Revenue growth management: Unlocking value in foodservice

An uptick in costs is tightening margins for CPG companies, but a coordinated strategy tailored to foodservice can wring more value from this channel.

Key takeaways

  • Revenue growth management (RGM) has proved its mettle in the retail channel of consumer packaged goods (CPG), but it has yet to be applied to foodservice, which represents a significant opportunity.
  • Foodservice has specific characteristics that will require CPG companies to adapt their RGM playbook.
  • Three core actions (define a comprehensive pricing strategy, optimize assortment, and manage trade through standardized terms and performance-based spending) and several enablers (data and analytics, talent, and a holistic strategy) can position CPG companies to capture the value at stake.

Sidebar

For the better part of a decade, CPG companies have had to be incredibly resourceful to sustain margins in the face of an array of challenges. Most CPG business leaders have deployed RGM over the past several years to optimize the retail channel, with a focus on using data and analytics to improve decision making. 1

The pandemic, however, has revealed a clear gap in similar capabilities in foodservice, a channel of increasing importance for the overall financial health of many CPG manufacturers (see sidebar, “Foodservice definition”). Foodservice’s growing size and complexity, evolving market dynamics (the rise of delivery and at-home consumption), and enduring pandemic-related behavior, such as hybrid work models, highlight the need for a clear, channel-specific strategy.

Sidebar

Some CPGs have already started their journey to develop an RGM strategy specific to foodservice by focusing on three core actions and several enablers. They have achieved impressive early results. For example, a specialty-food manufacturer established an RGM organization in its foodservice division with a goal of boosting return-on-sales (ROS) by more than 3 percent. It is currently on track to reach this target faster than the estimated two-to-three-year time frame. Similarly, a cooking-products manufacturer kicked off an RGM effort with a target of increasing ROS by 5 percent; it captured 3 percent within the first year alone.

The big reset

While retail has traditionally gotten the bulk of the attention, foodservice has rapidly grown to a similar size, thanks in part to the rise of both the away-from-home and at-home consumption categories over the past couple of years. Beyond the channel’s growth, several additional factors are creating a greater sense of urgency for CPG companies to turn their attention to revenue growth, including:

  • commodity price spikes: Costs are expected to remain high as a result of global supply-chain disruptions, the more recent rebound in consumer demand, and the limited capacity to meet it. These elements are significantly raising commodity prices for CPG companies and spurring fears of prolonged inflation.
  • a record rise in the Consumer Price Index (CPI): Since 2010, the Producer Price Index for intermediate and finished consumer food products has risen around 1.4 percent a year, while the CPI (for food consumed away from home) has increased approximately 2.6 percent. Starting in 2015, the rise in inflation put the two indexes on divergent trajectories (exhibit). 2 The current round of prolonged inflation has caused prices for finished food products and consumer prices to rise at an unprecedented rate.
  • severe labor shortages: Since the onset of the pandemic, around 4.3 million workers have left the workforce and not returned; many were part of the service industry. 3 This exodus was fueled by the pandemic but also reflects longer-term shifts, such as the acceleration of retirements.
  • closed operations: Evolving variants of COVID-19 and the subsequent public-policy response have led to uneven school openings across the United States and left office occupancy in the top ten US urban areas at approximately 40 percent of prepandemic levels. 4 As a result, roughly 80,000 restaurants have temporarily or permanently closed since the start of the pandemic, reshaping the supply and distribution landscape quite dramatically. 5
Consumer prices for food-away-from-home have risen faster than at-home and produce prices for finished food products.
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How foodservice is unique

To mount a successful ongoing RGM effort in foodservice, CPG companies must take a nuanced approach that reflects the ways in which selling differs between the retail-food and foodservice channels.

Value-based pricing (VBP) challenges

Since CPG companies sell goods in foodservice that are not necessarily end products, they have less control over pricing, promotions, and other commercial levers. This structure results in heightened price sensitivity among foodservice companies, leading them to segment the “value” of stock-keeping units (SKUs) within the consumer end product, quantifying them by such metrics as their percentage of end-product price, lack of substitutability, and unique flavor profile.

Elusive brand loyalty

Unless end consumers are aware of a CPG brand name, foodservice companies often view products as commodities. To overcome this dynamic, CPG companies can differentiate themselves by how they do business, for example, through the uniqueness or breadth of products offered, operational performance, capacity, and supply-chain resilience.

Longer-term contracts

Foodservice companies typically opt for multiyear contracts or menu-based pricing that change infrequently. CPG companies must be prepared to rigorously manage contracts by incorporating factors such as total cost to serve, pay for performance (such as growth tiers) and flexibility (for example, the ability to link and delink commodity pricing).

Maturity of data

Within foodservice, end-to-end data and material third-party data sources such as IRI and Nielsen, which are usually available in retail, currently do not exist. Alternatively, CPG companies need to rely on internal data and broader industry expertise.

Taken together with ongoing market dynamics, these factors highlight the need for CPG companies to think strategically about balancing price, volume, and cost to maximize revenues and margins for a healthy and sustainable future.

Crafting an effective RGM strategy

CPG companies can pursue a coordinated RGM effort consisting of three core actions supported by several enablers. These elements are drawn from the standard RGM playbook but tailored to the specific needs of the foodservice channel.

Three core actions

The three core actions represent the foundation for a robust RGM program that creates sustainable value.

Define a comprehensive pricing strategy. By implementing VBP, foodservice companies can systematically determine customer willingness to pay. This insight is especially critical for nonbranded products, where pricing sensitivity depends on the value of SKUs within the consumer end product. In addition to VBP, CPG leaders must consider policies such as bracket pricing and other surcharges that enable them to pass through costs and protect their margins.

Optimize assortment. CPG companies should also seek to streamline their product portfolio to ensure each SKU meets a specific strategic objective. For example, does an SKU help increase volume even if it is margin neutral? Is it margin accretive even if its sales grow more slowly than the company average? From here, CPGs can build robust product pipelines and reevaluate their portfolios on an ongoing basis to identify opportunities to fill a market gap (by addressing supply constraints, for example, and targeting new-product launches to capture a consumption occasion) or to differentiate through innovation.

Manage trade through standardized terms and performance-based spending. In a changing market, managing trade spending becomes a critical factor in sustainable growth. To do it right, business leaders should focus on two areas:

  • standardizing terms: CPG companies should reevaluate contract terms to ensure they reflect the current environment (for example, declining cash-discount rates) and provide adequate protection against market volatility, such as supply-chain constraints and changing delivery requirements. Once standard terms are defined, organizations should systematically review contracts and, at the earliest viable time, renegotiate them.
  • establishing a performance-based spending strategy: A trade-allocation strategy focused on both the distributors (by providing larger incentives for new customer accounts) and operators (by expanding growth and increasing R&D collaboration) should be established in parallel. In addition, CPG companies are often financing broadliners (for example, food distributors that handle larger volumes of different types of products) to run promotions, but data from end consumption is usually nonexistent. For this reason, CPG leaders must establish the right model for collaboration with intermediate players to monitor the execution of end-consumer promotions and maximize visibility into spending performance.

Organizations that have already taken foundational steps to build out their foodservice RGM strategy have already seen results. For example, a frozen foods company was able to negotiate double-digit price increases on major contracts, rationalize its portfolio by more than 60 percent while sustaining top-line growth, and identify a potential opportunity to reduce trade spending by 5 percent to 10 percent by allocating resources to high-ROI areas.

The right enablers

With the foundational elements in place, CPG companies should turn their attention to several enablers.

Invest in the right data, tools, and analytics. Although robust data and analytics are still relatively nascent in foodservice, they are rapidly becoming more central to strategic decision making. Identifying the right data—for example, internal pricing data and aggregated check data from quick-service restaurants (QSRs) as a proxy for market pricing—is paramount to maximizing the effectiveness of any tools and analytics that support RGM.

Find and build the right talent. The higher reliance on analytics and data calls for employees who can extract insights, such as data scientists and data engineers. While well-known CPG brands are likely to be more enticing to top candidates, most others will need to augment their external hiring with a focused effort on retraining their existing workforce and building an in-house capability.

Develop a holistic strategy with the retail business, where applicable. In cases where CPG companies serve both retail and food-service channels, they should develop a tailored strategy for each business segment:

  • balancing capacity: External factors like COVID-19 can cause opposing levels of demand in retail and foodservice. When panic buying and pantry loading spurred retail demand early in the pandemic, foodservice operators saw a drastic drop in consumers. Whenever possible, CPG companies should define a flexible strategy that reallocates capacity to accommodate market-driven spikes in either channel while preparing to rebalance once demand volatility declines.
  • accelerating product innovation: Retail can serve as a test bed for new products, especially branded items, that can be adopted for foodservice. For example, an alternative food company is bringing its meatless patties to QSRs, and a beverage brand is expanding its creamer’s footprint to office spaces. CPG companies should regularly review their retail portfolio to identify and develop products that might have traction in foodservice.

A robust RGM program is becoming core to winning in foodservice. Best-in-class manufacturers are already elevating their focus on building the necessary capabilities and organizational mentality. Given market trends and the growing availability of data and analytics, the time for RGM in foodservice is now.

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