For years, consolidation in the food industry has denied pricing power to small and medium-sized agribusinesses. Retailers like Walmart and Kroger—which together control more than a third of the grocery marketDisclosure 1 —and large, integrated food companies have established strong market power backed by low-cost positions that aren’t easily emulated.
If you’re a food manufacturer, however, you now have an incredible opportunity to turn rising prices to your advantage if you can think differently and establish partnerships with your best customers.
These customers—whether processors, distributors, grocery stores, or ultimately retail consumers—need to be educated about the value you deliver. And customer education works best when you stop thinking of your customers in the traditional sense and start treating them like partners.
Timing is important. On the heels of the pandemic, consumers are rethinking priorities, preferences, and habits. Pent-up spending is already creating a surge in bar and restaurant tabs. Moreover, several top food retailers are opening more stores this year after sales for national food brands increased nearly 12% in 2020.Disclosure 2
While consumers appreciate those who held the line on pricing during the pandemic, they’re also more understanding of industry challenges and more interested in quality. Thus, as prices rise, it's time to work with partners across the food supply chain to communicate your product’s full value. You’ll need to be more assertive and ask customers to pay more for the value they receive.
We’re talking about a once-in-a-lifetime opportunity to rethink how you see your customers and how they see you. Those relationships offer the means to educate customers on why the industry is spending more money to put food on the table.
Partnerships make you more nimble
Smaller companies shouldn’t try to play the big guys’ game. Work with other businesses in your supply chain so you can compete more successfully and stay ahead of the larger companies that can’t be as responsive and as specialized.
Communicating with your partners up and down the supply chain will help you understand customer shifts so you can adjust your offerings to command more value or market share. Tell your partners what you’re finding and what you need to compete with larger companies.
This way, your size and agility become advantages as customer buying behaviors start to shift, like they are now. Responsiveness, not size, becomes the determining factor for success in this industry. Consumers want products the way they want—size, look, package, everything— and they’re not just seeking the lowest price.
Look at the poultry industry. Larger producers may be able to produce chicken at the lowest cost on a worldwide scale. But cheap is not the only strategy. The smaller organic chicken farm can offer a higher quality product, plus packaging stating where the chicken was raised and where the feed came from.
The price of that organic chicken could be several times higher than the commodity chicken. Yet there are plenty of people who would happily buy the higher-priced product because it’s sustainably farmed, humanely raised, and locally sourced, with the quality, look, feel, and packaging to match.
In fact, some characteristics of your product, production techniques, and origin may form shared values that unite you with partners in your supply chain “ecosystem.”
You can innovate more easily than your larger competitors, squeeze into niches they can’t touch, and provide benefits that customers ultimately value and will gladly pay for. Find ways out of the commodity cycle where you only make money when commodity prices are in your favor. If you collaborate with others to make your company best in class and indispensable to the supply chain, you’ll be better positioned to withstand market fluctuations.
Investing in partnerships
Transforming your relationships into strong partnerships sets the stage for innovation and a supply chain based as much on cooperation as competition:
- Retail consumers – What shared values and product features are so important that they’ll pay more for them? Many consumers want to know more about their food. With traceable sourcing and transparent growing, raising, and production practices, you can justify a pricing premium.
- Supply chain customers – Rather than concentrating on your highest-volume accounts, identify the ones offering the best profit margin and work together to educate intermediate and ultimate customers about what they’re getting in return for higher prices.
- Suppliers – Challenge your suppliers to prove their value to you and help you earn business (or premiums) from your customers.
- Retailers – Show them how your higher-priced product can both drive sales and assure consumers you care about what they want. Invite distributors and retailers to join your commitment to shared values with consumers.
- Your financial partner – Share your long-term goals and financial plans with your Truist relationship manager and agribusiness specialist. Our team has a broad perspective on the entire industry, see best practices at work, and can often make valuable connections with another company that can supply a solution you need.
Bringing shared values to life
The food and agriculture industry is the cornerstone of many communities. The pandemic has changed how communities work, how people rally around one another, and how they support local businesses. At Truist, we want our clients to capitalize on these trends in as many ways as possible.
For example, at the height of the pandemic, the USDA created the Farmers to Families Food Box Program to support the food and agricultural industry while supplying food for families in need. Bidders had to commit to providing a standard box of food with a base level of assorted items.
The prices being paid were good, and we knew a grower who could provide five pounds of vegetables. But the grower didn’t have the other items needed, like cheese, meat, and milk. In less than a week, we were able to put together a group of 12 companies to support the grower’s bid. It created a partnership that benefited everyone involved.
On the other hand, some food and agriculture businesses enjoyed record years simply because they had product to sell and could get it to the buyer. But it would be shortsighted to overlook the need to restructure relationships.
Don’t just sit back and make whatever money comes your way. Use the good times to rethink your business, set new goals, and capitalize on new opportunities.