April 07, 2017
April 7, 2017
By Matt Bennett
Matt Bennett is a strategic consultant for food and consumables at PROS.
With more than 120 million pounds of Easter candy expected to be sold during the upcoming holiday, 70 percent will be chocolate. Equally as interesting, companies will manufacture 16 billion jelly beans and 90 million chocolate bunnies.
Beyond the sugar rush, there’s no lack of interest in these delectable treats. It stands to reason that chocolate manufacturers must be on cloud nine knowing the success that lies ahead. However, instead of elation in the boardroom, cocoa has been one of the worst-performing commodities of the past five years.
According to The Wall Street Journal, reports of poor cocoa bean quality from the Ivory Coast and other African growing nations – along with a forecast of a likely comeback of El Niño weather patterns that disrupted cocoa production just a year ago – have created shortages. This has ignited a bullish reaction in the commodities markets. It appears there’s a persistent and real fear of the looming chocolate shortage.
Cocoa production is down due to rough weather and rotting cacao trees. Industry giants like Mondelez, the maker of Oreos cookies and Cadbury chocolates, and producers including Hershey and Mars, are spending $1 billion to help cocoa farmers develop better ways to space seedlings, among other sustainability efforts.
Chocolate manufacturers and distributors – and, in fact, all food companies – are under consistent pressure from volatile commodity prices, rising energy costs, powerful customers and fierce competition. And that means revenue and margins are under equally constant threat.
So what should companies do when food supply-chain issues threaten to wreak havoc on their business? How can manufacturers and producers fight back? No one controls the weather, but companies can optimize their revenue potential to offset tough times, especially surrounding times of peak seasonal demand. A number of food manufacturers and distributors are taking a new proactive approach to pricing by optimizing margins while balancing price and demand within operational constraints.
In the midst of the chocolate challenges – and volatility in other ingredients markets – insight and agility are key. If it takes three weeks to update prices in the midst of rapidly shifting commodities, there’s no question that prices are not reflecting what’s going on in the supply chain. As a result, companies are losing serious revenues and margins.
Today, there are analytical tools and data intelligence that helps these organizations make better decisions. All food manufacturers and suppliers should be able to take advantage of these five capabilities on the fly to protect their businesses:
- Analyze every item – daily – to understand which products drive overall profitability and sales.
- Understand customer responses and sales impact to the pricing actions of every item.
- Adjust prices dynamically to account for shifts in underlying commodity prices, changes in market conditions and up-to-date supply information.
- Highlight opportunities for price adjustments, trade deals and other promotions by having more visibility into supply and inventory.
- Review and recognize at a granular level what adds value to the business, whether it’s deals, discounts or promotions.
Today, data science-driven analytical tools and data intelligence available to food manufacturers align product, demand and availability, as well as formulate winning pricing strategies that protect their margins. According to Gartner Research, a successful price optimization and management implementation can increase margins by 50 basis points or more, and increase revenue by up to 4 percent.
That’s a whole lot of chocolate bunnies and jelly beans.