CONTRACT MANUFACTURING Food manufacturing is frequently outsourced to companies that are different from the brand names consumers will recognise
Contract manufacturing is a common practice in the food and beverage industry, representing between 10% and 20% of total food production. According to a May report by multinational banking and financial services company Rabobank, this sector is growing more rapidly than food manufacturing in general.
In another report it published in April this year titled ‘Silent partners: Contract manufacturing’, the multinational’s food and agribusiness research and advisory team analyse the reasons for increased outsourcing in food production and opportunities for consolidation in the industry. The report’s findings detail three main trends in the current environment that have led to growth in contract manufacturing.
The first is shorter product life cycles and the pressure on food companies to offer greater variety and innovation. Secondly, the report highlights the growth of newer, smaller brands that often lack manufacturing facilities of their own. Lastly, the need to rationalise costs and improve returns on capital to investors is emphasised.
Further to this, the April report notes that food manufacturing is frequently outsourced to companies whose company names are different from the brand names consumers will recognise. Contract manufacturers often operate behind the scenes and under confidentiality agreements, making it difficult to quantify the size of the market.
“Food companies are having to bring new products to market at a faster pace than ever before,” Rabobank consumer foods senior analyst Paula Savanti states. “For this, they need manufacturing partners with a certain scale and sophistication. This is where growth and consolidation opportunities in the industry are seen.”
Rapid growth in the industry, combined with high fragmentation, leads Rabobank analysts to believe that contract manufacturing is poised for a roll-up strategy.