COVID and Contract Manufacturing

July 28, 2020

Co-packers are in great demand due to the crisis.

Sometimes crises force you into new ways of doing things, and sometimes they simply accelerate tendencies already in place.

Among the latter, we have General Mills increasing its use of contract manufacturers to meet demand for pantry staples, like soup and cereal, that has spiked during the pandemic. General Mills already uses about 200 of them, to supplement its 47 global plants (two dozen of them in the U.S.); it plans to use up to 40 more.

There’s a certain irony here, in that contract manufacturers have usually been used, up to now, to handle startup or fringe brands. That GM needs them to take on demand for mainstream products shows just how far out of whack the pandemic has driven consumer demand.

As you might imagine, demand for competent contract manufacturing has gone through the roof. But according to a Wall Street Journal article, GM is in a good position to handle the competition, thanks to the relationships it has already built among its current network of third-party manufacturers.

Contract manufacturing may confer flexibility, but it’s not cheap; it cuts into already thin margins. The Journal reports that General Mills is resolved to making significantly less profit on the units that will come from contract manufacturers, as a tradeoff for maintaining shelf space and market share. A lower margin is better than an out-of-stock.

That’s fine for a giant like GM, which can afford to take temporary margin hits. Smaller brand owners, however, aren’t so lucky. If their business model depends on contract manufacturing, of course they’ll build those costs into their prices. But what happens if, in a crisis like the current one, some huge processor bigfoots them out of the contractor’s plant?

Dave Fusaro, our chief editor, has written about how food processors are increasingly getting out of actual processing; they’re becoming brand managers who leave the manufacturing to someone else. The current situation is enough to make you consider the advantages of owning the plant where your products – some of them, at least – are made.