Economics of the Food Industry

1
Economics of the Food Industry
Polly Johnson Vice President, Marketing
2
Todays Discussion

• Real World Overview
• Provide an overview of food cost issues in
  todays business environment

3
For todays discussion...
Consumer food spending 795B
Retail 51
Foodservice 49
Source Technomic, 2000 sales
4
Developing a Cost Effective Product

• Know your market
• Understand the logistics
• Assess the product PL

5
Knowing Your Market

• 1. Define the segments
• 2. Select your segment
• 3. Understand the market dynamics
• WHY?
• backwards product development

6
Defining Food Segments

• By chain category / type
• Fast Food, Family Dining, Upscale restaurants
• By people type / demographics
• age, gender, household size
• By occasion
• entertainment, celebrations, quick bite
• By income / price points
• high income
• By flavor / food profile
• Mexican, Asian, Southwest
• Broad
  Narrow

7
Understanding Segment Dynamics

• Price points
• Consumer wants
• Restaurant operator considerations

8
Examples...
Burger King Dennys T.G.I. Fridays .99 2.2
9 3.99
Different segments, different dynamics, different
price points
9
Developing a Cost Effective Product

• Know the market
• segments
• dynamics
• Understand the logistics

?
10
Understanding the Logistics
?
11
The Delivery System
Other Plants
Ingredients
Warehouse
Manufacturing
Distribution Centers
Up Front Costs
Distribution Costs
12
Understanding the Logistics

• Know ALL the pieces
• Complexities can be numerous

13
Significance?

• Distribution cost management
• regional vs. national shipping
• shipping rates
• own trucks vs. outsource
• limited truck loads vs. full truck loads
• effective warehousing -- outsource?

Impacts available for the product, regardless
of who pays.
14
Developing a Cost Effective Product

• Know the market
• segments
• dynamics
• Understand the logistics
• distribution cost management
• Assess the product PL

?
15
PL Management

• Margin requirements
• know / set the goal
• example 30 gross margin 20 profit margin
• work backwards
• Key COGS drivers ??

16
The PL
?.
?.
?.
17
Product Cost Considerations
LOW COST HIGH COST

• Highly automated
• minimize labor positions
• maximize pieces/minute
• Affordable ingredients
• No special handling
• chopping, etc.
• Eliminate extra steps
• Simple package

• Labor intensive OK
• hand decorated
• Premium ingredients
• Most extras not an issue

18
Test Runs Lab ? Real World!

• untrained line workers
• different ovens
• processing equipment variances
• depositing equipment variances
• various freeze times (pies vs. pallets)
• different operations

19
PL Comparison Identify Key Drivers
20
Developing a Cost Effective Product

• Know the market
• segments
• dynamics
• Understand the logistics
• distribution cost management
• Assess the product PL
• understand margin requirements
• address key cost drivers