Ingredient Cost Control – At What Cost?

Ingredient requalification is finding an equal product that will work the same in a formulation but can be contracted in advance to lock in a price.

“Food and beverage manufacturers usually tend to be reluctant to make any change in production [yet they] express willingness to give such requalification high priority,” says Ronny Hacham, vice president of business development and marketing for Gadot Biochemical Industries Ltd. (www.gadotbio.com), Haifa, Israel. “Obviously, this should only be done whenever it is applicable.”
Gadot’s own experience shows that ingredient suppliers can be just as impacted by fluctuating supply costs as processors. “Right now we are trying to produce the same product using different raw material [as a means of] stabilizing the price,” Hacham says. “If market conditions do not allow for further [primary ingredient] cost reduction, food and beverage manufacturers may reformulate-out expensive ingredients and replace them with lower-cost ingredients.”

For some processors, there’s no way around engaging a paradigm shift. George Eckrich, owner of Dallas-based Dr. Kracker Inc. (www.drkracker.com), typically employs two strategies — one basic, the other more daring.

“First, we rented additional warehouse space so we can store packing material and ingredients that won't be affected by storage. That way, we can get additional discounts for truckload purchases. Second, in our new products, we have given up trying to source all ingredients as organic.”

While the company still is using organic grains and seeds, especially as the core of its new product line, Culinary Crisps!, its new products will be “about 70 percent organic.” Eckrich adds, “We continue to bake only with organic flour and organic seeds. But with new ingredients such as dried tomatoes, apple pieces and dried cherries, we’re buying all-natural. We verify that they are 100 percent natural, but we are not going beyond that. We’re balancing affordability and sustainability — which is to say, our own sustainability.”

Eckrich confesses that in the current environment, smaller companies can’t compete with the large manufacturers in securing limited quantities of ingredients at good prices. “We are doing everything possible to keep our prices under control, as we have only seen a few price decreases,” says Eckrich.

Sometimes, cost control means knowing when to sit tight. Many companies, aware that price rises could backfire into lower sales in an economy strained to the limit, choose to simply balance the cost of ingredients with slight retail price rises to avoid larger ones later.

Ingredient supplier Gadot Biochemical Industries must deal with both food processors looking for more economical ingredients and its own ingredient vendors. Gadot right now is trying to reformulate an ingredient with an escalating price using different raw materials.

“Across our portfolio, we continue to adjust pricing as needed based on market factors and the value we deliver to consumers,” says Joyce Hodel, corporate affairs manager for Kraft Foods Inc. (www.kraft.com), Northfield, Ill.

While commodities have moderated recently, input costs remain at historically high levels, she says. “Some inputs, such as wheat and soybeans, are still 150 percent above 10-year averages. In our Q3 2008 conference call, Kraft Foods announced that we expected full-year input cost inflation for the company to be about $2 billion, which is about 13 percent over 2007.”

Hodel explains that many factors influence the retail price of products in addition to commodity costs. “We have been adding value for consumers through significant investments over the past two years in product quality and innovation. Kraft isn’t just blindly talking the long view — the company knows its policy of putting customer needs front and center is crucial to any cost-management program. We must continue to deliver value to consumers and manage competitive price gaps,” Hodel insists.

Look to the Future
Emerging technology is bringing the future of ingredients into the present by removing barriers to some of the trendier nutraceuticals. An example is overcoming issues of solubility for lipid-based ingredients such as omega-3 oils.

“We initially developed our ‘Powder-loc’ technology to create a no-taste, no-smell omega-3 EPA/DHA ingredient from fish oil,” explains Lori Covert, vice president of marketing and communications for Ocean Nutrition Canada Ltd. (www.meg-3.com), Dartmouth, Nova Scotia. “But in the process of developing the technology, we discovered we’d developed an ingredient that would pass on significant cost savings to our customers.

“Technologies (like this) allow food companies to optimize their manufacturing process because dealing with a powder ingredient is much easier than dealing with an oil ingredient. Oils are much more difficult and expensive to handle, equipment requires more cleaning (and) performance of oil is not as consistent across batches so significant efficiencies can be lost when working with an oil ingredient.”

PL Thomas’s Rodger Jonas seconds this emerging trend of synergy in form and function. “We believe functionality, coupled with application, is the driving force for future ingredient use.” For its part, PL Thomas is creating new forms of existing oil-based ingredients such as coenzyme-Q10 to be employed in clear beverages. “We change forms to improve functionality and to reduce cost,” says Jonas. “This simple concept has a lot of work associated with development and a broader understanding of the application in order to get the product to work. We are helping reduce use cost and the actual cost of ingredients.”