Consolidation intensifies competition

February 29, 2016

Food and beverage processing is the largest manufacturing industry in Canada—larger than automotive and aerospace combined. As of 2013 (the most recent numbers available), it represents 16% of manufacturing GDP and contributes $27b toward the national GDP. It supplies Canadians with more than 75% of their processed food and employs almost 250,000 people.

As a growth industry, today’s food and beverage processors benefit from increasing demand for processed food in the US and globally, lower tariffs through bilateral agreements and Canada’s advantage as large agricultural producer. However, industry consolidation, particularly at the retailer level, stagnant pricing, and greater competition from new market entrants and non-traditional industries has many food and beverage processors feeling the pinch.

In 2013, BDO spoke to a number of CEOs of national food and beverage companies to gain a better understanding of both the opportunities and challenges these private, owner-managed businesses were facing. Over the past 6 months, we again spoke to a group of CEOs in this sector to gain their perspectives on how their industry, businesses, and roles had evolved. These are the common themes and insights that emerged from our discussions.

Consolidation and regulations drive a highly competitive landscape

When surveying the competitive landscape, by far the biggest competitive challenge cited by food and beverage processors is retailer consolidation. Consolidation has had a significant impact across the food and beverage processing industry. Between mega mergers of household brand names, and consolidation at the retailer level, smaller food and beverage processing manufacturers are feeling squeezed on all sides. They face higher production costs than their mega competitors, while at the same time being forced
lower prices as emboldened retailers flex their buying muscle.

Some CEOs also cited consolidation within their own industry as a competitive concern that is impacting their business, especially among smaller processing manufacturers that now have to compete with the behemoths of merged conglomerates.

Amid the challenges for food processers, there lies opportunities. Not all mega mergers have reaped the rewards the acquiring company anticipated, leaving the door open for smaller industry players and new entrants to seize market share. When we spoke with CEOs in 2013, they were focused on infrastructure investments and process improvements to protect existing market share and position themselves for the future. These investments may now reap their intended rewards as some food processors seek to acquire assets that can improve their position against the larger conglomerates.

Looking beyond the competition, regulations topped the list of market challenges. From fire and safety, to food safety and traceability, CEOs overwhelmingly feel that current regulations are both burdensome and costly. Their companies need to employ increasing numbers of food safety engineers and conduct more audits to meet compliance obligations. Foreign exchange also has food and beverage processors worried, especially given the volatility of the Canadian dollar at present. A low loonie doesn’t necessarily improve export revenues. At the same time, many have to finance equipment purchases in US dollars, which may hinder growth objectives. (For more information on how the state of the Canadian dollar is affecting owner-managed businesses, see BDO’s report: Getting the most from every dollar: What owner-managed businesses need to know about the exchange rate.)

“Consolidation of retailers, pressures on dairy, no price increases in seven years and a cutthroat environment among suppliers—this is the most extreme that I’ve seen in the past 15 years.”

Discerning customers follow food trends

Changing consumer tastes continue to present both challenges and opportunities for food and beverage processors. Health-conscious consumers are following food trends that have them avoiding certain foods such as dairy and gluten and demanding more organic and non-GMO choices.

However, even as consumers demand greater variety in products with more natural ingredients and transparent labelling, they are also searching for ready-made meals that help them juggle their time-limited schedules. In 2013, CEOs with whom we spoke talked about diversification as a way to both respond to and guard against these changes in consumer tastes. They were considering lateral strategies that dovetailed nicely with existing strengths and market positioning.

Today, CEOs indicate that shifting product focus remains top-of-mind. Meat processors, for example, are focusing on the humane treatment of animals, raising them free of antibiotics and hormones. Others are sourcing more organic and non-GMO ingredients for their products, electing to shift business objectives from frozen to fresh, or altering the formulas of existing products to meet the demand for healthier alternatives. At the same time, suppliers to food and beverage processing manufacturers are seeking to provide packaging and processing options that enable ease of use.

“The health and sustainability category is becoming more mainstream, rather than a niche market.”

Resource scarcity creates talent wars

When we interviewed CEOs in 2013, the war for talent was well underway. To differentiate themselves from their competition, respondents indicated that they were focused on becoming the “employer of choice” to help attract, retain and engage the talent they needed to prosper.

Today, the demand for more experienced resources with specific skill sets and industry certifications is intensifying as the regulatory environment is becoming more and more complex. This has only served to compound the skilled labour shortage food and beverage processors have been complaining about for years. In such a resource scarce environment,
competitors resort to poaching employees from each other, raising the competitive wage threshold which threatens intellectual property security as resources hop from one company to another.

To counteract this latest trend, CEOs we spoke with indicate that they offer better than average compensation for new hires and incentives to retain existing staff. Many are also providing change management and leadership training to advance professional goals. Most importantly, CEOs say they are looking to strengthen their relationship with employees: viewing their employees as their organization’s greatest asset and working with them to continually improve their work environment and their lives as a whole.

“We are trying to pay 75% of the industry average. We provide a baseline of pay and then add competitive benefits tied to sustainability.”

Companies continue to seek growth

Looking back at the evolution of their businesses, CEOs from across the food and beverage processing spectrum remember a simpler time. As competition, specialization and consumer demands transform the industry landscape CEOs agree that growth is necessary for their survival.

Over the next five years, CEOs told us they expect to concentrate primarily on organic growth. Almost all intend to introduce new products that address changing consumer demands. Some anticipate they will expand export opportunities and diversify income streams. Others are buying new equipment and increasing capacity of existing plants. CEOs are looking to improve manufacturing productivity and their agility, enabling them to respond quickly to changing consumer tastes.

Good corporate governance is also cited as critical to future success. Many of the CEOs with whom we spoke talk about the need for more structure, for better strategic direction, and for a shift in organizational culture. To achieve these goals, they acknowledge a need for hiring the right talent who can help them not only envision the future, but help them devise a plan for how they are going to get there.

“We have changed our focus from providing customer value through products, to providing value in products.”

Since these conversations, the Canadian dollar tumbled to its lowest level in 13 years. For food and beverage processors who rely primarily on exports to the US market, they may see their growth plans bolstered. However, those whose supply chain is currently priced in US dollars or whose business is rooted in Canada may see their growth plans change or stagnate as the dollar continues to decline and consumer spending decreases.

CEOs expect their roles to evolve alongside their businesses

CEOs continue to see the need to shift away from day-to-day oversight in favour of more strategic and future-focused thinking and decision-making and some have been making progress towards this in the past few years. The need to move focus away from day-to-day running of the business, often a challenge for private company CEOs and owner-managed
businesses, has never been more critical. As the industry continues to consolidate, new regulations add complexity, and competition escalates, food and beverage CEOs will need to turn their attention to strategic and operational planning that positions their organizations for growth and provides them with competitive advantages.

Yet, while CEOs seem to be focused on the future, succession planning still does not seem to be on the radar. Similar to 2013, a small percentage have one in place, but the overwhelming majority are either in the early stages of planning and are in no hurry, or have not begun to plan at all. Some cite the difficulty of successors within the organization of being a similar age to the current CEO. Others cite the limited options of suitable external candidates within the industry. Given the scarcity of resources and talent, finding a successor may take longer than in other industries. Food and beverage owner-managers need to begin the succession process sooner rather than later.

Positioning for performance is key

Industry consolidation, vigorous competition and a scarcity of experienced and qualified talent are creating a perfect storm of challenges that has food and beverage processors looking beyond their existing markets for future success. In the three years since our last report, they have done everything they can to cut costs to the bone in an effort to retain their
margins. With so little left to cut, processors have no choice but to shift their focus to performance excellence. This includes defining and delivering on strategic imperatives, differentiating themselves in the market and improving productivity.

As CEOs are shifting their attention to strategic decision-making, many of these objectives are already on their radar, as is attracting new talent that can help their companies take their performance to the next level. However, given the escalating pace of change in the market, food and beverage processers will have to do more and work faster if they intend
to compete both domestically and internationally.

About BDO

BDO Canada is one of the nation’s leading providers of assurance, accounting, tax, and advisory services. With strengths firmly rooted in the communities we serve, our professionals deliver highly individualized services informed by deep industry knowledge and nearly 100 years of experience working in local markets throughout the country. And with resources across Canada and around the world, BDO provides seamless and consistent cross-border services to clients with international needs.

BDO is an international network of public accounting, tax, and advisory firms that performs professional services under the name of BDO. With nearly 65,000 people working out of more than 1,400 offices in over 150 countries, the network generates worldwide revenue of $7.30 billion. 

This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our privacy statement for more information on the cookies we use and how to delete or block them.