Right now, it seems that a high priority for CPG companies is how to get more out of Trade Spend. Trade Promotions Management and Optimisation is key. Customer Investment Planning, and the link to wider Integrated Business Planning is also important.
Our CPG customers are addressing pressures from rising input costs and dominant retailers to see how they can protect margin and revenue growth through better allocation of trade investment.
But when will security of supply come to dominate their agenda? 10 years, 15 years? 5 years? And what will that mean to their Trade relationships?
Why will security of supply be an issue at all?
If we look at Chart 1 below, we can see that an example commodity such as wheat has seen a greater volatility in price in the last 5 years compared to the previous 5 years, with an overall trend being a rise in price. Although this trend is not 100% consistent across all commodities, it is not uncommon.
Chart 1: Wheat Price Received in $ per Bushel (US Department of Agriculture)
We all know that the world's population is increasing, but how does that compare to the amount of agricultural land available?
The World Bank shows that the overall percentage of the world's land dedicated to agriculture is around 38%, but this has not significantly increased over the last 10 years (in fact, it's shown a downward trend, as you can see in Chart 2).
Chart 2: % of world's land given over to agriculture (World Bank - Source)
In the meantime, population is increasing, and global demand for products such as wheat, which the western economies take for granted in many ways, is set to soar. According to the US Department of Agriculture, the total global wheat use for example, is set to move from 654m metric tons to 696m metric tons in the current year - that's a 6% increase in 1 year (Source - WASDE-507-18). Furthermore, China's Bright Foods' acquisition of Weetabix recently shows that there is a high upside risk to that growth due to, for example, China's population and change in demographics.
So what does that mean for wheat? Unless genetically modified (GM) crops become more acceptable, then all other things being equal, wheat prices are set to increase significantly in the coming years, and any weather-related surprises and so on will have an amplified impact on volatility.
That will turn into a Security of Supply concern if demand outstrips supply to the extent that certain players - maybe corporates, maybe nations - start to ring-fence supply for themselves at the expense of others.
How will that impact on Trade relationships? If you ask a retailer or a CPG supplier how willing they would be to try and pass on that input price rise to consumers right now, the answer would be uniformly negative!
I predict that it will take a long and painful period of trying to squeeze internal operations on both the retailer and CPG supplier side until both sides - probably a bit too late - realize that something drastic needs to happen…unless of course consumers accept ideas such as GM crops in the very near future. If Consumer Businesses try too long to keep consumers happy, some may fold under the pressure - and maybe that is what it will take for Consumer Businesses to try and address the challenges on the consumer side.
In terms of Trade Investment, the question is, will this be superseded by Security of Supply concerns, or will it be seen as a tool to address the impacts?
Clearly Trade Investment initiatives aren't going to magic commodities out of thin air! But if you do manage to secure your supply in 10 years time, some of it will be very pricey, so Trade Investment initiatives are critical to ensure that you get the best margin for your product!