It’s been a tough year for local food and beverage manufacturers. Shoppers have reduced their retail spending to cope with a rising cost of living and higher interest rates. Per capita retail spending has been falling since January, in tandem with a weakening labour market and rising unemployment.
When households cut spending, they don’t stop buying food, but they change their choices. They switch to lower-cost options, buy in bulk, pick more frozen items and shop around. It helps keep grocery bills under control, but it means there’s not much tolerance for rising prices – if a favourite brand puts prices up, people will often just pick a cheaper option.
If you run a local food business, this means you don’t have much capacity to recoup higher outgoings by raising prices. Instead, you may be facing reduced demand for your products, and grumpy customers if you so much as think about putting up prices.
With headwinds like these, what can food and beverage producers do to ride out an economic downturn? These five concepts can help FMCG businesses thrive when times are tough.
If a specific product isn’t doing well in the current climate, how do you develop something that hits the spot for price-sensitive shoppers? How can you use what you already have to diversify your range? Think about multipacks, a budget-conscious version of your product, or even ‘home brand’ supply agreements.
Let’s say a business sells premium block chocolate in supermarkets. Sales of its product are down, so the company diversifies by formulating a lower-priced block. Using generic cacao beans instead of high-grade beans from Ghana, it launches a new product with minimal packaging under a new brand. The business could also launch a supersized economy version of its flagship block, with a 15% lower retail price per 100g.
Another option, especially if you have excess capacity, could be looking at home brand opportunities. This is where you could supply your product at a lower price point to supermarkets, labelled with the supermarket’s own brand. This could lead to higher overall sales but will reduce your margins, so it’s important to weigh up the pros and cons and understand how this ties into your overall strategy.
Developing a completely new product is a bold move, but one that can reinvigorate a brand. Innovating has its risks and costs, but it can allow you to target a product to a niche you know exists. Whether that’s reaching a different target market, appealing to the big spenders, or undercutting an existing market leader.
For example, if sales are flat at the chocolate company, the team might have time to work on a Kiwi version of an individually wrapped chocolate product like Ferrero Rocher. Can they make a premium treat that appeals to shoppers at Christmas when they’re willing to splurge a little more?
Businesses don’t have to innovate all alone either. Help is available from the New Zealand Food Innovation Network, which has open-access production facilities and expertise designed to help local FMCG businesses grow. Research and development tax credits are also well worth exploring to help fund new products and services.
Why not put a Jaffa at the centre of that new chocolate treat? Collaboration can be a fantastic win-win strategy for food brands. We worked with a business that dramatically grew its market share after collaborating with two other well-known brands on flavours and products. It could also be a collaboration with a high-profile chef or a celebrity.
Collaboration can produce popular novel products, raise your company’s profile, and allow you to piggy-back on the marketing power of another brand. This can create a buzz that has a massive impact on your brand. We all know that Whittaker’s is a master of collaboration, since its Lewis Road Creamery chocolate milk become a must-have item in 2012. It has since collaborated regularly with brands like Jelly Tip and K Bar. This year, local gelato business Giapo partnered with singer Cher on a range called ‘Cherlato’. And Graham Norton’s collaboration with Invivo Wines has led to 10 vintages which have won hundreds of awards.
New Zealand is a small market – can you increase sales by expanding into new territories?
Many of our FMCG clients have had sales stalled here in Aotearoa but their products are selling like hotcakes in the USA. The revenue from their exports is more than enough to help them ride out an economic downturn on home soil.
Even if you’ve considered exporting in the past and the numbers didn’t add up, it might be worth taking a second look. Over the past few years New Zealand has entered into several new free trade agreements that have made exporting our goods more feasible and profitable than ever before. You may also be able to access support and/or funding from New Zealand Trade & Enterprise (“NZTE”) or support from the New Zealand Export Credit Office (“NZEC”). For example, Ozone Coffee recently expanded its UK operations with a loan guarantee from NZEC; it now employs over 150 people across the UK and Aotearoa.
Can your business improve process efficiency using automation or AI? Can you invest in the production process to reduce wastage and increase efficiencies so your long-term costs decrease? If sales are down, can you use this time to research how to set your business up for better efficiency and resilience in years to come?
You might also find ways to reduce other costs. Can you modernise your technology? Investing in apps to better monitor energy use, for example. Or installing solar panels, which can be funded with lower-cost green finance.
Can you invest in packaging or logistics technology that cuts down on wastage during shipping? In many cases, efficiency improvements can also improve your company’s carbon footprint, providing a win-win outcome.
If your business is experiencing a slow patch, use that time to strategise. Who are your customers? What is your direction? What do you want the future to look like?
By thinking ahead and positioning your company for success, your operation can go gangbusters when the market picks up again – which it will. Smart decisions and careful pivots can help you survive right now, so that when conditions improve, your company is stronger and more profitable than it’s ever been.
During conversations we have with businesses about risk, it’s eye-opening to see how many aren’t really making it a priority.
Grant Thornton New Zealand’s latest survey of over 200 business leaders and decision makers has revealed a significant uptick in optimism for the coming year despite many toughing it out in current economic conditions.
When you take a sip from a 330ml bottle of Speight’s Gold Medal Ale, you probably don’t consider the 47c in excise tax that was included in the price. And why would you? It would only take the fun out of having a nice cold beer. Unfortunately, if you run an alcohol business in New Zealand, you don’t have the luxury of forgetting about excise taxes. These have risen rapidly in recent years because they are benchmarked to consumer inflation. The rise over the last three years in the consumer price index to as high as 7%, has meant more than $94 million in additional excise tax for the alcohol industry. On top of that, the industry has had to absorb rising ingredient and packaging costs, skills shortages, falling sales and higher interest rates. It’s tough going for our alcohol manufacturers and distributors, many of whom are small privately owned and family businesses. While this is an area of tax legislation that might only affect a small number of businesses, it has a sizeable impact. It’s a challenge to be accurate and compliant, particularly for the smaller craft producers that make up around 10% of our local market. These inaccuracies are an under-recognised issue - get it wrong, and it can be extremely costly. Overpaying could lead to significant unnecessary costs Producers must record alcohol volumes accurately, have correct sales records, and lodge that data by the deadlines set by the New Zealand Customs Service. Because brewing is an art and a science, the level of accuracy required can be tricky to achieve. It’s not uncommon to see brewers make tiny errors that lead to big consequences, and the last thing anyone wants is to be facing thousands of dollars a month in unnecessary tax. It’s also easier to make errors at a smaller craft operation, because it’s less industrialised when compared to the big players like Speight’s or Heineken. Take, for example, a fictitious beer manufacturer – let’s call it Bottle Brewery. One of its best-selling beers is a light lager that should have 4% alcohol by volume (ABV). Unfortunately, the team at Bottle Brewery isn’t equipped to be 100% accurate with its calculation and processes. As a result, its light lager has been leaving the brewery with an ABV of 4.08%. That might sound like nothing more than a rounding error, but it’s just enough to increase the excise tax on the beer. The corresponding increase gets applied across the stock keeping unit (SKU) based on sales per month, and the light lager is selling well, shifting 100,000 units in a month. Applying the additional excise tax adds an extra $2,800 per month for that alcohol SKU alone. Plus, the Bottle Brewery team is a bit slow at filing its returns. With that late fine, and the extra excise tax, the company is unnecessarily paying $3,600 a month. Hopefully Botte Brewery has been more accurate with its other beers or its taxes could be really adding up. Underpaying can be a nasty shock When you’re underpaying tax, you run the risk of an unpleasant shock when you need to backpay the outstanding amounts. Customs carries out regular inspections of New Zealand’s alcohol businesses, walking through production facilities to see how you’re recording your alcohol volumes, checking your systems, and inspecting your reports and declarations. Inspectors will look at everything, even checking to see whether you have alcohol sitting in unlicenced areas of your property – you may need to pay excise tax on it if that’s the case. At a time when niche brewers have been struggling to stay afloat, investing in getting this right is well worth the effort – because the costs of getting it wrong can be disastrous. If Bottle Brewery has been paying its excise tax assuming its light lager is 4%, but Customs discovers it is actually 4.08%, the business may be on the hook for several months of backdated taxes. This could be a considerable cashflow blow for a small brewery that’s already feeling the headwinds of tough economic conditions. It may even face penalties for mistakes or omissions, on top of any tax owed. If Customs decides to do a full audit, that will also take up extra time and resources they can’t afford. Customs is very responsive and helpful, and they do have options under the legislation to remit penalties and offer time to pay arrangements. However, they don’t always have the ability or appetite to offer lenient repayment options, and outstanding excise tax and penalties may need to be paid. The right systems and processes can save you time and money Most breweries use spreadsheets to track their sales and alcohol volumes. Academic research has found that an estimated 94% of spreadsheets contain errors, which shouldn’t fill anyone with confidence. Breweries need to develop and maintain a laser focus on improving the quality of their data, and developing models that help them improve accuracy and file returns on time. Typically this investment quickly pays for itself, often simply by avoiding late filing fees. Improving systems and processes often leads to other increased efficiencies throughout the business, including better stock storage practices and more precise forecasting. When it comes to excise tax reporting, a millilitre of prevention is worth a fermenter full of cure.
