
Resources
Specific expertise
Time
Top initiative Second initiative
GREATEST OBSTACLES TO ACHIEVING CORPORATE INITIATIVES
Corporate initiatives 60% of survey respondents noted “growth” as their top corporate initiative. The second most pressing corporate initiative was “cost reduction” (40% of respondents). Resources and time were noted as the top two greatest obstacles to achieving corporate goals, surpassing capital constraints, lack of cross-company collaboration and specific expertise.
Business concerns
0%
20%
40%
60%
80%
Top Initiative Second Initiative
Top Corporate InitiativesGrowth (new products, new geographies, mergers &acquisitions, etc.)Cost reduction
Effective deployment of capital (CapEx, increasedividends, etc.)Protection of the balance sheet (increase liquidity,reduce leverage, etc.)Management of human capital (succession planning,improving recruitment/retention, etc.)
0%
10%
20%
30%
40%
50%
Greatest Obstacle Second Obstacle
Greatest Obstacles to Achieving Corporate Initiatives
Capital constraints
Lack of cross-company collaboration
Resources
Specific expertise
Time
Greatest obstacle Second obstacle
Growth (new products, new geographies, mergers and acquisitions, etc.)
Cost reduction
Effective deployment of capital (CapEx, increase dividends, etc.)
Protection of the balance sheet (increase liquidity, reduce leverage, etc.)
Management of human capital (succession planning, improving recruitment/retention, etc.)
Capital constraints
Lack of cross-company collaboration
Resources
Specific expertise
Time
Corporate initiatives
Sixty percent of survey respondents noted “growth” as their top corporate initiative. The second most pressing corporate initiative was “cost reduction.” Resources and time were noted as the top two greatest obstacles to achieving corporate goals, followed by capital constraints, lack of cross-company collaboration and specific expertise.
TOP CORPORATE INITIATIVES
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Depending on your business concerns, a variety of risk mitigation techniques exist. Here’s how to begin addressing your risks:
COMMODITY PRICE RISK: Not surprisingly, commodities represent the single largest income statement expense and source of risk and volatility for
respondents. Various risk management strategies exist based on the operations of the company and the company’s place in the food supply chain.
� For agricultural-input companies, forms of subsidized federal crop insurance is available to account for yield and revenue fluctuations.
� Other products such as shortfall coverage are open to intermediary producers with exposure to adverse yields by growers.
� The weather markets continue to expand, providing weather-derivative instruments based on parametric triggers such as excessive drought, rain, heat stress or frost.
� Most respondents use sophisticated hedging strategies, and these insurance products can seek to complement these tactics.
Business concerns
Commodity price risk
Business continuity planning
Disruption or supply chain
failure
Product contamination and/or recall
Reputation and brand damage
OUR SURVEY REVEALED FIVE TOP BUSINESS CONCERNS:
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WHEN WAS THE LAST TIME YOUR ORGANIZATION REHEARSED A CONTINGENCY PLAN TO HELP PREPARE FOR A CRISIS?
contingency protocols that serve to mitigate loss on a frequency of annually or greater.
Disruption or Supply Chain Failure –While supply chain represents a major threat to respondents (65% as vulnerable or very vulnerable), there is a lack of internal coordination among risk management and supply chain management (operations) departments (26% collaborate annually or less) and quality assurance teams (31% collaborate annually or less). Respondents indicate an opportunity to better manage the supply chain process, with roughly 35% indicating they manage ‘well to very well’.
5%
30%20%5%
15%
5%
10%40%
25%
50%
40%10%
5%
5%
5%
40%
25%
40%
25%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Brand/Reputational event (socialmedia, news)
Network security (breach,hacking, data loss)
Property/Catastrophe Product recall/Contaminationevent
When was the last time your organization rehearsed a contingency plan to help prepare for a crisis?
Quarterly Every 6 months Annually Every 5 years Never
53%
21%
21%
5%
How often does your risk management organization collaborate with supply chain
management?
Quarterly
Every 6 months
Annually
Never
Brand/reputational event (social media, news)
Network security (breach, hacking, data loss)
Property/catastrophe Product recall/contamination event
contingency protocols that serve to mitigate loss on a frequency of annually or greater.
Disruption or Supply Chain Failure –While supply chain represents a major threat to respondents (65% as vulnerable or very vulnerable), there is a lack of internal coordination among risk management and supply chain management (operations) departments (26% collaborate annually or less) and quality assurance teams (31% collaborate annually or less). Respondents indicate an opportunity to better manage the supply chain process, with roughly 35% indicating they manage ‘well to very well’.
5%
30%20%5%
15%
5%
10%40%
25%
50%
40%10%
5%
5%
5%
40%
25%
40%
25%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Brand/Reputational event (socialmedia, news)
Network security (breach,hacking, data loss)
Property/Catastrophe Product recall/Contaminationevent
When was the last time your organization rehearsed a contingency plan to help prepare for a crisis?
Quarterly Every 6 months Annually Every 5 years Never
53%
21%
21%
5%
How often does your risk management organization collaborate with supply chain
management?
Quarterly
Every 6 months
Annually
Never
BUSINESS CONTINUITY PLANNING: Responses indicate a lack of preparedness in developing and rehearsing contingency planning. Brand damage represents a major
obstacle to achieving corporate initiatives (80 percent identify as fairly or very disruptive), yet only 60 percent of respondents indicate planning and rehearsing of contingency protocols that serve to mitigate loss on a frequency of annually or greater.
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HOW OFTEN DOES YOUR RISK MANAGEMENT ORGANIZATION COLLABORATE WITH SUPPLY CHAIN MANAGEMENT?
53+21+21+5D53%Quarterly
5%Never
21%Annually
21%Every 6 months
DISRUPTION OR SUPPLY CHAIN FAILURE: While supply chain disruption
represents a major threat to respondents, there is a lack of internal coordination among risk management, supply chain management (operations) and quality assurance teams. Respondents indicate an opportunity to manage the supply chain process better, with roughly 35 percent indicating they manage “well to very well.”
As supply chains become more complex and geographically spread, the process of risk assessment and identification is emerging as a corporate imperative. Lockton can assist in this process by offering visual tools to map global supply chains, process flows, indicating locations that are exposed to heightened natural disaster risk such as hurricanes, floods, and earthquakes. Finally, the role of the distributed ledger is evolving, with numerous food companies rolling out blockchain traceability initiatives from farm to table. Product Contamination and/or Recall – Evolving food safety regulations and compliance requirements are impacting food companies. The influence of social media is profound and has contributed to food quality and contamination incidents ‘going viral’. Technology and machine learning are proving to increase the
0%
35%
35%
30%0%
How vulnerable is your organization to supply disruptions?
Not at all vulnerable
Slightly vulnerable
Vulnerable
Fairly vulnerable
Very vulnerable
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10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Contract management Establishingrequirements for
supplier insurance,indemnification and
limits of liability
Operational supplierassessment reviews
Property protection Provider optimizationand redundancy
Supplier financialstability
How well does your organization manage the following supply chain processes?
Poorly/Not at all Needs improvement Average Well Very well
HOW WELL DOES YOUR ORGANIZATION MANAGE THE FOLLOWING SUPPLY CHAIN PROCESSES?
Poorly/not at all Needs improvement Average Well Very well
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Food and beverage industry | January 2019
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15+5+55+25D15%Slightly disruptive
55%Fairly disruptive
5%Disruptive
25%Very disruptive
IF YOUR BRAND IS IMPACTED BY AN ADVERSE EVENT, HOW DISRUPTIVE WILL THAT BE TO ACHIEVING YOUR CORPORATE GOALS?
As supply chains become more complex and geographically dispersed, the process of risk assessment and identification is emerging as a corporate imperative. Lockton can assist in this process by offering visual tools to map global supply chains, process flows, indicating locations that are exposed to heightened natural disaster risks such as hurricanes, floods and earthquakes. Finally, the role of the distributed ledger is evolving, with numerous food companies rolling out blockchain traceability initiatives from farm to table.
PRODUCT CONTAMINATION AND/OR RECALL: Evolving food safety regulations and compliance requirements are impacting food companies. The influence of social media is profound and has contributed to food quality and contamination incidents ‘going viral.’
Technology and machine learning are proving to increase the effectiveness of linking foodborne illness and pathogens to the locations responsible for those outbreaks. Foreign supplier mandates and food transportation aspects of FSMA are being enforced. These issues are contributing to increases in the frequency of recalls, which is in turn driving changes in the product recall insurance marketplace.
REPUTATION AND BRAND DAMAGE: Reputation is the cognitive expectation stakeholders have of organizations. Brand is an emotional construct, a connection to a firm’s products. Reputation is an intangible asset and can comprise as much as 65 percent of the value of
an average company. Improving reputation can add up to 6 percent to enterprise value, while a reputation crisis can shave 7 percent of a firm’s market capitalization.
� 95 PERCENT OF RESPONDENTS have established processes and procedures for carrying out a product recall or brand/reputational event.
� 78 PERCENT OF THOSE RESPONDENTS have communicated those processes to all involved parties.
� ONLY 55 PERCENT OF RESPONDENTS’ COMPANIES purchase product recall or brand/reputation harm insurance.
“Reputation, Stock Price, and You,” Dr. Nir Kossovsky, 2012.
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There are a variety of products available to companies looking to protect their reputations. An assessment of enterprise risk management and corporate governance is the starting point for parametric risk insurance underwriting, which uses quantitative measures to establish and monitor corporate reputation risk/value. Other insurance products exist that can be tailored to specific perils/risks and protect business income. Regardless of the product, the process of assessing, treating and transferring (financing) reputation risk is highly customized.
Lockton helps food and agribusiness clients address the risks they face. We service more than 450 food and beverage clients across the globe ranging from production agriculture to retail foodservice. To see the full survey results, click here. Please contact your local Lockton representative if you have questions about the survey or would like to improve your risk management program.
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The Lockton Food and Beverage Practice is a team of Associates focused on providing clients with unique solutions to headwinds and pressures facing the vast global food supply chain. We support your business through our membership in national, regional and local trade organizations. We are well informed on industry dynamics and forge mutually beneficial client relationships. The breadth and depth of our practice allow us to deliver subject matter expertise on numerous topics and leverage the marketplace to drive meaningful outcomes.
Matthew Klein, CPCU, ARM, ARe, AU, CIC, CRISSenior Vice President
Food and Beverage Team LeaderKansas City Series — Kansas City
James IrvinVice President, Unit Manager Pacific Series — Sacramento
Nicole HolcombVice President, Strategic Leader Mountain West Series — Denver
Katie EngleAssistant Vice President
Account ExecutiveNortheast Series — Boston
Charlie GoraVice President — Senior Vice
PresidentFood and Beverage Practice
LeaderMidwest Series — Chicago
Scott HalpinVice President
Account [email protected]
Caitlin McGrath Product Recall & Contamination
Northeast Series — New [email protected]
Zac Sobba, ARM, CPCUVice President
Account ExecutiveKansas City Series — Kansas City
Matthew HumphriesProduct Recall and Contamination
London [email protected]
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NOTES
Lockton Companies
Food and beverage industry | January 2019
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