Coke, Pepsi face ‘massive’ future dairy sourcing challenge – Rabobank analyst

That’s according to Ross Colbert, executive direct, global strategist for the beverage sector at Rabobank, who spoke at InterBev 2012 in Las Vegas this week. Colbert said that, looking beyond the traditional CSD supply chain of 20 years ago (based on a DSD model) today’s beverage supply chain was far more complex for major players such as Coke, Pepsi and Dr. Pepper. An explosion in retail SKU numbers implied many more suppliers (often of sensitive ingredients imported from across the world), he added, and linked packaging demands. Emerging market demand also increased supply chain complexity, Colbert said, with massive BRIC country per capita consumption growth bringing tremendous pressure. Sourcing challenges were also exacerbated by ever-present trade barriers and dwindling global food stocks, he added, while consumers were now more aware of associated sustainability issues, traceability and health and wellness concerns. Colbert distilled these challenges into three main drivers (1) pricing volatility (i.e. sugar or HFCS going up in price) (2) security of food supply (3) sustainability. Crying over spilt milk? Since 2007 raw material prices had spiked, Colbert said, with supply security no longer assured for key commodities such as apple juice concentrate. “It’s even worse if you’re using milk. There are only eight countries in the world that provide milk, which have a milk surplus,” he said. “So if you’re Coke, Pepsi or one of the other big beverage players considering the convergence of soft drinks and dairy – which we’ve started to see – you have a huge challenge ahead in sourcing milk powder or dairy for beverages. A great example was Coca-Cola’s huge success with Super Milky Pulpy in China, Colbert added, “but they had major supply constraints in terms of sourcing enough milk powder to fulfil their demand”. While strategic sourcing mitigated supply risk and pricing volatility, Colbert said, it was also crucial that brands consider sustainability concerns (water stewardship, greenhouse gas emissions, child labor). ‘Sustainability puts brands at risk…’ “Brand value is a big driver of engagement. Sustainability puts brands at risk, so brandowners need to think about this,” Colbert said. “Big brand such as Coke and Pepsi are lightning rods for NGOs and activists to target. Why? Because brandowners are powerful and hold access to media.” The future lay in backwards supply chain integration – where farmers partner firms (often through more longer term and fewer spot contracts) to foster sustainability mitigate price volatility and secure supplies, Colbert said. “Increasingly, you see the big branded food and beverage players looking back upstream and saying, ‘who are the farmers we should be working with, and why?’ “Who is protecting our consumer’s best interest, and how can we align ourselves with them to achieve value for ourselves, value for our suppliers, and give the consumer what they’re looking for. So a very different approach,” Colbert added. Supplier diversification (as evidenced by Zico’s issues when PepsiCo bought its Brazilian coconut water co-packer Amacoco in 2009) was also crucial, he said. Large firms also increasingly ‘putting the farmer first’, Colbert said, gaining more visibility on how workers were treated, auditing suppliers more strictly, and joining certification schemes such as Fair Trade or Rainforest Alliance.

Coke, Pepsi face ‘massive’ future dairy sourcing challenge – Rabobank analyst

The Coca-Cola Company, PepsiCo and other firms riding the convergence wave marrying soft drinks to dairy face massive future commodity sourcing challenges.

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