Kraft Foods is slashing its supply chain costs by $300m - a decision that Leatherhead Food International predicts will dramatically affect suppliers and could result in casualties.
Market research analyst Chris Brockman estimated that about 30,000 companies could be affected across ingredients and packaging. Brockman said: “You’re looking at a dramatic effect on the supplier base, leading to consolidation at that end as well.”
The analyst predicted that some types of supplier will be affected more than others. He said: “This will affect most strongly a firm that is a big player in its own market, but not on the world stage. That type of company is likely to be caught up in the middle ground where there might be casualties.”
Weak economy to spark further consolidation
Brockman said Kraft’s move was a response to the weak global economy, as was its bid for UK-based confectionery giant Cadbury earlier this week, which would grow its presence in confectionery in the European market.
He said Kraft’s announcement of its cost-cutting strategy was an indication of how the state of the economy was affecting even global players in the food and beverage industry.
He predicted further supplier consolidation in the industry across Europe in the coming year: “You are starting to see some big announcements like this, which haven’t been around for the past 12 months. I think you can anticipate more of that coming from food companies in the next 12 months or so.”
Kraft outlines its plans
Kraft Foods confirmed plans earlier this week to cut the number of its strategic suppliers and reduce costs across the company through a range of other initiatives.
The global food giant refused to reveal how revising its procurement strategy would affect any particular class of suppliers, but a spokesman for the company said: “I can confirm that we are taking a holistic view of our supplier base to leverage scale with a reduced number of strategic suppliers across our total spend.”
He said Kraft also intended to “expand global sourcing and low-cost country sourcing, simplify material and product specifications while maintaining quality, food safety and service and re-engineer processes to reduce inventory”.
Speaking at the Barclays Capital Back to School Consumer Conference on September 9, Tim McLevish, executive vice-president and chief financial officer at Kraft said: “We have a strong pipeline of cost savings initiatives. We expect significant near-term savings in end-to-end productivity, including procurement, manufacturing and customer service and logistics.”
In addition, Michael Clarke, executive vice-president and president of Kraft Foods Europe said the company would focus on priority brands, end-to-end productivity and lower overheads.
In a statement, Kraft said European productivity savings were likely to come from procurement, manufacturing and distribution efficiencies.