ARC's John Blanchard CPG Presentation @ ARC's Industry Forum 2009 in Orlando, FL. Opportunities and Challenges for the Food, Beverage, and CPG Industries. Food, beverage, and CPG manufacturers find themselves caught between slow growth, rising costs, waning pricing power, accelerated regulatory and customer requirements, and a growing percentage of sales from a limited number of powerful and demanding retailer, and increasingly limited capital, human, and even material resources.

1. Opportunities and Challenges
for the
Opportunities and Challenges
for thefor the
Food, Beverage, and CPG Industries
for the
Food, Beverage, and CPG Industries
John Blanchard
Research Director
Food , Beverage , and CPG Industries
ARC Advisory GroupARC Advisory Group
jblanchard@arcweb.com

2. Challenging TimesChallenging Times
Food, beverage, and CPG manufacturers find
themselves caught between slow growth, risingthemselves caught between slow growth, rising
costs, waning pricing power, accelerated regulatory
and customer requirements, and a growing
percentage of sales from a limited number ofp g
powerful and demanding retailer, and increasingly
limited capital, human, and even material
resources
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3. Challenging TimesChallenging Times
How do we improve margins
and increase profitable
growth to sustaingrowth to sustain
shareholder value?
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4. Business EnvironmentBusiness Environment
♦ F d d d t f t d dili i i♦ Food and product safety due diligence increasing
• Concerned consumer
• Yearly food borne illness statistics
• Global terrorism
• Global sourcing & rapid high volume distributionGlobal sourcing & rapid high volume distribution
• These facts plus product counterfeiting are producing
• New industry and company food safety initiatives
• Increased regulatory and customer requirements
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5. Business EnvironmentBusiness Environment
♦ I i t l ti♦ Increasing government regulations
• US Bioterrorism Act
• FDA and USDA regulations
• CBP/CT PAT• CBP/CT-PAT
• DHS
Customs- Trade Partnership
Against Terrorism
• Truth in labeling laws
• FDA & USDA mandated HACCP programs
E. coli
Listeria
St h
Foreign
Matl
Recall Reason
for fish, meat, poultry, and juices
• Environmental regulations: land, water, air
Staph
Salmonel
Allergen
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6. Business EnvironmentBusiness Environment
♦ Increasing share of market controlled by a limited number powerful
retailers, manufacturers, and suppliers
♦ Increasing global competition for everyone
♦ Mature US and European markets with limited growth opportunities
♦ Seeking opportunities in high growth emerging markets
2 8 .0 %
2 1%
2 2 .5% 2 3 .0 %
$6 .8 b
25.0%
30.0%
$6.0
$7.0
$8.0
10 .5%
12 .0 % 12 .0 %
12 .2 %
13 .0 %
17.2 %
16 .3 % 17.0 %
$1.8 b
$1.0 b $1.0 b
$3 .6 b
$1.4 b
$1.8 b
$0 3 b
$0 .9 b
$0 3 b
$0 .9 b $0 .4 b
5.0%
10.0%
15.0%
20.0%
$1.0
$2.0
$3.0
$4.0
$5.0
$0 .3 b $0 .3 b
0.0%
Sara
Lee
G
illette
Kellogg
Kraft
M
ills
(Ex.Sam
's)
M
ills
(Incl.S
am
's)Energizer
P&
G
H
ershey
R
evlon
C
lorox
D
ialC
orp.
$0.0
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G
eneralM
G
eneralM
i
Share of Business at Wal*Mart Dollar Sales
+Data sources did not indicate whether Sam’s Club data was included or not in the reports.

7. Rapid Change, More Complexity, Limited
Resources
Rapid Change, More Complexity, Limited
Resources
♦ Global sourcing of more limited, higher cost, more exotic ingredients
♦ Value health and environmentally conscious and demanding new♦ Value, health, and environmentally conscious and demanding new
consumer
♦ Lots of consumer short (fads) changing purchasing patterns
♦ Rapidly changing demographics and new geographies (small♦ Rapidly changing demographics and new geographies (small
bodegas)
♦ Increasing number of SKUs and new product introductions
♦ Increasing percentage of sales from promotions♦ Increasing percentage of sales from promotions
♦ Increasing importance of packaging
♦ Limited resources
♦ Available capital
♦ L b l d kill t
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♦ Labor pool and skill sets
♦ Water, energy, ingredients, packaging materials

8. More Sustainable ManufacturingMore Sustainable Manufacturing
♦ Driven by retailer initiatives
• “The challenge of creating a low-carbon society will
require a revolution in thought and action – arequire a revolution in thought and action – a
revolution in green consumption.” - Terry Leahy –
CEO Tesco
♦ Driven by business and regulatoryy g y
requirements
• As a part of their effort to eliminate waste and
improve efficiency, Pepsico has been applying eco-
friendly technology in packaging, deploying solarfriendly technology in packaging, deploying solar
energy and methane gas recovery technology, and
testing hybrid vehicle programs in their delivery fleets
♦ Driven by limited resources for manufacturing in most♦ Driven by limited resources for manufacturing in most
parts of the world
♦ Driven by the “green” consumer/shareholder
A 50% f id “ ” i h i h i
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• A recent survey over 50% of consumers consider “green” in their purchasing
decisions and 20% are ardent “green” even concerned over how a company
treats its employees

9. Sustainable ManufacturingSustainable Manufacturing
♦ To the consumer♦ To the consumer
• Product availability
• Environmental
responsibility
Environment
& Resource
Friendlyresponsibility
♦ To the employee and
his/her family
Friendly
Products
/ y
♦ To the local community
♦ To many segments of
Environment
& Resource
Friendly
Plants
Environment
& Resource
Friendly
Supply Chain♦ To many segments of
manufacturing
♦ To Wall Street
PlantsSupply Chain
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10. Response to Changing Business EnvironmentResponse to Changing Business Environment
i i l “Margins rise while returns are flat”
♦Initial Strategy
• Mergers, acquisitions, divestitures, outsourcing
• Product portfolio rationalization/optimization
“Margins rise while returns are flat”
Product portfolio rationalization/optimization
• Productivity initiatives
• OEE, TPM, continuous improvement
• Supply chain optimization programs• Supply chain optimization programs
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11. Now Food, Beverage, and CPG Manufacturers Are
Asking
Now Food, Beverage, and CPG Manufacturers Are
Asking
♦ How do I address the fluctuating price and availability of
commodities?
♦ How do I reduce my energy and other utilities costs and
ensure the long term availability of these resources?
♦ How do I find and evaluate new technology that will support
innovation and speed time-to-market?
♦ How do I reduce my manufacturing cycle time?♦ How do I reduce my manufacturing cycle time?
♦ How do I come up with new ideas or equipment that is multi-
tasking and that can reduce change over time?
♦ Wh t th b t t i t t f t f t i♦ What are the best metrics to support future manufacturing
requirements?
♦ How do I support my ever expanding manufacturing and
business automation systems and networks?
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business automation systems and networks?

12. Response to Changing Business EnvironmentResponse to Changing Business Environment
♦Strategy Going Forward –
“An agile, innovative enterprise to
sustain growth and improve
margins”
• Global “super branding”
• Expansion of distribution channels
• Process automation and integration of• Process automation and integration of
manufacturing & business processes enterprise-wide
• More sustainable & flexible manufacturing & supply
h ichains
• Develop a more innovative and extended
organization and culture (people)
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13. Operational excellence is no
longer enough.
Its power to differentiate has
eroded.
Rory A. M. Delaney
Senior Vice President
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Strategic Technology
General Mills

14. A Discipline of Innovation EmergingA Discipline of Innovation Emerging
Innovation is generally recognized as the principle
driver of growth and shareholder value
• An increased rate of change has made an
ability to change more valuable
g
• Methods and tools are emerging to vastly
improve innovation success rates
• Companies need new insights to achievep g
growth
• Companies are “globalizing” their innovation
processes. A “follow the sun” process isp p
emerging
• Companies are also utilizing more external
resources to drive innovation
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15. A Discipline of Innovation EmergingA Discipline of Innovation Emerging
Innovation is generally recognized as the principle
driver of growth and shareholder value
• Companies involving suppliers earlier in design phase of
new products and processes
g
• Some OEMs are driving innovation faster than their clients
– even in non-traditional areas of their business
• Patented product packaginga e ed p oduc pac ag g
• More functions on a single unit or machine
• More continuous on-line quality verification
• New environmentally friendly technology
• Packaging end line provider• Packaging end line provider
• Sustainable manufacturing and limited
resources in emerging markets will
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resources in emerging markets will
drive innovation even faster

16. Where Are We Today?Where Are We Today?
♦ Few food, beverage, CPG manufacturing sites have
their processing, packaging, warehousing, logistics,
and business systems networked together with bi-and business systems networked together with bi
directional electronic exchange of information
♦ Over 67% of packaging lines do not measure
performanceperformance
♦ All respondents felt there was room for improvement in
on-line quality verification, with almost two thirds
saying there was significant room for improvement
ARC Insights & Manufacturing Performance Surveys 2007
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17. Increased Need for On-line Quality VerificationIncreased Need for On-line Quality Verification
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18. Where Are We Today?Where Are We Today?
♦ One of the primary reasons for purchasing production
management software is compliance
♦ Leading edge companies depend upon production
management software to optimize margin and qualitymanagement software to optimize margin and quality
ARC Insights & Manufacturing Performance Surveys 2007
♦ Some factors inhibiting adoption of technology
• Lack of ease of use for operatorsLack of ease of use for operators
• Cost and complexity of maintaining technology
• Lack of resources to evaluate new technologies
• Long standing purchasing & amortization policies
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• Long standing purchasing & amortization policies

19. What Do We Need To Do?What Do We Need To Do?
♦ A More Comprehensive Plan to Meet Business and
Regulatory Requirements includes:Regulatory Requirements includes:
• Increased emphasis on performance monitoring ,
continuous improvement, and flexibility
• Improved electronic tracking and tracing from the source
to the consumer
• Improved manufacturing plant security
• Increased on-line quality verification and Quality by
Design (QBD)
• An “in depth” sustainable manufacturing strategy
• An automation strategy that recognizes the commonality
in both business and regulatory requirements
A f l l bl
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• A focus on people – your most valuable resource

20. It’s Not Just About TechnologyIt’s Not Just About Technology
“To sustain the productivity surge, today's managers must
develop incentives that encourage their workers-as well as
themselves-to be more creative, self-starting, educated, and
willing to experiment. Jobs that call for simply following recipeswilling to experiment. Jobs that call for simply following recipes
will become scarcer, and demand for an innovation-driven
workforce will continue to grow.”
“……..It took 40 years for businesses to figure out how to
redesign their factories and processes so that electricity could
deliver a productivity payoff. Managers cannot afford to wait
decades to harness the greater productivity offered by today's
“Productivity's Technology Iceberg” March, 2004
by Erik Brynjolfsson,
Professor of Management
decades to harness the greater productivity offered by today s
IT advances. …….
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Professor of Management
MIT Sloan School of Management

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